With elections looming, India’s largest political parties have announced cash-transfer schemes to win over the poor. In addition, Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) has proposed a contributory pension scheme for workers in the unorganised sector, which employs some 420 million people.Although both the ruling party and the rival Congress haven’t disclosed how they plan to finance their proposals, there is reason for cautious optimism. With careful planning, cash-transfer schemes have the potential to deliver significant welfare gains.What is also welcome is that the political sparring has shifted the debate from juvenile one-upmanship about which party delivered fractionally higher growth, to designing a scheme to provide social assistance and social insurance to the poor. For while it is true that growth has helped reduce absolute levels of poverty in India and elsewhere, it is also true that inequalities have widened.The proposals suggest that both political parties recognise that direct cash transfers may be a more economically efficient way of supporting farm incomes than fiscally unsustainable loan waivers or price-distorting subsidies – a point argued by India’s former chief economic adviser Arvind Subramanian, who published his recommendations just ahead of the Congress announcement.Whether the financing plans for the schemes envisage a gradual phasing-out of inefficient subsidies, however, remains to be seen. It will require political will, as farmers may still prefer price subsidies. Cash transfers will also require India to build capability in identifying the households (Aadhaar could be useful here) and linking them to bank accounts. Roll-outs will need to be phased and carried out alongside greater penetration of banking services to rural areas to enable cash transfers.Also read: The Promise of UBI, Minimum Income Guarantee Is a Paradigm Shift in Economic PolicyCash transfers also shouldn’t preclude other kinds of anti-poverty initiatives such as increased investment in public health and education or the government’s Mahatma Gandhi National Rural Employment Guarantee Act, which provides jobs for 50 million households.As with all populist spending plans, any significant departure from the fiscal deficit target will incur the wrath of markets, rating agencies and institutional investors, pushing up the country’s borrowing costs. So, a more generous scheme may win rural votes but may be fiscally imprudent – depending on how the scheme is financed.Taxes tend to be the only sustainable way of financing social security schemes. India has the third highest number of billionaires and yet only about 2% of the population pays income taxes. Will the government be able to get more people into the tax net? Will it have the stomach to weed out crony capitalists who have expanded their business on generous state bank loans and make them directly contribute to social welfare schemes? The latter seems a stretch, given that elections are funded by companies with deep pockets.Even though we don’t have details on funding, the man on the street is weary of empty promises made on the eve of elections. The electorate is bound to compare the two cash transfer proposals.Neither proposal should be confused with a universal basic income (UBI), an idea that has been discussed for some time in both developed and developing countries. UBI, by definition, avoids inclusion and exclusion errors, has lower administrative costs and is less susceptible to corruption than targeted schemes. However, by virtue of its universal coverage, it is also likely to be more expensive than targeted schemes, making it unfeasible given the country’s limited tax base.Also read: Is Jharkhand Really Showing the Aadhaar-Way to Success in New India?Subject to the caveat that we neither have details on how the schemes will be financed nor the design of the Congress proposal of a minimum income guarantee, it appears the latter will be more broad-based and generous than the BJP’s plan. The Congress proposal applies to every poor person in India. The BJP’s proposal will apply only to marginal farmers holding less than 2 hectares of farm land, thus excluding the agricultural labourers who are among the most vulnerable of the rural population.Specifically, the BJP has offered direct cash support of Rs 6,000 annually to 120 million poor farmers. The amount to be paid to each household is also less than under the similar Rythu Bandhu scheme, rolled out in May 2018 by the Telangana state government.Congress leaders have scoffed at the Rs 500 a month offered by the BJP to targeted households, saying it is too little to make a difference to farmers suffering from acute economic distress.Congress’s cash-transfer proposal is progressive, in that if a person’s income falls below a threshold, the person will get assistance to bridge the gap. It is as yet unclear how the Congress will define this threshold. In the absence of reliable income data, this plan is open to abuse. For example, there will be an incentive to understate income to avail that assistance.The BJP may have avoided this targeting problem by restricting the scheme to land-holding marginal farmers, but the experience with the Rythu Bandhu scheme shows that here too there are pitfalls as land records would need to be updated. Also, by targeting only landholding poor farmers it has excluded agricultural labourers, perhaps the most vulnerable segment of the rural population.Neither party has said how they will fund the cash transfers, but the BJP’s forecast has factored in only a small slippage in its fiscal deficit target. It put the fiscal deficit for the year ending on March 31 at 3.4% of GDP, slightly higher than the targeted 3.3%; and the deficit target at 3.4% for 2019-20, instead of 3.1% – but pegged it at 3% in both of the following two years. That should keep the rating agencies and institutional investors happy. How the numbers add up remains to be seen.The Congress plan appears to be more ambitious, and the loan waivers recently announced in Congress-ruled states would raise concerns about a possible fiscal breach. We will, however, have to wait for financial details before reaching a verdict. The Congress plan, being more broad based, will likely be politically more attractive for farmers if implemented well. But that is a big ‘if’.A cash-transfer system has the potential to deliver significant welfare gains. However, policymakers should be wary of overambitious targets because it would be both fiscally imprudent and difficult to implement.Indrani Dattagupta is a UK-based business journalist and has previously worked for the Economic Times and the Wall Street Journal.
