Column: 1960s-style thinking on poverty

Written by Surjit S Bhalla | Updated: Jul 18 2014, 07:11am hrs
There was a lot of expectation that specific reforms would be announced in Budget FY15 regarding the operation of subsidies in India. None cameindeed, the Budget has been criticised by many for lacking any reforms on expenditure policy. Pointedly, many analysts have concluded that Budget FY15 is just another UPA-Chidambaram budget.

However, what was announced in the Budget is that the government will create a commission to look into the entire nature of our expenditures, with specific emphasis on poverty elimination. And the biggest such item is the Public Distribution System (PDS) of foodgrains meant for the poor.

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In a recent India Policy Forum lecture (India: Changing Mindsets, Accelerating Growth, and Reduced Inequality), I made the simple point that the mindset that has produced policies like the Food Security Act (FSA)which mandates that two-thirds of the Indian population are deserving of food subsidiesand NREGA , a jobs entitlement program for all of rural India, needs to be junked before India can look forward to realising its destiny of being an 8 %-growth economy and a major emerging power on the world stage. The Sonia Gandhi-led UPA mindset was inconsistent with the belief that India can be anything but a poor country, not much different than the nightmare concocted by Swedish Nobel prize winner Gunnar Myrdal in the late-1960sthe three-volume Asian Drama, from 1968, in which his contention was that Asia was doomed to be poor forever. Myrdal can be forgiven for speaking too early, and being wrong, but what do you say about politicians, and policy makers, and their intellectual advisers who still believe in 2014 that Myrdal was right and that India is a forever-poor country

In 1968, Indias per capita income was around $100 per person per year. When the food security law was passed last year, Indias per capita GDP was 15 times higher. Yet our mindset was pursuing the same policies as fifty years earlierindeed, expanding them. The PDS system has been in operation since 1942 when it was introduced to counter famine conditions in Bengal. It was expanded over the years and became a full-fledged all-India operation around the time of Myrdals book. The food-/cash-for-work programme was first introduced in 1973 in Maharashtra, and introduced primarily to provide incomes to very poor people during conditions of drought. In 2005, Sonias government introduced an act of parliament to make it a right of every individual to have 100 days of work. The effectiveness of this program (NREGA) in achieving its noble objective of providing incomes to the poor will be explored in a subsequent article.

A good documentation of our ancient mind set is provided by the Indian discussion on poverty and its alleviation. A new report on measurement of poverty, commissioned by the UPA a year ago, has just been released (Rangarajan Report of the Expert Group to Review the Methodology for Measurement of Poverty). There is nothing in this Report that is different (forget new) from the first poverty line report produced in the mid-1960s. (Note how things literally havent changed since the 1960s!). The report then also (mistakenly, in my view) based poverty on caloric intake. This method was demolished by nutrition expert PV Sukhatme in 1973; but our mindset is not bothered by any evidence contrary to ones ideological predilection. So entrenched has the poverty industry been in India, mostly in the Congress-led governments who feel it is in their political interest to perpetuate the notion that India is poor, that it has published four reports since the mid-1960s study, and all of them (including obviously the Rangarajan report) have stuck to the same outdated, and false, notion of absolute poverty.

So much has happened, but our knowledge-proof poverty experts remain oblivious. The calorie obsession has to do with notions of nutrition. Sukhatme pointed out that there was so much inter-individual variation in body metabolism that caloric consumption intake was a highly misleading indicator of nutritional well-being. Recent research has emphasised sanitation (read toilets and open defecation) as a major contributor to nutrition, thus further reinforcing the conclusion that measuring poverty via caloric intake borders on the nonsensical.

Should we not, as a society, be much more concerned with effectively targeting the poor population and methods to best deliver incomes to it For sure, all the answers are not known, but enough is known to suggest that cash transfer is the best transfer system. Do the transfer in cash rather than a very indirect in-kind method (the latter is much like catching your nose by circling your hand behind your neckmost cant reach it).

When I presented my findings regarding PDS efficiency at the IPF lecture, one sceptical economist wondered aloud as to what data could substantiate such absurd() findings. As is well known to most observers of Indian policy, the National Sample Survey Organization collects detailed data on the various items of consumption. This exercise is undertaken every 5 years, but sometimes the gap is less than five. The detailed questionnaire asks separately for the quantity and price of food items bought from the market, or bought from the PDS ration shop. As such, there is fairly complete information available on the PDS received by each household in the economy.

In FY12, the NSSO data shows that average consumption of cereals was about 10 kg per person per month, and that the poor received less than a third of their consumption via food subsidies. The food subsidy bill in FY12 was R73,000 crore. Only half of the foodgrains that was ostensibly sent to government shops (called offtake) actually reached the shops. Where did this other half gorotted and sent to liquor manufacturers (rotting or fermenting grain is good for alcohol consumption), or sent to food mills for later entry into the market, or... You can fill in the blanks. The fact remains that less than 50% of foodgrains meant for ration shops ever reaches the ration shops.

Once food reaches the PDS ration shops, 40% of the poor do not receive any subsidy. The net effect is that of every R100 spent by the government, only R15 reaches the poor. Or the poor got only R12,200 crore of food subsidies of the R73,000 crore meant for them. BJP, Modi, Expenditure Commissionare you reading, and will you change the system to maximise governance, and reduce corruption

The author is chairman, Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin, a leading financial information company. Twitter: @surjitbhalla