India spends close to four per cent of its GDP on an alphabet soup of welfare schemes and subsidies - it has become a welfare state before becoming a developed state. Despite its significant costs, India's welfare system is neither comprehensive nor very effective - subject to huge leakages and corruption, and not well knit into a coordinated whole.
Subsidies on the 3 Fs - food, fuel and fertiliser - cost 2.5 per cent of GDP, greater than the sum assigned to all development schemes. In the 1960s and 1970s, when India had mass poverty, subsidising products, such as food or fuel, made some sense; but today, when poverty has declined, product-based subsidies mainly benefit the non-poor and distort markets. We need to move away from product- to portable people-based subsidies - especially as India will witness 300 million migrants over the next 15 years. Cash transfers have proven to be the best delivery option to reduce costs all over the world, through better targeting without diluting benefits.
The PDS costs Rs 3-4 to deliver Rs 1 of subsidy. Much attention has been placed on leakages in fair-price shops, about half of which are due to corruption. The other half are due to a deliberately outdated ration card system based on household surveys carried out in 1993-94. This should be fixed by updating the beneficiary lists and moving to cash transfers. But the bigger problem lies in the operations of the Food Corporation of India, which procures, stores and moves grain from surplus to deficit states and does all this very badly. Fixing the FCI maybe one solution but doing away with it altogether must also be an option.
One bold solution would be to shift not only to cash transfers on the consumer side but also on the producer side, as in Mexico and in Turkey. This would allow the government to collapse fertiliser and all other input subsidies into a cash subsidy, and allow the private movement of grain from surplus to deficit states, with the government buying small quantities needed for its strategic reserve. Public stocks would decline from the current level of 80 million tonnes to around 20 million tonnes, with huge fiscal savings. The entire food market would shift out of government hands into private hands. Several emerging economies such as Mexico and Turkey have made such a switch with savings of around 60 per cent.
India cannot afford to rely only on Western-style welfare. It runs one of the world's largest "workfare" (cash-for-work) programmes, the rural employment guarantee scheme - but with mixed success and huge implementation problems. Part of the problem is that there are at least 18 other uncoordinated schemes that deal with rural and land development. The MGNREGA scheme itself has seven stated objectives - so it's difficult to measure success, especially as none of these seven has any clear yardstick for success. Even the basic objective of 100 days of employment is not based on any assessment of needs. Some states may need 50 days, and others may need as much as 150.
Ironically, more developed states, with better administration, have used these schemes more than the more needy backward states, widening further the gap between them. The assets created have not been durable and their creation is not consciously linked to any district- or block-level development plan. In 2013-14, it cost Rs 175 to deliver Rs 132 of wages, of which about Rs 90 actually got to beneficiaries (using a leakage rate of 30 per cent). But if no real assets are created, it's better to shift to a simple cash transfer to help the beneficiaries and save money.
Since last year MGNREGA work has been allowed on private small farms of backward communities, which has helped improve land productivity and its employment potential by enabling the shift from traditional cereals to more lucrative cash crops, vegetables and fruit. But these remain a very small part of the total scheme so far. MGNREGA work has been allowed for building toilets - but that diffused its core objectives even further and has now fortunately been stopped.
India needs workfare to complement welfare, but it should be refocused on fewer objectives that will increase community resilience to drought and climate change such as land improvement, water management and reforestation. It should also have a sunset clause so that once the assets are built, MGNREGA support can be phased out in a particular area.
The health-related schemes also need significant review and rationalisation. Of India's Millennium Development Goals for 2015, it is furthest behind in maternal and infant mortality (and neo-natal mortality). Despite so many schemes, "out of pocket" expenses on health, at 60 per cent, are the highest in the world. But in health, cash transfers are not the best answer, as shown by the poor experience with Janani Suraksha Yojana. Better results are being achieved by the recently introduced Janani Shishu Suraksha Karyakram (JSSK), which is a cashless scheme designed to provide a combined package for the mother and child from seven months of pregnancy to one month after pregnancy. It has helped reduce the maternal mortality rate as well as the neo-natal mortality rate.
A patchwork of ineffective health insurance schemes, such as Rashtriya Suraksha Bima Yojana (RSBY) and various state schemes also need a revamp. With a migrating population, India needs portable national schemes and not a patchwork of state schemes.
Hopefully, the new Expenditure Commission will provide a comprehensive review of India's welfare spending to lower its costs and improve its benefits to the poor and modernise it for the 21st century. Small fixes here and there, scheme by scheme will not do it. We don't need more schemes but a modernised welfare/workfare system to protect people.
The writer headed the Independent Evaluation Office and was Assistant Secretary General at the United Nations
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