Tuesday, July 17, 2007

Arvind Virmani: Poverty can be eliminated

A modern smart card system that delivers cash and/or subsidies to the poor could do the trick.

What is the cost of eliminating poverty and hunger in India? That of course depends on the extent of poverty, which has been mired in academic debate about the measurement of poverty. There is however universal agreement that in the years from 1993-94 to 1999-2000 the poverty rate (HCR) was between 25 per cent and 35 per cent. We can therefore skirt the esoteric debate about the precise change in poverty between 1993-94 and 1999-2000 and its level in either year by considering three numbers. For each of these years we order the households/person by consumption level and identify the ones which are 25 per cent, 30 per cent and 35 per cent from the bottom. That is, we identify in each year the consumption level of the person(s) who would be just at the poverty line if the poverty rate was 25 per cent, 30 per cent and 35 per cent, respectively. Then we calculate the income transfer needed for everybody below that level to be brought up to the level. The data are summarised in the table .

In 1999-2000, the total subsidies provided by the central government were Rs 25,690 crore, of which Rs 22,680 crore were for food and fertiliser. During the same year the central and state governments together spent another Rs 28,080 crore on “Rural Development (RD),” “Welfare of SC, ST & OBCs” and “Social Security and Welfare”. Either of these was sufficient to bring all the poor to the consumption level of the person/household at the 30 per cent level. Given that poverty was between 26.1 per cent and 28.6 per cent, either of these if transferred directly to the poor and disadvantaged would have eliminated poverty. Together these subsidies and poverty alleviation expenditures (Rs 53,770 crore) would have been sufficient to eliminate poverty in 1999-2000, even if administrative costs and leakages used up half the allocation (and the small fraction of rural development expenditure on water supply were excluded).


Poverty Rate (HCR) or Cut off line (x)

25% 30% 35% 50%
Average Per Capita Expenditure (1999-2000)
Person at x% line 4092 4356 4632 5532
Persons below x% 3273 3523 3622 4026
Average Gap 819 833 1010 1506
Number below x% (crore) 23.1 27 32 46.21
Total GAP (Rs crore) 18914 22478 32318 69584
Average Per Capita Expenditure (1993-94)
Person at x% line 2288 2448 2596 3102
Persons below x% 1810 1927 2029 2258
Average Gap 478 521 567 844
Number below x% (crore) 21.1 25 29 42
Total GAP (Rs crore) 10086 13016 16448 35459

It can be argued that the most efficient social welfare policy is a direct transfer of income to the poor through a negative income tax. In a developed country, this would be very easy. How can we transfer these amounts directly to the poor, the needy and the disadvantaged in a poor country? The answer: By setting up an Indian version using a modern smart card system that delivers cash and/or subsidies to the poor, based on their entitlements in accordance with specified parameters and norms.

Such a smart card could be programmed with identity (photo & biometric fingerprint), and have information on social (SC/ST) and personal/household characteristics. Each person/household’s entitlements could be in the form of specified subsidies for food/cereals, kerosene, midday meals, nutrition supplements, drinking water, toilet/sanitation services, basic drugs, schooling (primary/secondary), Internet access, electricity and a host of other items reflecting the dozens of subsidies and programmes currently in existence. The entitlement could be varied with and dependent on economic and social handicaps such as SC-ST, age (infant or aged), mental handicap, physical disability, female head of household, lactating mother, chronic illness, etc. In this way the current stakeholders, special interest groups and social policies could be accommodated in a single integrated system.

These subsidies would have to be collected through the smart card system, as is done currently in a credit card system. Alternatively, these entitlements could be calculated and consolidated into a single cash value to be delivered to the beneficiary every month at his residential address, through the smart card system. Though on theoretical economic grounds the latter may be the preferred option, the former would also yield substantial gains and perhaps be more feasible at this stage.

If poverty could be eliminated so easily why has this not been tried before? There are many reasons, but the most fundamental is illustrated by the following experience: In the formulation of the Tenth Plan for food policy/PDS, there was a proposal to gradually introduce a credit /debit /smart card system to replace the existing PDS, characterised by enormous leakages and high administrative costs. In this system the entitled person could obtain the specified subsidy from any participating supplier of food/cereals. The person would pay the supplier the difference between the market price and the unit subsidy, and the supplier would collect the subsidy from the government. The formal proposal was to carry out an experiment (as a first step) to determine its effectiveness and to learn about and iron out any problems that may arise. Consequently funds were allocated for introducing it in a sample of urban areas along with the introduction of a food stamp system in a sample of rural areas. Not a single state government agreed to undertake this experiment, as it has the potential of dramatically reducing leakages and administrative costs.

The smart card would also constitute a national identity card. For instance the card could contain information on citizenship, tax status, and voting eligibility. Secrecy and confidentiality clauses would have to be built into the national smart card system by law. Many agencies of government (e.g. CBEC, CBDT, and Home) can therefore use the card by accessing their own special modules (password protected access to memory segments) within the card for their specialised needs.

The cost of setting up and running a nationwide cash delivery system for the poor would probably be significantly less than that of a commodity-related system. The total steady state cost of running this system (including depreciation and return on capital) should be of the same order as the current credit card systems (<>

An independent authority including government officials and non-government organisations could be set up to monitor the integrity of the Poverty Elimination System. This supervisory authority would ensure that private operators are running the smart card system in a manner needed to ensure that the subsidy reaches the poor.

Contrary to popular wisdom, the large number of the poor has little to do with income distribution. Our income distribution as measured by the Gini co-efficient is better than three-fourths of the countries of the world. Further our rank with respect to income distribution is even better, with the poorest 10 per cent of the population having a consumption share that is the sixth highest in the world. Poverty can be eliminated within five years if we radically change the approach to “poverty alleviation” which was started in the early 1980s. Smart cards, anyone?

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