Welfare Reforms and the Leviathan State

Abstract

Should cash transfers replace targeted in-kind food transfers and public works program? Can making welfare provisions universally applicable make the program more effective? Would technological innovations help overcome implementational deficits in the welfare delivery systems? Why not introduce a singular program of universal basic income (UBI) as an alternative to the array of poorly implemented welfare schemes? But does India have the fiscal and organization capability to manage and fund an expansive set of social safety nets? Social safety net debates in the country are currently organized around these questions. In this chapter, we unpack the arguments and evidence on either side of the debate and offer suggestions for future policy.

Introduction

As social safety nets programs are increasingly recognized for their usefulness in poverty reduction and building resilience in the Indian policy debate, an intensely contested and polarized debate has emerged on how to design and implement the programs more effectively. This debate touches upon the fundamental aspects of the social welfare programs—what is an effective way to reach the vulnerable population (focus)? what is the most cost-efficient and welfare enhancing form of welfare transfers? Do the transfers improve long-term welfare of the households (scope)? These questions have emerged as central to social policy as the economic, demographic, political, and technological change has brought about progress, but also generated newer sources of vulnerability.

In the chapter, we would focus on 4 key questions. First, do cash transfers provide a better alternative to the lengthy value chain of welfare transfer infrastructure beset with implementational deficits? There are auxiliary parts to this question. Shall cash replace food transfers through PDS only, or other welfare programs as well? Should it be narrowly targeted or take the form of a universal income transfer (UBI)? Second, given the implementational deficits in reaching the most deserving, can technology help overcome the governance of social welfare programs? Is payment through a biometrics-based digital identification the panacea to reducing last-mile corruption? Third, given India still being a developing country with limited financial resources, does it have to wherewithal to have an expansive social welfare system? Fourth, two decades of expansion of social welfare have now created economic and political disquiets around welfare payments considered as ‘freebies.’ What does it imply for the future of social welfare programs?

Cash Transfer: Changing the Form of Welfare Transfers

Given the inefficient design of welfare delivery system which is beset with administrative inefficiencies, leakages, and promotes corruption and rent seeking, cash transfers have been introduced as a more efficient alternative form of welfare delivery. Theoretically, the case for cash is an economically sound one. A lump-sum amount of cash can have multiple benefits. First, it would expand the set of choices beneficiaries have in terms of household resource allocation and does away with the element of paternalism imbedded in the current form of welfare delivery. Cash eases immediate financial constraints and is likely to reduce borrowing from exploitative informal credit markets. Second, replacing in-kind transfers would also imply getting rid of the institutional system of welfare delivery which has not only been a source of corruption hurting beneficiaries but also an impingement to government’s fiscal health. Third, in the case of India, a cash transfer is also likely to alleviate the interpersonal and regional inequity in the distribution of subsidies. Currently, food or fertilizer subsidies provide disproportionally high benefits to the economically prosperous rice growing regions of the country as compared to the poorer states.

One of the earliest proposal for cash transfers was made by Subramanian et al. (2008) marking ‘a radical shift in the structure and mechanism of spending on poverty reduction programmes.’ Their back-of-the-envelope calculation of a potential monthly transfer—computed by dividing the total budgetary expenditure on 30 centrally sponsored major social welfare programs by the number of poor in the country—suggested substantial fiscal savings over what is currently spent on anti-poverty programs. They particularly argue for replacing food transfers, fertilizer subsidy, housing subsidy, and the self-employment assistance program with monthly monetary handouts. Distributing cash, however, would create newer infrastructural requirements. The authors suggested that a unique biometrics-linked identification cards be provided to every citizen in the country, and the poor among then should be identified through the local participatory institution (panchayati raj institutions, PRIs) as traditionally done in the country, with frequent revisions to the list. The stipulated cash transfers should finally be provided into the account of a female member of the household.

This much avowed ‘revolutionary’ idea, however, skirts around some of the structural issues with the existing welfare delivery architecture. Cash transfers with a focus on the poor imply reliance on the same set of identification tools which are fraught with targeting errors. It is also unknown how cash transfers would reduce the power of local elites—principal contributor to the implementational deficit—in rural areas are less likely to disappear through participatory governance. Lastly, the required technological infrastructure—identity cards, internet, bank accounts, and financial literacy—is still lacking in most parts of the country, especially those where social welfare programs are of most importance. To sum up, any form of welfare delivery must face the grim realities of the Indian state, which is characterized by underdevelopment, low state capacity, bureaucratic apathy, and elite capture.¹

Implementational challenges aside, the role of cash transfers in bringing about a transformational impact on poverty and make households resilient—assuming it to be the scope of cash transfers—requires rigorous empirical scrutiny as the nature of poverty and its determinants are likely to vary across context. There is a growing body of empirical work which supports the argument that ‘small, recurrent, and reliable’ cash transfers to the poor households improves multiple aspects of their well-being, such as consumption, savings, child nutrition, and mental health among others while lowering the incidence of teen pregnancies, child marriages, and intimate partner violence.² Cash transfers prove particularly useful during times of natural calamity and exogenous negative shocks such as COVID-19 in increasing the adaptive capacities of the poor in the short-term.³ Their medium to long-term impact in increasing human or physical capital accumulation, however, remains less convincing because sustainable transition out of poverty depend upon the amount of transfer, along with the nature and extent of poverty, and household’s initial asset endowment, access to markets, financial infrastructure, and property rights (Balboni et al. 2022; Blattman et al. 2020; Haushofer and Shapiro 2016). As a result, while cash transfers potentially increase short-term welfare of the poor, the transferred income is mostly spent on immediate items of consumption such as rent, food, or energy and therefore the positive gains are not likely to persist even for more than six months (Altındağ and O’Connell 2023). For the poorest of the poor, also referred to as ultra-poor, long-term reduction in poverty, therefore, requires a range of social assistance—consumption support, asset transfer, entrepreneurship training program, etc.—along with cash transfer for a sustainable reduction in poverty (Banerjee et al. 2015, 2022, 2021). Cash transfers, therefore, can’t be conceived as the only form of social assistance when the scope of social policy is to reduce long-term poverty and make households resilient. Surely, it could be one among other forms of welfare support.

The Old Debate: Cash or Food?

Old age pensions, maternity benefits, and farm income support, apart from other subsidies to the poor such as scholarships, cooking gas, are some of the existing cash-based social welfare transfers in India. However, the area where cash transfers have been proffered as the most compelling alternative is the replacement of food with cash. This debate has generated steam as food assistance through PDS has expanded to an unprecedented scale in the recent times.⁴

The theoretical case for cash is a sound one because food transfers amount to a deadweight loss. Staple grains-based food assistance programs entail huge operational costs on the supply side—state-led procurement, storage, and distribution of food grains—and on the demand side, they reduce consumer’s food choice. Consumers could have spent the money on more nutritious food items or incurred essential non-food expenditure. While there is no disagreement on the fiscal argument, the welfare effects on household from cash in lieu of food has been the source of debate. Critics of the cash argument cite market failures (absence of food markets and the fear of inflation), lower state capacity and credibility (government’s ability to deliver regular cash payments on time), and behavioral attributes of the beneficiaries (fear of wasteful expenditure, and differential ownership of cash and food in the household) as reasons to continue with the current form of food-based assistance. How much of these reservations stand to empirical scrutiny?

Global Experiences with Cash Transfer

Cash transfers increase household welfare in regions where markets are present and average income levels reasonably higher. Comparing cash and in-kind transfers across different regions of Mexico, Cunha, De Giorgi, and Jayachandran (2019) find that in remote areas, in-kind food transfers lead to a reduction in food prices, while cash transfers have the opposite effect. Food transfers, therefore, have greater overall benefit to the consumers than cash transfers of an equivalent amount in the absence of well-functioning markets.⁵ Experimental studies from Ecuador, Niger, Congo, and Mexico further reveal that the cash versus food debate also needs to account for the income levels of the context in which the question is asked because household in poorer regions might prefer food even if it is of poor quality, while above a certain income threshold, they may prefer quality over quantity, which thereby affects the estimated welfare impact.⁶ As a result, in-kind food assistance is preferable in poorer and inaccessible geographies.

Besides supply and income considerations, poor consumers may value food over cash for various reasons such as gradual erosion of purchasing power because of food price volatility and inflation, inherent transaction costs associated with going to a financial institution to access cash, or confidence in the government institutions. A survey which solicited about this option, an overwhelming majority of the beneficiaries of Ethiopia’s Productive Safety Net Program (PSNP) expressed a preference for food transfers, despite cash being the dominant form of payment in the program (Hirvonen and Hoddinott 2021). While households with better access to food markets and financial services preferred cash, the majority responded to in-kind transfers as their preferred form of welfare payment. The preference for cash also depends upon the citizen’s perception of past government performance and their trust in its ability for redistribution. In a survey in Tanzania, two-thirds of voters expressed approval for spending gas revenues on government services than cash transfers, arguing that “social services encourage a collective voice that helps increase accountability, while cash transfers would focus people on private interests and leave room for corruption” (Sandefur et al. 2015).

Prospects of Cash Transfers in India’s Complex Socio-Political Landscape

Cash transfers in lieu of food (mostly calorie-rich, rice and wheat) would surely expand the choice set of the poor Indian consumers to buy more nutritious items, yet a pilot study conducted in Bihar, Muralidharan et al. (2011) finds that respondents do express concerns about moving to a cash-based system. They expressed inflation, delayed or incomplete payments, and the risk of cash being spent on non-food items as reasons for preference of PDS over cash. Further, they elicited a higher amount than the value of PDS subsidy, on an average, as their willingness to pay to move to cash in lieu of food. It can also be argued that disappointments with other cash-based transfers acts such as pensions, and wage payments in the public works programs also influences their stated preference for in-kind transfers (Khera 2014).

Cash in lieu of food might allow Indian poor to buy other food items, but to exercise such an option there needs to be sufficient supply of such food items in the private market at affordable prices. Given the inadequate value chain development of nutritious food products in the country, particularly in rural areas, moving to cash might deprive the poor of food security, the scope for which the PDS was designed.⁷ The transactions cost of accessing cash might be more than getting food at the closest PDS shop. Further, food price volatility is a common feature in the country and beneficiaries might worry about the erosion of purchasing power of the cash transfer.⁸

Critics of in-kind transfers argue that there is paternalistic note to continuing with the current system—a belief that poor can’t make wise economic decisions on their own. Poor beneficiaries might not spend cash on wasteful expenditure and on temptation’ goods such as alcohol or tobacco.⁹ Yet, one must also account for India’s social context where adverse intra-household bargaining power, and self-control influence the beneficiary preference for food in place of an equivalent amount of cash (Khera 2014; Pradhan et al. 2015). Poor consumers might have a preference for food because it allows them to have a constant supply of food throughout the month, while cash might be spent on one-time bulk purchase of other items.¹⁰ This does not imply that the poor can’t make correct economic decisions for themselves, or act impulsively, rather it is a symptom of scarcity itself, which lowers their cognitive bandwidth required to strategize and plan an investment.¹¹

Perhaps, a bigger obstacle to the cash versus food debate in India emerges from the unequal agency of women within a household. In an Indian household, women traditionally have a greater say in the control of the kitchen, while men control financial transactions. The move from food to cash could entail an adverse effect on the bargaining power of women who is in charge of the household food security. An incentivized experimental survey from low-income neighborhoods in Nashik, Maharashtra reveals this behavioral preference (Abbink et al. 2022). Respondents in the survey, mostly women in male-headed households, were asked to choose between varying amounts of cash and the fixed quantity of rice they get from the PDS. Most of them chose a much higher value of cash over the value of the food subsidy that they were receiving, suggesting their preference for in-kind food transfer.

Citizens may also resist cash transfers if they have a lower trust in the government to provide regular payments without administrative hassle. Further, if the promised amount is not revised regularly to account for inflation, it may lead to a loss of welfare to the poor. Old age pension amounts haven’t been revised in the last three decades since their inceptions and have been left to the states to revise it upward. The states which have increased the amount are also the one with lower levels of poverty. For cash to be an alternative, the government must provide a credible policy signal. In a survey of 3800 respondents in Bihar, one of the poorest regions in India, 87% preferred investment in public health infrastructure over cash (Khemani et al. 2019). The former was overwhelmingly preferred among the poor and less educated. Insufficient infrastructure and quality of public services lower the trust in government to provide regular payments of cash. Beneficiaries of the conditional cash transfers (replacing bicycle provision for school going children) expressed a clear preference for in-kind payment as the disbursement of money too inordinate time, and often the amount was insufficient to purchase a bicycle (Ghatak et al. 2016). Similarly, the confidence in local institutions to provide the food entitlements may be higher than an electronic money transfer through an impersonal technology and limited financial infrastructure. Currently, around 500,000 PDS shops in the country provide food rations—one shop in 75% of the villages—while banks and post offices which would be required to provide cash payments are present in only 8 and 25% of villages which (Narayan 2015). A pilot study in some of the most urbanized regions of the country shows that 20% of the beneficiaries did not receive the money, while for some who lived farther from the markets and ATM machines were unavailable in the neighborhood, transaction costs—of time and money—were substantially higher than the benefits (Muralidharan et al. 2017). Movement from food to cash transfers therefore creates a huge expectation from the financial system to deliver welfare.

As a result, the debate has now veered toward providing citizens the option of choosing cash or food.¹² The proposed choice-based model relies upon digitization of the PDS value chain, ubiquity of e-POS devices for every transaction, and portability of benefits across different shops where beneficiaries can ask for food or cash whenever they would like. We would discuss later in this chapter, how individual details, along with their bank account information, are now linked to their unique digital identity which allows cash to be transferred into the beneficiary’s account, preferably a female member on whose names food ration cards are issued.¹³ The option of cash would also incentivize the PDS shop owners to provide better services and reduce diversion of their stock to the open market. This seems a reasonable mid-way solution but would still require addressal of some of the structural issues associated around implementational deficits, credibility of the government to deliver regular payments, intra-household distribution of resources, and the over-reliance on the fragile technology to provide welfare payments to the poor. Food versus cash debate in India, therefore, must be situated in the complex economic, social, and political reality of the nation.

Lastly, the choice of cash versus kind is also a political one. Replacing food with cash implies an end to massive procurement system which was set up five decades ago to increase food security to the consumers and incentivize farmers to produce more through minimum support prices (MSP). Replacement of PDS with cash would require an overhaul not only of the food subsidy to the consumers but also newer ways of social support to the farmers, and agricultural market structure to reduce price volatility and build buffer stocks for emergency. Agriculture market reforms which were initiated in 2020 received a massive backlash from the farmers, and the government had to ultimately roll them back.¹⁴ While a cash transfers through a new social protection scheme, PM-KISAN, has been launched, the amount is meager especially in the context of stagnant farm income in the country. Moreover, the scope of PM-Kisan is to support small farmers (focus), while the scope of PDS is to remove hunger and food insecurity among the poor. Cash versus food debate, therefore, pits one policy objective against the other and creates a trade-off between the welfare of some citizens at the expense of others. The ‘radical shift’ toward cash, therefore, requires a fundamental rethinking not only around the form of welfare transfers, but also the scope and focus of state-led welfare programs, in general.

Targeted or Universal Benefits?

Indian social policy has constantly wrestled with the question of whether welfare schemes should focus only on poor or span the entire population. Targeted schemes focus on the needs of the poor and the vulnerable, allowing for a more concerted attention to the cause of poverty, while using the limited fiscal resources efficiently. The efficiency objective, however, runs into a trade-off with the economic, moral, and political costs of targeting.¹⁵ Targeting errors are inevitable in developing countries where income—to determine poverty status—is not directly observed. Any eligibility criteria are bound to leave out some of the deserving citizens (exclusion errors) and include the non-deserving (inclusion errors). The magnitude of these errors is determined by the choice of targeting criteria, the quality of information on citizen’s income and assets, and the extent of last-mile corruption. The acceptability of these errors, however, depends upon the nature of politics and citizen empowerment. We have discussed earlier in the book that countries with a more progressive social policies prioritize ‘universalism’ considering it as a part of the social contract where welfare entitlements are the rights of a citizen, while countries with a targeted system devise eligibility rules to determine the ‘deserving’ population. Most of the developing countries including India mostly employ targeted welfare programs when fiscal resources are limited.¹⁶

While the benefits and pitfalls of welfare targeting are an old debate, it has gained greater significance in the Indian policy debates along with the greater calls for cash transfers replacing food-based social assistance. The choice of targeting is an ideological choice. Given the importance of early life disadvantages for human capital and intergenerational poverty, social welfare programs with a focus on children—nutritional assistance, and school meals—have universal eligibility, while public works program focus on the rural labor. Food transfers, public health insurance, and old age pensions, on the other hand, are meant for those identified as poor. Poor and non-poor in India are identified through the above poverty line (APL) and below poverty line (BPL) cards which were introduced when PDS make a targeted program in 1997. With the National Food Security Act (NFSA) in 2013, the PDS coverage has been expanded with households being classified as ‘priority’ and ‘non-priority’ households. Other schemes like PM-JAY for health insurance have also expanded the targeted beneficiaries from those identified as BPL households. Beneficiary targeting, however, remains an administrative hassle, a source of exclusion, and contributor to burgeoning fiscal costs in the absence of limited information on household’s socio-economic situation. For these very reasons, it has been singled out as one of the primary reasons for a shift away from in-kind benefits to a progressively universal cash transfer.¹⁷

Amartya Sen had famously said, “benefits meant exclusively for the poor often end up being poor benefits” (Sen 1992). There are several reasons why progressive universalism works better in the Indian case. Over the last two decades, the expansion of beneficiary coverage (focus)—as local government have revised targeting criterions—has led to improvements in the performance of social welfare programs.¹⁸ First, finer targeting reduces political support for the programs. Greater share of beneficiaries allows for lesser opposition from any particular interest group and enhances political support behind the program.¹⁹ This not only leads to greater enrollment but also facilitates stronger citizen participation thereby reducing last-mile implementational challenges. Second, targeting is efficient when institutions are transparent and targeting rules are non-discretionary, otherwise it creates an opportune environment for rent seeking and corruption. With limited information on the poverty status of citizens, the poor and non-poor classification is often found to be discretionary despite a list of exclusionary criterions. Targeting errors—both inclusion and exclusion—are often a function of who the local elites consider poor, and the process is replete with corruption and favoritism.²⁰ With progressive universalization of benefits, these errors have however reduced. Third, targeting precision has been enhanced through several attempts at a systematic database of all citizens of the country. Initiatives like Socio-economic and Caste Census (SECC) 2011, a door-to-door enumeration of citizens and an array of social and economic indicators pertaining to their households conducted by the Ministry of Rural Development, Government of India, allowed for the creation of a large database—with its own imperfections—which became the basis of expansion of PDS and other welfare programs.²¹ A live roster of citizens is now maintained under digital identity initiative, Aadhaar, about which would discuss in the following section, has further enabled in creating a database of potential beneficiaries.²²

We would like to argue that when the majority of workforce is outside the employer-based social security system, covering a larger set of beneficiaries under social assistance program is key for resilience building—to address current poverty as well as poverty in the future. Throughout this book, we have highlighted that there are poor and there are those who are at the risk of falling into poverty. Building resilience requires social support for the symptoms as well as cause of poverty.²³ Moreover, the poor themselves are variegated—with some closer to the poverty line while others stuck in a state of poverty trap—and household-based poverty line is possibly not the best indicator for the range of vulnerability over a life course for an individual. A progressively universal social welfare, therefore, avoids such errors of exclusion, even when there are errors of inclusion.²⁴ This trade-off is inherent when targeting is a part of the policy design. Indian social welfare policies have tried to reduce it through progressively expanding the set of beneficiaries as part of the emerging social contract.

Is Universal Basic Income (UBI) the Solution?

There is a strong call for universalization of social safety nets globally with idea of Universal Basic Income (UBI) gaining political traction. Envisaged as an unconditional cash transfer to every citizen of a nation, financed through progressive taxation, it would allow for a substantial income redistribution and surmounts the inefficiencies associated with in-kind subsidies and a narrow focus on the identifying ‘deserving’ citizens.²⁵ Justifications for UBI are derived from normative concerns of helping the poor as well as the implementational inefficiencies inherent in the current design of the social welfare programs. There is a lot to like about the idea of unconditional assured income to every citizen in a poor country. Universal Basic Income (UBI) is an elegant way to protect risks to livelihoods and ensure a life of dignity. For those, who prefer not to work (or engage in paid work) and those on the search for work, the nominal amount of UBI transfer would allow to sustain a life at least at a ‘social minimum.’ In a world where every citizen has an address, a bank account, and the agency to use the money at their discretion, benevolent governments can transfer a stipulated amount of UBI to the registered bank account of every resident of a country, like a monthly paycheck.

Economic Survey of India 2016–17, under the leadership of economist Arvind Subramanian, an early proponent of cash-based welfare system, introduced the possibility of a UBI to replace existing welfare schemes (Government of India 2017). The report made a conceptual and philosophical case for UBI as a ‘radical new vision’ which “puts money into people’s hands” and provides the “shortest path to eliminating poverty.” It argued that UBI—in lieu of other forms of transfers—would offer a solution to many of the inefficiencies associated with identifying and providing beneficiaries of the welfare payment. It obviates the need of intermediaries—local state institutions such as bureaucrats and politicians—in helping the poor. The semantics used in the survey appealed to the rights-based aspect universal entitlements to cash-based welfare. It said, “every person should have a right to a basic income to cover their needs, just by virtue of being citizens” and further claimed that UBI could become the form of welfare transfer which can address some of the fundaments concerns of human development—social justice, individual agency, poverty, and unemployment—in the most efficient manner. UBI, can therefore, replace all existing subsidies provided by the government. The proposal, however, stopped short of the strict universality and instead termed it as a quasi-UBI covering 75% of the population. Based upon the official poverty numbers, an annual UBI of INR 7620 per person (around 100 USD) for the year 2016–17 was computed which was assessed at around 4.9% of the GDP. These numbers subsequently ignited a debate around the feasibility of UBI, the optimal transfer amount, fiscal costs of the transfer, and the required infrastructure to make these transfer work.²⁶

In the parlance of this book’s framework, the scope of UBI is to reduce poverty through a guaranteed welfare transfers in the form of cash payments to those in the bottom 75% of the population (focus). It would be difficult to imagine cash transfers or UBI to be the single form of social safety net which could address vulnerabilities which emanate across the life cycle of a human being. Not all social welfare schemes can be substituted with a cash transfer, especially the early life interventions. The provision of school meals, or nutritional support to pregnant and lactating mothers, along with a menu of care provisions for preschool children is designed because of the missing market for early life care and stoking behavioral nudges which are key to long-term development of child health. It is for this reason, even the developed countries—where it is easier to implement UBI—continue to have an active welfare provision without any discussion on moving to cash transfers. PDS or MGNREGS are the only major scheme which could be a like-to-like replacement for UBI. Other major social safety net programs like maternity benefits, old age pensions, and cash transfers to farmers (with a focus on distinct population groups) are already being provided in the form of cash. Earlier in this chapter, we have discussed the challenges of replacing PDS with cash transfers. Under MGNREGS, beneficiaries are paid wages in their bank account for their labor employed on public works program. If MGNREGS wage payments are provided as monthly cash transfers, rural infrastructure creation as the secondary scope of the program—providing income security being the primary one—would be compromised. One must note that the success story of MGNREGS has been its contribution to rural economy on multiple fronts—fallback employment option during times of economic distress, infrastructure creation, improving wages and bargaining power of labor, and facilitating labor force participation of women, among others, thereby facilitating rural resilience.²⁷ Can UBI be the tour de force it is envisaged addressing the multidimension developmental deficits many of these social welfare schemes—as intended in their scope and their inadvertent impacts—currently address?

One can only speculate upon the short- and long-term welfare impact of UBI on poverty and equity before it gets implemented. The challenges of implementation, however, are clear. First and foremost, introducing UBI would first requires an institutionalized system of cash transfers which a dynamic database of citizens, which is connected their bank accounts where money would instantaneously get transferred every month. Such an infrastructure, however, has begun to emerge with digital identity and cash transfers to farmers in existence, however, it is fragile with a risk of excluding the poorest and most marginalized, the primary focus of welfare programs. Secondly, while cash is the form of transfer under UBI, there needs to be consensus on the optimal amount of transfer, whom to target (focus), how frequently would the amount be adjusted to the inflation rate, and how does it account for regional variation in prices. While it is inconceivable that UBI could substitute for mother and child nutrition programs, school meals, or health insurance programs, there needs to be a greater deliberation of the schemes it replaces and equity-efficiency trade-offs therein. Lastly, but most importantly, the move toward UBI must also articulate its developmental scope. Each of the existing welfare programs have a stated ‘welfare objective’—eradication of hunger, poverty, food insecurity, or nutritional advancement, reducing gender inequality etc.—each of which contribute to development resilience in distinct own way. Combining them into a cash-based welfare transfer in the form UBI might increase the short-term income, but whether this income gain translates into a sustainable increase in the standard of living would also depend upon investments in essential public infrastructure, financial market, and public services along with changing social norms around intra-household bargaining power. If spending on UBI crowds out public investments, welfare gains may be limited or non-existent. Folding all (even a few) welfare programs into a UBI would therefore require a new articulation of the scope of this transfer.²⁸

To summarize, it is early to think of UBI as a replacement for the existing set of social welfare programs, or even a few of them. We make this claim primarily for two reasons. First, the cost of UBI at a minimum level of income support is prohibitively high (around 4% of the country’s GDP) when it can’t substitute for the other welfare schemes. Increasing public expenditure on health probably should be higher on the policy agenda. Second, a hasty move to UBI might be bad economics as well bad politics given the economic and socio-political ramifications of each of the schemes.²⁹ Yet, we believe that including UBI to the conversation in social policy design is indeed important. The larger social welfare policy debate, however, should first organize itself around a more fundamental question: “what kind of society people want (and will vote for) as about how to get there” (Banerjee et al. 2019). UBI may or may not be the only or another complementary form of welfare measure to the existing ones to get there, but it is more important for the policymakers to decide what ought to be the destination, i.e. the scope of their social welfare policy agenda—to reduce visible feature of poverty, to stem the inflow of people into deprivation, or both—and create a social contract around achieving them.

Leveraging Technology to build Local State Capacity

The role of technology in identifying poor and the vulnerable, disciplining the local state actors to reduce leakages and rent seeking activities, and thereby contributing to state capacity is a key social policy debate in India. This debate is relevant not only to fix the ‘leaky pipes’ of current welfare delivery system but also to create an enabling plumbing infrastructure for a gradual transition to market-based forms of welfare transfers. There are two kinds of technological innovations introduced to stem leakages in the current welfare delivery system. The first one focuses on transparency and accountability in the entire value chain of welfare transaction. Introduction of GPS tracking in the vehicles transporting food to the PDS shops, e-POS based PDS purchase, text-messages to inform beneficiaries about the delivery of grains at PDS shops, geo-tagging of MGNREGS work, smartcards for portability of services, digital registry of all healthcare providers for beneficiaries of the public health insurance program, MIS system at the ICDS centers, call centers and helplines, public data dashboards where beneficiaries can verify the receipt of benefits, are some of the examples of using digital infrastructure to improve welfare delivery.

The second, perhaps a more significant one, is the provision of a digital identity to every citizen of the country. Aadhaar, as the 12-digit unique identity card (UID) is called, assigns a biometric authenticated identity number to every citizen of the country, and connects it to a host of demographic and socio-economic data pertaining to the individual.³⁰ The unique ID, Aadhaar (A) along with a government financial inclusion program, Jan Dhan Yojana (J), which provides every person has a bank account, and the spread of mobile (M) phone to the remotest parts of the country, comprises of the pillars of “JAM trinity” is hailed by the government as a ‘game changer’ in the delivery of welfare.³¹ It is envisaged as a solution to all last-mile implementation problems through eliminating ‘intermediaries and leakages’ and reaching ‘only those who actually need them’ without much influence of the local bureaucracy and political elites.³²

Challenges with JAM

The JAM digital governance infrastructure is geared to deliver subsidies—cooking gas, old age pensions, farmer income transfer, wages in the public works programs, maternity benefits among others—through a cash-based direct benefit transfer (DBT), which is planned to be extended further to replace food, kerosene, and agricultural subsidies.³³ According to government figures, the new DBT-based governance infrastructure has allowed it to save around 2.8 billion USD by November 2021.³⁴ The technology-based welfare transfer infrastructure has earned great plaudits from International Monetary Fund (IMF) and the World Bank as a “logistical marvel” in solving problems of poverty.³⁵ Parameswaran Iyer, the CEO of NItI Aayog—Indian government’s planning body—subsequently proclaimed that JAM-based DBT initiative is only “expected to expand further in size and structure as it continues to be the major tool of the government for a more nuanced and targeted intervention towards improving the ease of living.”³⁶

While it is yet unclear whether Aadhaar is a voluntary exercise or constitutionally mandated, JAM-based infrastructure has become a sine qua-non to access any form of state-provided subsidies, benefits, and other services.³⁷ The government’s standpoint is the following—JAM allows it to authenticate the beneficiary and reduce ‘fake’ or ‘ghost’ registries and reduce the dependency of beneficiaries on corrupt local institutions, both of which ensure significant financial savings to the exchequer. Digitization of transactions on a real-time basis also enables a simpler and faster flow of information and funds which increases efficient monitoring and effective governance of the programs. DBT to their bank accounts, instead of cash or wages in hand, further increase financial inclusion of the poor and encourages the culture of savings in bank accounts.

As of November 2022, more than 1.30 billion live Aadhaar numbers covering around 94% of the Indian population.³⁸ There are 1.2 billion mobile phone subscribers, around 0.5 billion new bank accounts have been opened under the Jan Dhan Yojana, and between 0.6–0.8 million banking correspondents are now placed to deliver branchless banking services within 5 km of every village in the country. These infrastructural preconditions are necessary to usher in an era of DBT as the form of welfare payment, yet the initiative’s potential success continues to be contingent upon the existing institutional challenges which plague the present system. Deficient rural infrastructure, inflexible public systems, and discriminatory social institutions, while creating newer challenges inherent in an opaque system of electronic transfers and the ensuing citizen-state negotiations.³⁹ Critics highlight that the promise of digital transfers in bypassing local state intermediaries has failed in both regards—it has neither ensured a more equitable form of transfer through becoming potential source of exclusion of the marginalized, nor it has increased efficiency in fiscal resource use (Khera 2017, 2019b).⁴⁰

PM-Kisan is one of the earliest attempts at unconditional cash transfers through DBT. Field-based reports and analyses of government statistics suggest that there are serious concerns around successful seeding of Aadhaar with bank accounts, back-end system integration, connectivity failures, and inappropriate grievance redressal system. Despite the use of Aadhaar, DBT under PM-Kisan for many people were falsely credited into the bank accounts of ineligible people.⁴¹ Gupta and Hussain (2022) analyzing the record of around 40,000 farmers in the East Godavari district of Andhra Pradesh who are enrolled under the PM-KISAN scheme and did not receive their entitlement. They find that almost 50% of these failures were on account of back-end failures of Aadhaar integration into the payment system and duplication of the Aadhaar ID. In about 5% of the cases, banks could not validate the account number seeded into the system. A study based in two villages in Telangana which—based upon comparing land records and the number of beneficiaries—estimates these errors to be of the magnitude of 16–20% as land records often do not match beneficiary list prepared by the government (Thomas et al. 2020). At the same time, tenant farmers, who do not own land, and owners of land under litigation lose out on the cash benefits (Masiero and Buddha 2021).⁴²

The story is similar for other schemes too. A government report notes that 33% of Aadhaar based payments (around 7 million payments) under the Pradhan Mantri Matri Vandana Yojana (PMMVY) got transferred to a different bank account, according to government’s own report (NItI Aayog 2020). Kishore et al. (2022), assessing the DBT-based transfer of agricultural subsidies to the farmers report significant lags in payment. Delayed, rejected, diverted, or blocked payments are some of the recurrent issues associated with Aadhaar line MGNREGS payment (Khera and Somanchi 2020b). Corruption in the food transfers through PDS, too, continues to persist as beneficiaries often do not get their full entitlements, biometric authentications often fail, and successful disbursement is recorded despite non-delivery (Hundal et al. 2020). The failures of Aadhaar may not come as a surprise to the ardent students of the Indian state, and the leviathan which it is.⁴³

The key marker of success of these technologies—build state capacity and deliver welfare in a more effective manner—is whether they can prioritize citizen’s empowerment in a socio-political system where the citizen-state relationship is characterized by asymmetric power. Any technology, after all, is only a tool to serve the interests to which they are designed. In a democratic system, citizens are supposed to be at the center of such design, but often stated citizen interests are undermined by the existing inefficiencies in the public systems. While Aadhaar may allow the government to ‘see better’—borrowing the phrase from Scott’s, Seeing Like a State (1998)—citizen’s welfare lies in being ‘served better.’ From the perspective of citizen empowerment and building resilience into the system, the promise of Aadhaar has fallen short of its promise. It also flares up serious concerns from the way the government is forcing it upon the citizens. Making Aadhaar compulsory for social welfare programs like school meals for children under MDMS or early life nutritional supplements at the ICDS is hardly conceivable as sound economic reasoning.

The purported idea of using Aadhaar to weed out ‘ghost’ beneficiaries might have some arguments for food rations, cash transfers, or public work programs, but its mandatory use for nutritional support to children defies logic. Newly proposed linkage of the Aadhaar database with electoral roles poses further threat to the democratic process as the ensuing India Stack—as it is sometimes referred to—allows the information on more than a billion voters to the government as well as other agencies. The ubiquitous reliance of Aadhaar in social welfare policy, therefore, faces some serious challenges which we discuss below.

Limited ability to deal with corrupt practices: Aadhaar has been proposed as an answer to corruption and frauds in welfare delivery with a limited understanding of what causes are these last-mile malpractices. Local corruption occurs through misclassification of beneficiaries, duplicitous claim on someone else’s identity who may be dead or non-existent, or deceitful quantity supplied. Fraudulent quantity claims could either be a complete denial to provide beneficiaries their entitlement, reduce their quantity entitlement, or ask for bribes for the transfers.⁴⁴ Inconvenience to welfare beneficiaries also emerge in the case of delayed or irregular payments from the government. Among these many forms of corruption, Aadhaar is only useful to address cases of identity fraud through controlling for duplication, at best (Bhatia and Bhabha 2017; Khera 2017).⁴⁵

Infrastructural Constraints: JAM-based online authentication often fails because of a mismatch in biometric, internet communication failures, server overload, or other technological glitches thereby increasing the transaction costs of obtaining welfare entitlements for the poor. The success of this technology requires regular and high-speed internet connectivity, super-efficient severs, and easier access to banking facilities, which continues to remain underdeveloped, despite an improvement over the years, especially in the remote areas of the country. Digital financial payment systems are not devoid of inconsistencies with a high frequency of delayed, rejected, diverted, or blocked payments in the bank accounts.⁴⁶ These infrastructural anomalies hurt the poorest most. Results from the field surveys as well as randomized control trials suggest that despite the presence of these technologies, local corruption remains pervasive, and beneficiaries often lose their precious entitlements. Even the most zealous supporters of JAM-based welfare delivery recognize the limits of fragile rural infrastructure and suggest a more careful scrutiny of its benefits (Muralidharan et al. 2022).

Lack of Legal Protection to Citizen Data: Data privacy, commercial misuse of the data, and risk of state surveillance create some of the ethical issues with the use of Aadhaar. Currently, there are no laws which protect the privacy of the sensitive personal data which not only include biometrics but many other private information about citizens such as their bank accounts, addresses, mobile numbers, tax details, and ration cards which poses hazard to individual right to privacy.⁴⁷ The proposed Data Protection Bill in the country has undergone many botched attempts with its most recent draft, Digital Personal Data Protection Bill 2022, being the fourth attempt at it since the Supreme Court of India questioned the government on the privacy safeguards with respect to the Aadhaar data. The current draft too has been questioned by digital media researchers in its commitment to protect the ‘right to privacy’—recognized as a fundamental right by the Supreme Court—of citizen. While a commitment to citizen privacy was included in the preamble of earlier drafts, it is conspicuous by its absence in the current one. The 2022 draft gives a carte blanche to the government agencies to share personal details of Indian citizens with other data fiduciaries—private or public; domestic, or international—at the behest of “sovereignty and integrity of India, security of the state, friendly relations with foreign states, maintenance of public order or preventing incitement to any cognizable offence relating to any of these.” Advocacy groups such as the Internet Freedom Foundation have raised concerns that not only can this allow unfettered access of personal to private agencies but could also be a tool of mass surveillance.⁴⁸

Government Audit of the Aadhaar-based transfers: The first independent performance audit of the Aadhaar system by the Comptroller and Auditor General (CAG) of India carried out between 2015 and 2019 points to some of the most glaring inconsistencies in the system (Government of India 2021). It notes that Aadhaar numbers in the database were often incomplete with biometrics not matched with the address and demographic information of the resident. The report further questions the claims of uniqueness of the UID. Technically, no individual can obtain two Aadhaar IDs, or a person’s biometrics cannot be assigned someone else's UID, but as of November 2019, around 0.5 million cases of duplications were found. Despite many subsequent corrections in the system, challenges of faulty identification remain replete. To correct for some of these discrepancies, the Unique Identification Authority of India (UIDAI)—agency responsible for collecting and storing the Aadhaar data—places undue responsibility on the citizens themselves, which also comes at a monetary payment. The CAG report states that during 2018–19, more than 73% biometric updates were voluntary undertaken by residents for data entry faults and they had to pay charges to correct their entries. Huge volume of voluntary (around 30 million) indicate poor quality of initial data. CAG further admonishes UIDAI for not having a data archiving policy, a management ‘best practice,’ especially while storing private information. Building the UID database relies hugely on private contractors which poses an added risk to privacy as many of these third-party agents do not have the same safety safeguards as required. In fact, the data sharing ecosystem of UIDAI with other financial institutions, telecommunication companies, and other agencies to authenticate private services is a breach of privacy compliance and contradicts regulations of the Aadhaar Act itself.⁴⁹

Global evidence around digital IDs suggests that they could be ‘subject to failure to deliver on high expectation’ (World Bank 2016, 196). For digital IDs such as Aadhaar to succeed as a tool for welfare recipients, supportive legal framework, adequate financial and human resource, committed leadership, and high trust between citizen and state is required. India fares poorly on most of these preconditions for success and therefore a unique ID could at best be one component of the social policy and not the be-it-all source of beneficiary identification.⁵⁰ If social welfare programs, on an average, are already improving in implementation, single-minded focus on JAM-based welfare delivery might amount to “pain without gain” (Drèze et al. 2017). Several states including Kerala, Chhattisgarh, Jharkhand, and Odisha have already suspended Aadhaar-based transfers while others like Madhya Pradesh and Haryana are attempting alternative forms of beneficiary identification methods.⁵¹

To sum up, it is imperative that one must be aware of what biometric technology can potentially accomplish and the preconditions required for its success. First, JAM-based welfare transfers are effective in reducing only specific kinds of corruption, but not all. Second, in the absence of appropriate data protection laws, such a data architecture is a potential threat to privacy and civil liberty. Lastly and most importantly, the enthusiasm associated with sophisticated technology must reconcile with the sobering reality of the functioning of the Indian state and its public systems, which to put it mildly, are not ‘citizen friendly.’⁵² The reliance on digital identity, therefore, must be studied in this light with adequate weightage to its benefits and pitfalls.

Technological Efficiency Sans Bureaucratic Incentives

Technology can be used to enhance transparency through digitization of welfare records, public data dashboards, and greater dissemination of on-the ground implementation to the welfare beneficiaries. Digital technology, in the Indian case, has significantly reduced the information gap—which contributes to clientelism, last-mile corruption, and overall program inefficiency—between the higher level authorities who design programs and the lower level implementing institutions. For instance, the MGNREGS website provides a list all the works undertaken, and payment delivered on a real-time basis. Similarly, most state governments now have a list of the PDS ration cards available on the internet with all requisite details which does improve transparency and lowers corruption. One can also check for the status on delivery of pensions and other schemes. The government has also initiated e-governance reforms to ensure information on fund flow within the government departments—from central government to the local institutions—on a real-time basis to increase efficient fund transfers.⁵³

Such information disclosure been key source of increased beneficiary welfare—as a facilitator of greater transparency and accountability in the welfare delivery systems—by making information easily available to everyone. It helps political leaders electorally because the beneficiaries are now more ‘legible’ to them to stake claim for improvements in welfare delivery.⁵⁴ There are also added incentive for the upper-level politicians to monitor local party workers and bureaucrats for improved welfare delivery, at a reduced cost, with information on welfare benefits available on a real-time.⁵⁵ The state and national leadership have, therefore, been upfront in staking claim for the improvement of welfare programs as a part of their redistributive strategy in their electoral bids.

The use of digital technologies for improved governance and local state capacity, however, has its limits. While the use of technology can certainly improve citizen-state interactions through efficiency enhancing information systems which enables greater compliance to formal rules by the bureaucrats, it does little to reform existing bureaucratic structures—archaic administrative systems, demotivated service providers, and stymied local accountability—which are the typical feature of the flailing Indian state and its limited state capacity (Pritchett 2009). Numerous studies show that technological innovations have been undermined by the low levels of motivation and commitment to the public service. Oft-cited examples include staff monitoring technologies and a management ‘best practice’ in public health service and schools, respectively which failed to have their desired effect.

An experimental study under which attendance and effort of nurses in public health facilities was monitored through a time/date-stamping machines, along with a threat of fine imposition in the case of delinquency, failed to have any effect in the long-run, despite its short-term promise (Banerjee et al. 2008). The public health staff utilized the provision of “exempt days” as allowed by the hospital administration to reduce their work hours and effort, while still complying with the official monitoring rules. Subsequently, under the National Rural Health Mission (NRHM), the state of Karnataka, introduced biometrics-based attendance for the health workers—with a threat of pay cut for lower attendance—at public health centers (PHCs) to measure whether it improved staff attendance. An evaluation of this intervention by Dhaliwal and Hanna (2017) shows that while the attendance monitoring technology improved staff attendance, however, it only worked for nurses and pharmacists but not for the doctors. Doctors had access to better outside employment options which nullified the threat of penalty. Similarly, an educational intervention designed to improve management quality in public schools leading to higher learning outcomes among children got reduced to an “exercise in administrative compliance” (Muralidharan and Singh 2020). The schools diligently carried out every mandated administrative task considering the documentation of school improvement plan as the ultimate end goal. The government considered the timely submission of paperwork as a success and scaled-up the program to over half a million schools. Any increase in student learning outcomes, however, was not found. The incentive structure for the local bureaucrats—officials and teachers, here—was designed toward completion of procedures around meeting administrative targets, with little concern toward the scope of the intervention—greater learning ability of children.

The success of technology-enabled monitoring system in fixing the ‘leaky pipes’ of the social welfare delivery architecture, therefore, require necessary complementary inputs—political will, citizen empowerment, flexibility in the public systems, and robust infrastructure. While creation of infrastructure is relatively easier in the short-term, political will, state-citizen interaction norms, and public system reforms require greater commitment to social democracy.

Complementary Inputs: Political Commitment and Citizen Empowerment

Top-down digital technologies like JAM can only reduce, but not solve local corruption or exploitative practices entirely. Technological systems can also exclude the poor and undermine their potential as a ‘social good’ unless they prioritize democratic empowerment of citizens over their use as an policy instrument of reducing fiscal cost of transfers.⁵⁶ Contrasting experience of two states—Jharkhand and Andhra Pradesh—provide a testimony to the mediating role played by political will and priorities in leveraging technology to build state capacity (Muralidharan et al. 2022). JAM succeeded in achieving the twin goals of improving beneficiary welfare as well as economic efficiency in improving MGNREGS payment in Andhra Pradesh because the state government has a strong emphasis on beneficiary experience. Active safeguards were put in place to protect citizen entitlements through timely payments. In Jharkhand, on the other hand, government prioritized fiscal savings as the stated scope of JAM-based food transfers without the short-term concerns of the beneficiary welfare. Some of the beneficiaries were excluded from the benefits, many had to make multiple trips to the PDS shops, and sometimes they got less than their entitlements as the newer system had many technical glitches. Eventually the program was discontinued by the Jharkhand government. Similarly, a new electronic payment system introduced in the state of Bihar to manage the flow of funds from the higher level of government to the implementing agencies in the case of MGNREGS led to a reduction in leakages but also generated greater lags in the payment schedule which worked against worker’s interest (Banerjee et al. 2020; Drèze 2020). Hasty implementation of a potentially useful technology and lack of political support behind it can therefore prove to be its undoing.

The use of digital technologies in the last-mile implementation can be leveraged to empower citizens and increase greater accountability among the service providers. A persistent challenge of welfare delivery is the lopsided structure of power—bureaucracy’s sway over the beneficiaries’ welfare claims—which undermines public action. For example, the local officials often engage in quantity fraud through not providing full entitlements to the citizens or they may request a bribe for the service. Greater local accountability among service providers could be encouraged through publicly disseminating statistics on welfare benefits could be another which also allows fostering of local democratic accountability.⁵⁷ Proliferation of mobile phones and its use to call and verify beneficiary claims reduces the monitoring costs of the government and have been recommended as a scalable and cost-effective tool to incentivize the local bureaucracy to improve welfare programs.⁵⁸

Welfare Expansion: Good Economics, But Contentious Politics

The expansion of social welfare programs has increased the quality of life of the poor, and made them resilient to multiple, but it has also increased political disquiets around its form, focus, and scope. Political debates have emerged around whether welfare transfers are unproductive handouts or ‘freebies’ in return for political gains, at the cost of taxpayer’s money. At the same time, national as well as subnational governments are competing to stake claims for newer forms of programs with a more encompassing scope, greater coverage (focus), and better delivery of welfare programs. This has led to a tension in the asymmetrical federal structure of the Indian constitution where the central government holds greater financial power, and subnational governments often exceed their fiscal resources in making welfare promise to their voters.

Welfare Transfers or ‘Freebies’?

Targeted welfare transfers have been a common source of scorn by the well-off section of the society as populist bargains—referring to them as doles, handouts, or freebies—which makes the poor lazy, spawn corruption, and hollow out fiscal resources.⁵⁹ As the form, focus, and scope of social welfare programs have increased in India, concerns have been raised about a rising culture of freebies. In 2022, India’s Prime Minister (PM) referred it to as revdi culture—equating it to the frivolous distribution of sweets—as an attempt to “buy the people by distributing freebies to them” analogous to a form of “bribery” which according to him bodes of a “dangerous” political development.⁶⁰ Government institutions have also called for the rationalization of these subsidies.

The apex monetary institution of the country, Reserve Bank of India (RBI), in a June 2022, raised an alarm about rising fiscal debt in some of the states because of the increase in expenditure on direct welfare transfers (Reserve Bank of India 2022). Supreme Court of the country, which had earlier championed the expansion of social welfare reforms in early 2000s, also chimed in suggesting an independent panel of experts be appointed to evaluate the rising expenditure on various kinds of subsidies being provided. The Chief Justice expressed the court's concern that the “state largesse dressed as freebies should not bleed the national economy dry.”

The RBI report refers to freebies as a “public welfare measure that is provided free of charge” but distinguishes welfare transfers from the provision of free access to services like electricity, water, and public transportation, and waiver of long-standing dues such as pending utility bills and farm loans which are potentially affect credit markets, distort incentives for private investment, and reduced incentives to work.” By this definition, meals at school, free or subsidized housing, gas cylinders or credit for education, toilets, free bus passes to women, or cycles to school going girls can also be classified as freebies. Surely, these are not. Rather, they are ‘merit goods’ with long-run benefits to the larger economy. The scope of many such welfare transfers is to improve developmental possibilities for those who can't afford basic essential needs for a dignified living which could take the form of publicly provided private goods at a subsidized or no cost. Without school meals, children would suffer from loss of learning. Bicycles would allow girl child to attend school and free commute for women facilitates greater employment among women. Subsidized toilets and housing allow for a dignified living and saves them from various hazards. Similarly, gas cylinders reduce the dependence on cook stove which increase respiratory infections. Free or subsidized access to many private goods, therefore, has multiple positive externalities through increasing the productive ability of its citizens and these transfers ought not to be dubbed as handouts or freebies as the benefits of ‘merit goods’ exceed their costs to the exchequer in the long run.

Welfare transfers are public investments in human capabilities with positive externalities for growth. Not only were public works program and food transfers instrumental in helping millions escape the wrath of livelihood and income loss during the pandemic, COVID-19, these welfare payments act a source of support for millions of others in the wake of everyday vulnerabilities of a poor household. We have discussed the importance of these welfare programs in building household resilience in the earlier chapters of this book.⁶¹ Demeaning the political commitment of government toward the poor by calling them as freebies is grossly misplaced for the dignity of the poor as well as building the productive capacity of a nation beset with a high level of multidimensional poverty and deprivation.

Subnational Politics of Welfare Delivery and ‘New Welfarism’

The freebies versus welfare debate carries significance beyond its economic rationale. The rising importance of social welfare schemes on the policy agenda has made it a hot-button political issue. In earlier sections of this book, we have highlighted the role played by subnational governments in the early 2000s in moving social welfare policy to the forefront of the social policy debates which thrived under by the welfarist leanings of the central government during this period (2004–14)—Congress government under the leadership of then PM, Manmohan Singh—further enabled an expansion of the centrally sponsored welfare programs. The subsequent PM Narendra Modi, who was in the opposition during this period, however, was a passionate critic of welfare programs. In a famous speech in the parliament, he had once called out MGNREGS as a useless dole to people and sneered at the construction work undertaken under the program as ‘living monuments’ of the current government’s failures.⁶² However, once he got power, PM Modi also could not to stymie MGNREGS. On the contrary, there has been increase its budget allocation since and the scheme is now referred to as ‘national pride’ in improving livelihood opportunities for the poor.⁶³ Politics, therefore, is key to the continuation of social welfare programs, but the very nature of welfare politics keeps on evolving. One could argue that there is a reasonable amount of continuity in welfare policy with the expansion of various programs and their recognition as anti-poverty instruments. However, the new government also brought about some fundamental changes in the focus and form of social safety nets along with a greater use of technology to monitor welfare delivery, which together is reshaping the politics around the social welfare policies.

Using the catch phrase of sabka saath, sabka vikas (social solidarity, and collective development), PM Modi embodied a new idea of inclusive development which expanded the current forms of welfare transfers to subsidized provision of private goods like bank accounts, water, toilets, and cooking gas, along with cash transfer to farmers (PM-Kisan) and expansion of health insurance for the poor. The developmental scope of these newer programs was several—improving financial inclusion, better sanitation practices, reducing indoor pollution, insurance against risks, etc.—with clear long-term positive externalities. What was surprising to political analysts, however, is to find the pro-business political party which harped upon creating “minimum government, maximum governance” turning toward a new form of welfarism (Jaffrelot 2022). The other major push of the Modi government has been on digitization and extreme reliance on technology (despite their imperfections and challenges) to deliver welfare benefits. Despite the teething challenges of digital infrastructure, technology has brought about a degree of fairness and reduced the stranglehold of political clientelism through eliminating an array of middlemen in the welfare delivery system (Wilkinson 2021). This has allowed the central government to speak to its clients, the beneficiaries, and stake claim for more programmatic service delivery than in the past.

The ‘new welfarism’—visible forms of direct transfers aided by technology—has surely increased the short-term needs of the poor but most importantly it has proven to be of considerable electoral gains to the central government as a quid pro quo bargain (Aiyar 2019).⁶⁴ Improvements in the welfare programs which began at the subnational level—owing to greater political competition at the state level—and gradually became an issue of national level social policy is increasingly being used by the central government to gain political legitimacy.⁶⁵ Voters in the age of new welfarism increasingly attribute the receipt of social welfare to the central government despite state governments being in charge of welfare program delivery. Using the CSDS Lokniti post-election survey for the years 2014 and 2019—when central elections were held—Wilkinson (2021) shows that while the share of welfare beneficiaries haven’t changed significantly between 2014–2019, the share of beneficiaries which credit the central government for MGNREGS and PDS has almost doubled (Table 9.1). State governments which are primarily responsible for implementing the program have lost out on the credit they deserve thereby reducing their incentive for better governance. Direct transfers of welfare programs have allowed the central government to bypassing the multiple stakeholders involved in welfare delivery and therefore claim credit for better service delivery. Aggressive political messaging on similar lines through PM’s photographs and a renaming of welfare programs with “Pradhan Mantri” (Prime Minister) suffixed on helped increase PM’s ‘connection’ with the poor beneficiaries, a unique form of welfare populism.

Table 9.1 Greater credit to central government for welfare schemes

This new welfarism raises two important concerns from the perspective of long-term development. Centralized transfer of welfare benefits—bypassing the subnational government, leveraging upon the technology to make direct transfers—encroaches upon the state government’s constitutional responsibility and fiscal space causing rift in the federal system of governance (Aiyar 2019). Fiscal centralization has already begun to be a bone of contention between the central and state governments as latter complain getting lesser share of the tax revenues for the welfare schemes. Traditionally, the fiscal devolution—transfer of tax revenues to the subnational government—was decided based upon a formula arrived at through consultations between the Planning Commission and Finance Commission. Since 2015 these transfers have become ad hoc, based entirely on political exigencies as Planning Commission has been scrapped and its replacement, NItI Aayog, does not have the same mandate (Rao 2022). The terms of reference as devised under the 15th Finance Commission in 2018 have further accorded greater power to the center worsening the fiscal health of the subnational governments (Aiyar and Tillin 2020). With Goods and Services Taxes (GST)—a multi-stage indirect tax—replacing many of the other local levies and taxes in 2017, the ability of state governments to raise revenues has already declined. This impinges not only the ability of subnational government to innovate on social welfare programs but also their ability to undertake public investments in services like health and education.⁶⁶

How to allocate resources and prioritize public spending between social services—infrastructure and welfare programs—is the other key policy issue for the future. It has been argued that public provision of private services over social safety nets and investment in ‘hard’ infrastructure—social services such as basic health, primary education—and productive safety nets might undermine long-term human development benefits such as health and nutritional gains (Abhishek et al. 2020; Anand and Subramaniam 2021). It is ultimately a matter of political priority as long-term gains from public investments are unquestionable and widely known. However, there is no conflict between investments on welfare as well as infrastructure are both are two important levers of a developmental state. What is required is a political commitment to both these efforts but unfortunately in a democratic society, there are more tangible electoral gains of private transfers—often necessary—than public investments on essential services.

Expanding Social Welfare System with Limited Fiscal Resources

Redistributive powers of the state are fundamentally tied to its ability to tax its citizens.⁶⁷ Along the process of economic development, governments increase their taxation capacity, broaden the tax base, and improve their tax/GDP ratio which allows them to develop the required state capacity to fulfill their productive and redistributive resposibilities. One of the fundamental reasons for the economic progress of Western countries lies in the role fiscal policy played in generating funds for building infrastructure, investments in essential public services, and a strong social welfare system. In the aftermath of the World War, the Western nations increasingly utilized a progressive fiscal policy using greater tax revenue mobilization to support those who cannot provide for themselves—through investments in education, childcare, health, and retirement benefits—taking on the responsibility of a ‘social state’—(Saez 2021).⁶⁸

Western Europe (Germany, France, UK, and Sweden) which is considered as the pioneer of the social state is the best example of efficiently utilizing fiscal resources for public welfare and investments in building human capabilities of its citizens. Piketty (2020) provides an overview of the rise of European social state from 1870s and its effect on higher levels of current human development outcomes. In the early twentieth century, only 2% of the national income was spent on public services while 8% was spent on maintaining law and order. As of 2020, while defense related expenses remain the same, expenditure on public services and social welfare programs comprises of 37% of the total income (Panel A, Fig. 9.1). Greater public investments were principally brought about by rise in income and its fiscal mobilization through progressive taxation. The same is true of other advanced nations which are part of the OECD which spend around 20% of their GDP on social welfare programs currently, comprising of old age care (7–8% the GDP) followed by health (6%), and family and incapacity-related benefit (2% each).⁶⁹

Fig. 9.1

The role of fiscal policy for social welfare program expansion

Nations which can generate greater fiscal capacity, as reflected in their higher tax-GDP ratio, are able to utilize the same for greater investment in social assistance programs. There is a clear positive association between the two using the World Bank ASPIRE database for the most recent years for which the data is available (Panel A, Fig. 9.1). India lies somewhere in the middle with low tax-GDP ratio as well as expenditure of social protection programs.⁷⁰ India’s inability to generate and allocate commensurate fiscal resources for redistribution and facilitate greater economic opportunity—despite rapid economic growth in the last few decades—has been highlighted as one of its major failings of social policy which has exacerbated inequality and limited its potential for broad-based prosperity (Chancel et al. 2022). An equitable tax-funded welfare architecture in the developing countries like India, therefore, necessitates a broader tax base and fiscal modernization for efficient tax collection. In this section, we would assess the expenditure patterns of the current array of welfare schemes in the country and the discuss ways to raise higher tax revenues to finance them.

Current Expenditure on Social Welfare Programs

India’s budget documents unfortunately do not provide a very clear picture of amount allocated under different schemes. At the same time, many state governments have multiple welfare programs of their own or add to the central allocation on specific schemes from their own resources. Getting a sense of the consolidated amount of money spent on various social welfare programs is therefore prone to errors of assumption. Yet, the numbers reported in the central budget of India which includes a combined expenditure (of state and center) on the Centrally Sponsored Schemes (CSS) provides us with useful benchmark estimates. The set of schemes under CSS are predominantly funded by the national government and subnational governments spend a small share out of their own resources. CSS are further classified as core schemes, core of the core schemes, and major central schemes. Not of all the schemes included in the list, however, can be classified as social protection schemes because some of them are solely focused on identity-based marginalized groups, and infrastructure related programs. We would restrict ourselves to the range of major social welfare programs—which span the life cycle of an individual—around which the book has been focused.

Overall expenditure on CSS comprises around 10% of India’s GDP, while the major social welfare schemes constitute a little less than half of it, around 5% (Table 9.2). Food assistance under PDS and public work program MGNREGS are the major source of this expenditure (around 3%). Both schemes, as we have discussed in the earlier chapters of the book, have been the mainstay against the daily risks of consumption and livelihood food insecurity. As part of the COVID-19 relief measures, they were the most reliable form of welfare support. Cash transfers to farmers (PM-Kisan) and subsidized housing scheme (PMAY) are the other major social welfare expenditure which are provided in the form of cash transfers.

Table 9.2 Expenditure on major social welfare programs (in Rs. crores)

Despite an increase in the outlay on social welfare programs, poverty and vulnerability in India continues to be high. If India aspires to be in the league of more advanced nations, not only its spending on social welfare requires greater effort—in terms of its form, focus, and scope—but also needs to be combined with a rise in public investment in the field of health and education (Fig. 9.2). Lack of public investment in health is a particular concern because beneficiaries of the public system of care largely belong to the poorer sections of the poor. Even by markers of the other lower-middle-income countries, India’s performance fares worst.⁷¹ While subsidized public health insurance programs are a newer component of the social protection strategy, spending on it forms a tiny proportion of the budget share (See Table 9.2).

Fig. 9.2

Public expenditure on education and health (% of GDP)

Raising Tax Revenues

A common lament among Indian policymakers is the lack of sufficient fiscal ability to expand social welfare programs and increase public investments on health and education. We would discuss here several ways to increase tax revenues for better redistribution which include higher income tax revenues by expanding the tax base, increasing the tax burden on the ultra-rich, re-introducing taxes on inheritance and property transfers, and reducing the amount of corporate tax revenues foregone.⁷²

Greater Reliance on Income Taxes

Among nations which have been consistently democratic in the last 50 years, India is ranked within the lowest ones in terms of the number of taxpayers per capita GDP (Kapur 2020). Tax/GDP ratio in India has remained consistently low at around 12% (Fig. 9.3). Several factors explain lower income tax revenues in the country which include a high threshold for minimum taxable income, lack of taxation on agricultural income, generous tax concessions, lower rate of taxes on capital gains, and tax avoidance among non-salaried people. Structural problems of informality further aggravate the challenges of widening the income tax base. Nearly 90% of the workforce is engaged in informal economy and is therefore outside the purview of income taxes. As a result, indirect taxes (mainly on goods and services)—where every citizen bears an equal burden—comprise a greater share of total revenues leading to distributional concerns.

Fig. 9.3

Source of tax revenues in India

It must be noted that a low tax-GDP ratio does not only a reflect smaller number of taxpayers or low tax rates but is also symptomatic of a poor effort by the government to collect taxes.⁷³ Inefficient tax collection methods, archaic taxation structure, widespread corruption, and tax concessions to private corporates collectively reduce the ability to collect more taxes in India. When it comes to income taxes, the limited coverage of the tax base in the country—despite its progressiveness—has been attributed to the constant upward revision of exemption levels and tax brackets which makes income taxes apply only to a tiny minority of individuals—2% of the total population contributing to 2–3% of the GDP (Piketty and Qian 2009).⁷⁴ With greater informalization of the labor market and farm income outside the purview of income tax, overall tax base for income tax has continues to remain low. Upward revision of the minimum income bracket for taxation in a highly unequal economy has further limited the potential for greater revenue mobilization. Using Indian data on income taxes between 2011 and 18, Datt et al. (2022) show that that despite a progressive tax structure, it does not lend itself well to greater redistribution because of the lower amount of revenues generated. According to their analysis, greater tax-financed redistribution could be achieved by lowering the income threshold for higher marginal taxes. Another regressive aspect of the India’s tax structure is the negligible taxation of income earned from long-term capital gains on financial investment and dividend earnings which benefits the wealthy disproportionately. Restructuring the country’s taxation rates—lowering the threshold for tax exemptions, and reducing many other concessions—in line with that followed in other emerging economies is likely to increase revenue from income taxes by at least 50% (Joumard et al. 2017).

Taxing High Net-Worth Individuals

There has been a significant increase in the concentration of wealth and capital among few individuals in India. The World Inequality Report 2022 computes the share of private wealth (sum of all financial and non-financial assets, net of debts, held by the private sector) in the country as a share of national income at 560% in 2020, a marked increase from 290% in 1980. The report further notes that the top 10% of the Indian citizens hold 57% of the total wealth and 64% of total pre-tax income.⁷⁵ Just before the pandemic, Hurun Global Rich List 2021 added 55 new Indian billionaires in the year 2020. It is quite embarrassing to note that a country of 221 billionaires, also has the ignominy of being home to the highest number of poor and malnourished children. The sobriquet of ‘billionaire raj’ is only befitting not only do these individuals possess much of the nation’s wealth but pay far less in taxes.

While India has a progressive tax rate structure in addition to taxes on capital gains, gifts, and a surcharge on income tax on the ultra-rich, but there are sufficient loopholes and lax implementation which allows them to get away. At the same time, the effective tax rate is not progressive with respect to wealth. The ultra-rich Indians on the Forbes List pay less than 0.2% of their wealth—a much smaller tax burden than the liability falling on individuals at median wealth levels—because they misreport income to the government (Singh 2022). The wealthiest citizens of the nation transfer only a miniscule share of their capitals returns to their personal accounts which lowers their tax accountability in the books. Unless the tax system considers total income earned and not just the reported income by the person filing taxes, the affluent groups have no incentive to report their actual income.

Rising wealth of the ultra-rich or the high net-worth individuals (HNI)—even in developing countries—calls for a reconsideration of wealth and inheritance tax.⁷⁶ Currently, there are no taxes on bequeathed assets in the country. Inherited property is also not considered for capital gains tax because it is only a transfer of ownership. In 1986, India discontinued inheritance tax citing little revenue from this source as wealthy individuals would often pool their assets into family trusts which fell outside the purview of inheritance tax. This argument, however, is a misplaced because family trusts typically comprise of bank accounts and equity shares with unrealized capital gains. A study based upon the revenues from ‘estate tax’—taxes on large bequests—in place between 1953 and 1986 suggests a significant ‘wealth leveling’ during the period (Kumar 2020), and the findings concur with that of Banerjee and Piketty (2005) who study income inequality in India during this period.

Lack of an inheritance tax—a progressive levy on wealth in one generation—in an economy with increasing concentration of wealth implies an intergenerational curse of higher concentration of wealth, inequality of opportunity, and its associated social consequences such as conflict. We have discussed the role of building state capacity for implementing social welfare programs in many parts of the book. Low tax revenues in India also suffers from the inability of the state to identify and tax the rich in an efficient manner. Infact, inheritance or wealth taxes were removed primarily on the logic that the administrative costs associated with collecting tax revenue outweigh the collected revenue. However, now with Aadhaar-linked digitization of tax records, administrative costs are much lower to collect these taxes. Digitization of land records further allows to assess the true value of real estate and property sales which are commonly known to be ludicrously low compared to an estates’ market value of the same.

Reducing Corporate Freebies and Non-Merit Subsidies

The government of India provides numerous exemptions, concessions, and deductions in tax payments every year. The idea behind these exceptions is to provide greater incentives for private investments in hitherto underdeveloped sectors and is a common policy followed by governments across the globe. Companies investing areas like scientific research, infrastructure and employment creation, software technology parks, special economic zones (SEZs), the power sector, industries established in backward regions are therefore provided tax breaks or favorable rates. However, these concessions provide an opportunity for massive tax evasion and avoidance in the absence of any metric to assess if indeed private incentives influence investment objectives of the beneficiary firms (Rao 2016). Till 2014–15, the revenue foregone used to hover around 4–6% of the GDP. A change in accounting methodology in 2015–16 subdivided these incentives into conditional and unconditional categories and only the former was considered as foregone revenue. As a result, the tax revenue forgone came down to around 1–2% while the rest.⁷⁷ Mundle and Sahu (2020) estimate that around 3% of GDP—more than total public investment in health and education combined—can certainly be mobilized through removing these blanket waivers.

It must also be noted that the foregone tax revenue neither includes dividends earned by individuals from Indian companies and the exemptions provided for long-term capital gains which could be additional sources of fiscal mobilization for more socially responsible investments including social welfare programs. Reducing non-merit subsidies—expenditure on state-provided services other than pure public services and social welfare expenditure—is the other method to create more fiscal space for social expenditure. Currently, the non-merit subsidies, which largely go to better off sections of the population stand at 5.7% of GDP, a reduction of which would further enhance the fiscal space for redistribution (Mundle and Sikdar 2020).

Conclusion

A good economic policy advice must be motivated by a sound theoretical framework around understanding of market failures (Townsend 2011), it ought to be grounded in the specific institutional context (Rodrik 2007), and supported by rigorous empirical evidence of its efficacy (Banerjee and Duflo 2011). The best possible advice also needs to be politically feasible, which often it is not, and therefore one must account for the political consequence of policies (Acemoglu and Robinson 2013). Our diagnosis of the current conundrum of India’s social welfare policies is mindful of these challenges and therefore for each of the solutions we offer, we also add a cautionary note on the politics it creates.

On the question of cash versus in-kind transfers, we would like to argue that in a world where markets are well developed, social institutions are unhindered by paternalism, patronage and corruption, citizen trust their government, and public systems efficient, cash certainly leads to better welfare outcomes. As India has time to get to such a level of socio-economic development, it is better to wait and consolidate the current programs while testing out the feasibility of cash transfers in particular contexts where greater progress has been made. Metropolitan cities and urban areas progressively are a good place to experiment with cash (through giving beneficiaries an option of cash versus food)—without replacing the current system—on a pilot basis and update policies accordingly. Yet, it is important to note that cash versus food is not a debate independent of government’s food procurement policy. If government continues to procure food on a large scale—which has increased in the last decade—food would continue to be the main form of transfer. Solution to the procurement issue is first a political one followed by the behavioral aspects of beneficiary preference for cash or food. In a patriarchal society, intra-household inequality—where women have less control over cash—paternalistic arguments of irresponsible use of cash prevail over the idea that poor be left to their own devices in choosing how to spend cash.

The choice between targeted and universal welfare benefits has amassed a wealth of empirical and theoretical literature. The answer is trivial. If it is possible to identify beneficiaries, targeting is a superior alternative. In the Indian context, targeting is arguably the most important source of corruption and inefficiencies in the welfare delivery system. Evidence suggests that states which have followed the policy of progressive universalism have improved performance. It would be natural therefore to err on the side of caution and argue for more universal programs. Progressive universalism is also desirable in the context of India’s stunted structural transformation and heightened informality of labor force where even the non-poor are highly prone to falling into poverty given loss of livelihood, an illness, or any other misfortune. In the absence of employer-based protection to almost 90% of the citizens, it is the moral responsibility of the state to provide a support against any potential slide into poverty. Development resilience, which we argue in this book to be the scope of social welfare programs, particularly calls for effective safeguards against such risks.

Indian policymakers are fascinated by digital technologies as the be-it-all solution to all problems of corruption, clientelism, and associated last-mile implementational deficits. We have argued that the technology enthusiasts must understand the complexities of the Indian public systems as they envisage the role of digital technologies in developing state capacity for welfare delivery. Technology surely has a role, but it cannot be the ultimate solution when underdevelopment, citizen disempowerment, lower public action, insufficient political will, and bureaucratic indifference to the cause of welfare are the endemic problems which limit the effectiveness of public systems responsible for welfare delivery. The JAM infrastructure, which has been introduced as a tool to surmount these organizational issues, however, continues to be fragile, open to manipulations, and often exclusionary, which has been brought to light by field-based reporters, and most recently by the government audit report. Moreover, in the absence of adequate data protection laws, the fragile JAM infrastructure could encourage financial frauds while posing a threat to privacy and civil liberty. One can only hope that with time, the teething issue with the technology gets resolved over time to realize its purported welfare gains.

The debate around UBI is in infancy even in the most developed countries with abundant fiscal resources, a high level of literacy, financial development, efficient public services, empowerment of women, and most importantly a political system in which citizens demand welfare entitlements as their legitimate dividend from the country’s growth process. The idea of UBI treats the desired transfer as a citizenship right. In Indian political system, apathy of the government toward the poor and other beneficiaries of the government system is so ingrained that even accessing citizen rights—right to work, and food under the welfare system—is considered a charity by the benevolent government. Furthermore, operationalizing UBI at the current level of economic development in the country poses multiple challenges of state capacity. Many of them overlap with those of the existing social welfare programs. Lastly, if credible evidence is the yardstick for policy prescription, numerous recent studies have suggested that in asset-poor societies with deprivations on multiple counts, cash transfers only resolve the short-term constraints with no impact on long-term asset accumulation, thereby leaving the structure of poverty intact. We would, however, not like to brush aside the idea of UBI altogether as it could surely be a powerful tool of anti-poverty policy, but in the future. Currently, as India learns from the global experiments around UBI and cash transfers, a scrutiny of PM-Kisan—unconditional cash transfers to farmers—would also improve our understanding of the issue.

India’s vastly heterogeneous population, high inequality, vested class interests, along with its federal structure makes it challenging to agree on common long-term goals and, how to pursue them collectively while brushing aside the divisions. As welfare programs have expanded at scale, the tensions around fiscal federalism have also risen where the central government is trying to stymie the subnational political actor’s influence in program delivery which not only limits their outreach to their voters in claiming credit, but also breaches the federal spirit of the Indian constitutions. The centralization of welfare credit seeking has also worsened the position of state governments in an already asymmetric tax distribution system with much reduced fiscal power to influence developmental spending and introduce welfare programs. Central government is aggressively using its power to de-legitimize state level welfare programs—any private provisions of public services at subsidized or no cost—calling them as ‘freebies’ while broadcasting the developmental scope of similar programs run by the central government at the same time. This conflict can only be resolved in the democratic space with the center and state agreeing on a common formula for fund devolution and its periodic revision every few years which has been the norm until now. Newer frameworks must be constructed for fiscal devolution which provides subnational governments fiscal strength and autonomy which they enjoin under the federal constitution of the country.

Despite its imperfections, local welfare delivery has improved significantly with time in India. While there are areas of neglect, greater democratic competition and public accountability has collectively improved the bargaining power of citizens when it comes to public services and social welfare entitlements. Greater reach of the social welfare programs, the ‘new welfare’ push, especially with the expansion of technology, has provided some semblance of enhanced state capacity—notwithstanding its fragility and apathetic bureaucratic culture—which has begun to contradict the claims of India as a ‘flailing’ state. But improvements in the local welfare delivery system have been accompanied by a decline in the quality of apex institutions in the federal democracy through greater centralization of power which has also subdued expectations around economic potential of the country.⁷⁸

Lastly, we are sanguine on India’s fiscal prowess to continue to fund its current welfare programs and its possible expansion, but it needs to undertake fiscal modernization which would allow for a greater share of the population to be covered under the ambit of income or wealth taxation. Economic growth in the last few decades has significantly expanded the economic base and there are sufficient avenues to raise tax revenues to around 10% of the GDP, provided there is sufficient political will. It would require rationalizing spending on non-merit goods, increasing direct tax revenues through a re-structuring of tax bracket, re-introducing inheritance tax, reducing corporate tax holidays, and increasing the capacity of tax personnel to catch tax avoidance by the ultra-rich whose number is increasing rapidly. Fiscal modernization measures, however, demand significant political courage and compromises in a democracy where elections are increasingly funded by anonymous corporate money and the aspirational middle class—comprising a significant share of the voter base—falls out of the tax ambit.⁷⁹