‘You Cannot Subsidise The Poor Entirely’


Kaushik Basu, the current Chief Economic Adviser to the Ministry of Finance, had a 15-year-long stint as Professor of Economics at Cornell University. The Padma Bhushan awardee has been working closely with the Finance Ministry and the Prime Minister to chart the country’s future growth path. He spoke to Manav Chopra about the need for better monitoring to ensure growth doesn’t happen at the expense of social justice. Excerpts:


Taking stock: Kaushik Basu leads the charge for equitable growth
Photo: Shailindra Pandey

A common criticism is that India squanders precious resources on populist measures. Why is inclusive growth so important? Why not invest in the most productive sectors and wait for it to trickle down?
The course depends on one’s broad ideological position: do you focus on maximum growth and wait for the trickle down in 10-15 years, or do you opt for growth but are mindful that 10-15 years is too long for the bottom end of the income pyramid to wait. I am for inclusive growth. However, you cannot entirely subsidise the poor, because that is not growth. The right policy is taking the middle path, which is roughly being implemented. Additionally, keeping certain sectors buoyant will gradually empower the poor by providing them with job avenues and reduce government responsibility. This is the winning combination.

What worries me is that the money apportioned for the poor does not reach them.

But can growth be made inclusive?
The three areas where the government should get involved directly are food, healthcare and education. Everyone has the right to food, even those who cannot work. Government should stop interfering in enterprise and focus on these three sectors. There are better systems and schemes out there to streamiline the existing processes and use money much more efficiently.

What did the Finance Minister mean when he said India needs to become an enabling state?
An enabling state knows that it cannot provide everything for everyone directly — not even things like food and health. The state must intervene intelligently by giving incentives to people, so they provide for one another. One good example is creating employment opportunities. But then it is impossible to provide jobs to everyone. Even the US cannot deliver on that. So instead of trying and failing, the State must aim for intelligent design and intelligent market interference, so that individuals can deliver to each other.

You said India’s stimulus package was different from those of other nations. Please elaborate.
In industrialised countries, a lot of the stimulus went to the smaller sections of society where the problem originated, like the banking sector. And America got a lot of flak for supporting these affluent sections. India, partly due to its design orientation, and partly due to good luck was not hit on that count. So stimulus was targeted at the bottom sections. NREGS, loan waivers and tax concessions helped the lower classes and the Pay Commission helped the middle class. The top-end corporates did not get any money. And it worked brilliantly for us.

To Avoid Waste, Subsidies Must Be Directly Given To The Poor Consumer And Not To The Producer

How strong are the existing systems to support the poor?
There are many, but we must simply do better in using what we have. For the poor, we have mechanisms like the Public Distribution System, loan and credit, NREGS and so on. What I am interested in is sounder implementation. The number of poor people in India stands at over 250 million, and our budget is severely limited. In my view, we can do four times better for the poor with the same amount of money, if we have better design.

So what is the solution?
We do spend a lot, but we keep the price low for the entire population, instead of passing the benefit entirely to the target population. So one of the things you need to do is decouple price control from helping the poor. For most of these goods, it is the market that should fix the price, and the subsidy should be given directly to the poor consumer and not to the producer.

How will the proposed coupon system be implemented to overcome basic problems in subsidy delivery?
The coupon system should replace the existing system of giving subsidies to the producer/seller and artificially controlling the price at a lower level for all consumers. This results in wastage. The market must determine the correct price and the subsidy handed to the end user/consumer in the form of coupons that they can use to buy grain at a lower cost. This method has been tried and tested around the world in places like Sri Lanka, the US and so on.

Take fertilisers for example. Currently fertiliser companies receive the subsidies and their accounts need constant monitoring. Additionally, fertiliser companies do not know which is the target population, so to subsidise 25 percent of the population prices are slashed for all consumers, which is a waste. Fertiliser should be produced at market price and subsidy given to the consumer.

The only drawback of coupons is we do not know who the poor are. So implementation can only start when the UID card is in operation. Once in place, the subsidy needed will be halved and the benefit to the poor doubled. With the savings you can cut down the budget deficit, spend it on infrastructure, on education and so on.

We had very high inflation recently. Food inflation soared whereas nonfood inflation was marginal. What is this phenomenon called ‘skewflation’ ?
The inflation right now confined mainly to the food sector is known as skewflation It is not caused by industry-wide factors, it has very specific causes. And the government’s target intervention too has been very specific. India has had a foodgrain shortfall of around 8 percent, which is very large. There aren’t enough remedies. Pulses cannot be imported from elsewhere as there are no global producers; sugar has seen a shortfall in production in India as well as Brazil. Food inflation has gradually been coming down, but not fast enough.

Honesty and trust are two essential qualities of societies that develop into successful economies. Where does India stand on these counts?
Most studies show that trust and honesty levels are not very high in India. In developing countries in general these tend to be very low. However, these are not innate qualities people possess, they are learnt. India’s long reign of colonial rule has led people to become self- centred to survive. Studies in South Korea show that these things can change over a short time. My own hunch is that this is improving in India. People are starting to realise that one cannot just look after their own self interest but also learn to trust each other if they are to function productively. So I am optimistic.

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