Decoding India’s conundrum of free food despite falling poverty

medium nocaption120434803A Supreme Court bench says free foodgrain should go only to the poor, not be diverted to the non-poor. The govt boasts that poverty has been slashed by hundreds of millions. Yet it also boasts of providing free foodgrain to 800 million poor people (57.5% of the population), a figure that never falls no matter what the decline in poverty. Is this not hypocrisy?There are actually two separate issues here. The first set, Type A errors, represents the leakage of subsidies to the non-poor. The second set, Type B errors, represents state failure to reach every poor person.Politicians seek to prevent Type B errors — they would like schemes to reach all the needy, which can translate into more votes. But they do not want to check Type A errors, the leakage of subsidies to the non-poor. Indeed, democracy provides a perverse political incentive to maximise the leakage, thus reaching the maximum possible beneficiaries and getting their votes. The SC asks, are ration cards turning into popularity cards? Answer: they have always been popularity cards, nothing new about them.No logical contradiction exists between checking Type A errors and encouraging Type B ones. Both aim at expanding beneficiaries, one by reaching all the unserved, and the other by reaching all the undeserving. Type B errors are mourned as leakages only by newspaper editorials, economists, and the occasional judge, not by politicians or voters. Former PM Rajiv Gandhi once said only 15% of money in anti-poverty programmes reached the poor, with the rest wasted in red tape, corruption, and targeting errors. The delivery capacity of govts has improved greatly since then with digitisation, Jan Dhan Yojana, Aadhar, direct benefit transfers, elimination of ghost ration cards, and reduction in avenues for corruption. Substantial digital errors remain, highlighted by economist Jean Dreze, but overall errors are fewer than before. During the Covid panic, free rations to the poor were well handled by the govt, and voters rewarded the BJP with a handsome victory in the subsequent state election in Uttar Pradesh.Why, despite considerable improvement in state capacity, does the targeting of free rations not improve? Because of democratic politics. When most people were below the poverty line, anti-poverty programmes were, by definition, targeted at the bulk of voters. But once the poor became a small minority, (at least according to official statistics) politics changed totally. Limiting benefits to the small minority meant taking away cheap food rights from millions. Any politician will tell you this is political suicide. And so, even as poverty falls by hundreds of millions, no political party dares withdraw entitlements from hundreds of millions.In the US, Ronald Reagan became popular by decrying benefits to “poverty queens,” who could work and earn a living but preferred to live on subsidies. Reagan denounced this as a waste of taxpayer money, and won over a sizable part of even the working class.Why are politics in India so different? Because political wooing of the middle class has resulted in the lifting of the income-tax exemption to one lakh rupees per month. Only the richest now pay income tax, constituting only 4% of the population.The success of democracy is supposed to lie in an implicit social contract between voters and elected rulers. The people give the govt the power to tax them and, in return, get good public and social services. Voters dissatisfied with the use of their tax money are supposed to vote out errant govts, thus checking misuse.This does not happen in India because only the top 4% pay income tax. Many more file tax returns but pay no tax. Most voters are unconcerned with the misuse of tax money since they do not pay income tax. Their tax rupees are not being misused, and they are fine with the tax money of the rich being misused to serve sundry vote banks. Most voters want to expand the freebie base, not the tax base. Is this a perfectly okay outcome of democratic politics? Okay maybe, but surely very sub-optimal. Translated into Indian rupees, the income-tax exemption limit in Pakistan is Rs 1.8 lakh (one-seventh of India’s rate), in Bangladesh Rs 2.45 lakh (almost one-fifth India’s rate) and in Sri Lanka, Rs 3.48 lakh (a bit less than a quarter of India’s rate). Clearly, India’s tax exemption rate is too high. So, India is a flawed democracy in a way that might surprise most. It has broken the normal social contract that ensures that those taxed keep a check on poor use of their tax money. That is not fatal to democracy or the economy. But it shows where reforms are badly needed.