The most important economic policy in the world is only weeks away

by on December 15, 2012 at 1:41 am in Economics, Uncategorized | Permalink

At the very least this is in the top five most important economic policies and yes it is from India:

D-day is 18 days away. On January 1, the Congress-led UPA government will start migrating the delivery of welfare services to a new architecture: straight into an individual’s bank account, verified by a unique identification (UID) number called Aadhaar.

It’s a soft launch. The first of the three stages will unravel in 43 districts where a large percentage of people have bank accounts and Aadhaars. Also, in the programmes earmarked for stage I, worth about Rs 20,000 crore, transfers to bank accounts is already happening; what will change is that they will now be linked to the Aadhaar number to reduce, if not eliminate, duplication.

The complexity of the exercise will increase manifold as more of India is covered in the other two stages, in April 2013 and April 2014. This will also increase as more programmes are added, especially food, oil, fertiliser and employment. In full flow, the money flowing through those pipes could go up to Rs 300,000 crore. So, is the government ready?

This will likely prove part of a much larger move to a reliance on cash transfers and conditional cash transfers.  Eyescans will be used to create unique identification numbers for individuals and in theory 800 million people will be enrolled in this program over the next fifteen months.  (Don’t count on that pace.)  The government is easing the procedural barriers to creating bank accounts.  I am mostly hopeful although I do worry about privacy issues, this kind of identification becoming a more generally used network, and government misuse of the information.

You can read much more at the link.  The virtuous Tim Harford covered some of it here, but most of you have been pretty silent.

no December 15, 2012 at 3:06 am

The reason for the silence is largely, incredulity at the willingness of the state machinery to disregard all contrary opinion and evidence and push ahead with an initiative which can never achieve any of its stated goals. The bureaucracy is the main supporter of the UID initiative, because at the foremost it makes “the society legible to the state”, to use words which originally belong to James Scott.

Mark my words. Initiative like the UID are never meant to succeed. But even in their failure, they will expand the reach of the state over the citizenry and legitimize new ways of engagement with the public. They will also make the citizenry of this vaunted democracy increasingly distrust the state.

Ritwik December 15, 2012 at 3:45 am

Privacy is actually a non-issue for most Indians.

The domestic debate in India has largely been around :

1) This is just a sop before elections, a kind of brazen legitimised bribery.
2) The welfare architecture will not simply be migrated, it will be expanded.
3) Is conditionality critical to success? There remains no clear method to establish conditionality.
4) Identification of deserving families remains the problem. Until that is solved, nothing changes.
5) This is basically a turf war between ministeries and the previous operational/financial failures of the UID program are being hidden through the hasty implementation being planned now.
6) Getting in-kind subsidised goods through regular intervals during a month is superior cash flow management for a poor family than a lump-sum cash transfer at the end of the month

All the criticisms could be partially true. But the operational costs of the welfare delivery infrastructure will surely go down. Food and fertilizer have not yet been shifted – too politically sensitive – but amazingly, fuel has been. The biggest no-distortion gain is likely to come from there – the consumption of kerosene will most likely take a massive beating. It reduced by about 90% in a pilot.

The other corollary benefit – of using an Aadhar card as a means of establishing identity and for KYC norms in banks – is also absolutely tremendous.

It is indeed a top 5 most important economic policy issue in the world. But India is generally a low-trust society and in particular this gov’t is distrusted in most policy circles. Hence the rabid skepticism all around. I tend to be a lot more optimistic than that.

The great public choice question is – will they ever manage to bring food under this? For one, the PDS system was showing signs of an organic improvement. Second, the popular imagination has always conceived of the ‘man of the house’ frittering away hard earned money on country liquor if the woman of the house is not given grains directly. Third, giving away PDS distributorships has been an effective method of giving favours to those who the dirty work for national politicans at local levels – it is perhaps the longest running and biggest scam in India.

If they actually conclude that the greater ease for a poor family will convert into more votes than the losses they might take on the previous three fronts, it would be absolutely amazing. My sense is, like most great policy decisions, this will go through simply because it’s an idea whose ‘time has come’, and we will invent post-facto justifications of how it was politically rational o go through with this.

Adrian Ratnapala December 15, 2012 at 4:03 am

My sense is, like most great policy decisions, this will go through simply because it’s an idea whose ‘time has come’, and we will invent post-facto justifications of how it was politically rational o go through with this.

Does this mean you are actually cynical about cynicism?

Ritwik December 15, 2012 at 4:14 am

Sort of, yeah. Corruption is always and everywhere rational. The real public choice question is not how/why governments screw up, but how they manage to get anything done.

Andrew' December 15, 2012 at 4:23 am

Does welfare raise prices on stuff poor people buy?

Andrew' December 15, 2012 at 4:57 am

Identifying people and determining if they are a good investment as well is kind of the function that (micro)credit provides.

Rahul December 15, 2012 at 4:43 am

The project is the brainchild of Nandan Nilekani after a pretty successful money making stint at the Indian IT majorInfosys.

The guaranteed beneficiaries of the project were the IT contractors rolling this out; whether the nation benefits is an open question. Maybe marginally, yet I am skeptical.

Ray Lopez December 15, 2012 at 5:14 am

Having lived in southeast asia for a while, I’m very surprised people even have bank accounts. Heck even in more developed Greece it’s not that common for people to have bank accounts (somewhat for tax evasion issues, since 20% of the economy is underground black market). Like Rahul says, it looks like an effort to steer some microfinance type monies to Indian rich capitalists. BTW, I’m reading this book: “Due Diligence: An Impertinent Inquiry Into Microfinance” by David Roodman (critical, scholarly book on the costs and benefits of microfinance).

mw December 15, 2012 at 5:07 am

In fact they want to start *not* by dismantling the direct food-based welfare system but by *improving* it using the new ID system to reduce graft. The switching-to-cash is just yet another economist fetish with no hard evidence recommending it over a putative analogously graft-free food distribution program.

Andrew' December 15, 2012 at 7:51 am

It’s just a little more than a fetish. Giving food, if it actually got to the people (which it often doesn’t) may just raise the price of food while reducing the price of creating more mouths to feed. Food seems fine for emergencies and famine relief, but the only fundamental solutions to poverty are those that either reduce the net cost of humans or increase their net productivity and the individuals are asserted to be the best judges.

mw December 16, 2012 at 3:40 am

My god, what a bizarre fantasy view of the world. It must be really difficult to sleep at night knowing that every country on earth with enough development chooses to ‘force’ health care services on their poor and that they don’t even regret that those poor were denied the ‘freedom’ and ‘personal responsibility’ of frittering away a cash transfer instead to buy a subprime mortgage for a needlessly large house in the great consumer marketplace.

Given the perennial absence of data supporting this insane view of humanity, one has to wonder whether economists’ ‘rational man’ idea could ever have penetrated society this deeply, if not for the sad primitive animal appeal of couching everything in childish moralism.

Rahul December 15, 2012 at 5:48 am

The other irony here is that districts where a large chunk has bank accounts is probably the place that needs welfare the least. A bad test case in reality but a good one to show off.

Sort of like the drunk who searches for his lost key under the bright streetlight.

whatsthat December 15, 2012 at 8:24 am

those with bank accounts probably benefit the most, in the short run?

david December 15, 2012 at 7:57 am

Singapore handed out a chunk of stimulus-package-cum-universal-welfare-cum-electioneering via cash credited straight into bank accounts, repeatedly, over the past couple of years.

What is astonishing in India would be the ambitious scale despite the entrenched corruption and relative poverty.

spandrell December 15, 2012 at 9:27 am

Can’t be that important when nobody gives a shit. This includes 98% of your readership.

Brian Donohue December 15, 2012 at 2:02 pm

um…examine your premises?

Mike H December 15, 2012 at 10:03 am

“The first of the three stages will unravel… ”

really?

Ashok Rao December 15, 2012 at 1:24 pm

India needs a technology upgrade. A McKinsey report concluded that with an approximate investment of 1 lakh crore (25 billion dollars) they could save that much annually.

This is a huge amount for India, which receives less than five times that in tax revenues yearly.

Ritwik December 15, 2012 at 2:12 pm

Tax revenues in India are about 19% of GDP = 17 lakh crores.

1 Lakh crore is not that big an investment. 1.1% of GDP. It’s just that people, or atleats policy commentators, don’t trust this gov’t to do anything right.

Rahul December 15, 2012 at 2:53 pm

Don’t think it’s specific to “this government”.

dead serious December 15, 2012 at 4:11 pm

India should spend something to do away with its crazy lakh crore system of notation.

RR December 16, 2012 at 11:35 am

just like the US with its pint, quart, gallon, …ounce, pound,….mile….system.

paul December 15, 2012 at 8:46 pm

Sounds promising. If only 20% chance of success, then probably a risk worth taking. Worst case scenario is massive loss and corruption, i.e. just like all the other welfare programs. On the other hand, if they can create an island of bureaucratic excellence around the program administration, it could be a very very big deal.

Electronic taxation of wages massively reduced under-reporting, both because there is an inherent data trail and because the default goes from zero payment to correct payment. Both of these effects are likely to go in the right direction on automatic payment of welfare checks.

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