Why not promise direct cash transfer?

Political parties are competing with one another in promising freebies to the people. The people are already getting free education and farmers free electricity. The government has already implemented programmes such as free distribution of gas cylinders under Ujwala scheme. Now, political parties are promising laptops, bicycles and even in one case reportedly free distribution of liquor is offered in addition to the freebies already being given.

Whether these distributions will get votes or not is something we may not know; but it is clear that such distribution does not help people in earning stable and long-term incomes. There is a saying that it is better to teach a person how to fish rather than to give him fish. He can fill his stomach for a long period of time once he learns how to fish. Similarly, the distribution of Ujwala cylinders does not help the people earn long-term incomes. Further, the purpose of human life is not merely to eat food. There is a saying one eats to live; rather than lives to eat. "Eating to live" means that there is more than eating to one's life. This "more" consists of jobs, self-esteem, the development of entrepreneurship and a purposefulness in life.

The difficulty is that in the present times of robots, automatic machines, artificial intelligence, we are increasingly adopting automated production and the number of jobs available for the people is reducing by the day. Demonetisation and GST have further put the nails in the coffin of small and medium enterprises. These are the sectors that were creating most of the jobs.

Therefore, there are no jobs for the people today. As a result, the people are helpless. The only recourse in this situation is to provide them with some free distribution to keep their body and souls together. It must be clearly said that this is not the best way to achieve human welfare, but given the march of new technologies and our infatuation with cheap goods, there seems to be no possibility of creating jobs. Therefore, in the present times, we have to necessarily adopt some kind of free distribution to secure the minimum welfare of people.

The first objection to such free distribution is that this is not financially sustainable. The government does not have enough revenue to provide free cash distribution in a substantial manner. The issue here is slightly different. The government expenditures take place in three ways: One, free distribution of cash or kind; Two, government consumption; and three, government investment. If we have to increase the expenditures on free distribution, then we have to reduce either government consumption or government investment. If the reduction is made in government consumption, then free distribution becomes sustainable. On the other hand, if the reduction is made in government investment, then indeed free distribution becomes unviable. Therefore, free distribution is itself viable.

The second objection is that free distribution is misuse of tax money. Indeed, the taxes are paid mostly by the upper classes. The use of tax revenue for providing free distribution to the people involves transfer from the rich to the common man. Now, this is part of the welfare state. The government has provided that corporations will have to spend part of their profits in "Corporate Social Responsibility" programmes. Similarly, if the government uses the tax revenue for providing free distribution to the people, then it also is like the Corporate Social Responsibility.

The real issue in free distribution is whether we distribute in terms of cash or kind. The distribution in kind is the same as providing subsidies on fertilisers and food grains. The idea is that by providing subsidies on specific goods we encourage the people to increase the use of those particular goods. For example, in 1960s when the country was facing food shortage because of drought, the provision of subsidies on fertilisers was made so that the farmers would be encouraged to use more fertilisers and increase production. But this was an emergency situation.

Similarly, when the government provides free education, the underlying idea is that people would be encouraged to send their children to the schools. The presumption in both these cases is that the people are themselves fools and they do not understand that necessity of either using fertilisers or of sending their children to school. This idea does not seem to be correct. The fundamental basis of democracy is that people are wise enough to be able to choose the Prime Minister of the country. If they are competent to choose the Prime Minister, how can they not be competent to decide to use chemical fertilisers and provide education to their children?

My sense is that the farmers would have used fertilisers even if the government did not provide subsidies on fertilisers in the 1960s because it would have been profitable for them to increase production of food grains. The real reason, therefore, for distribution in kind is not that the people need to be goaded in a particular direction. The real reason is that the bureaucracy gets huge benefits when distribution in kind takes place. For example, the bureaucrats get opportunities in buying, storing and selling the food grains and in making of ration cards in the public distribution system. So, the distribution in kind is actually a smokescreen to protect the interests of the bureaucracy.

We should therefore, abandon this whole idea of distribution in kind and move towards distribution in cash so that people can get enough income to keep their body and souls together and they can then use their income wisely as per their own wisdom to obtain education, fertilisers and whatever may be their need.

In conclusion, the ideal approach is to change the economic model and move it towards creation of jobs. If that is not possible, then the second level solution is to go for cash distribution and empower the people to use the money as per their own requirements. The third level solution is to go for distribution in kind, which provides more benefits to the bureaucracy and less to the people. In this election time it is imperative that the parties move from promising free distribution of laptops and bicycles to free distribution of cash.

(The author is former Professor of Economics at IIM, Bengaluru)

(The opinions expressed in this column are those of the writer. The facts and opinions expressed here do not reflect the views of The Hans India)