Direct elimination of poverty

["Dr. Sanjeev Sabhlok" <sanjeev@sabhlokcity.com>]

---------------------------------------------------------------------
Please help make the Manifesto better, or accept it, and propagate it!
---------------------------------------------------------------------
I am addressing some of the concerns expressed by Dr. P.Sen from Plg. =
Commission. A copy is being sent to him separately. Critical comments =
are most welcome. [I am summarizing the entire discussion so far, before =
proceeding to my reply] Sanjeev

DIRECT ELIMINATION OF POVERTY

  Dr. Sanjeev Sabhlok, 9.5.2000 (for discussion)

Thesis
Preliminary analysis of poverty elimination in India through direct =
(negative) income tax is available at =
../debate/Notes/poverty-tax.xls (excel document) =
linked at ../debate/notes.html

Analysis shows that ALL poverty in India can be eliminated by targetting =
payments to the poor at a cost is approximately Rs. 26,000 crores =
annually (Rs.650 per capita average annual payout to those below poverty =
line) [this cost is subject to further verification and is likely to be =
lower]. It is a shocking state of affairs where the Planning Commission, =
which derives its sustenance and privileges in the name of the poor, has =
not made it a practice to announce this calculation each year so that =
the country has a benchmark to assess the requirement of funds for =
poverty elimination. Currently, subsidies exceed this requirement by a =
wide margin and ought to go immediately.=20

Response from Planning Commission
On 11.4.2000 , Dr. Pronab Sen, Advisor, Planning Commission wrote =
[extracts] in response:

"First of all, you are probably right that the amount being spent on =
subsidies and transfer payments today is considerably greater than the =
amount that would be needed to bring everyone above the poverty line =
with direct income transfers. The calculation is quite simple and =
involves taking the difference between the mean consumption expenditure =
of each NSS expenditure class below the poverty line and multiplying it =
by the number of people in the that class and adding up.  There are, =
however, two issues that would need to be addressed. The first is that =
all direct transfers will have to be netted out, preferably at the =
individual or household level, and the poverty lines will have to be =
recalculated to correct for all forms of commodity subsidies, =
particularly food subsidies. Second, the short run effects of removal of =
other subsidies, ie. those on production goods, would need to be =
estimated as far as production is concerned, and then on consumption =
expenditure. This is not a trivial exercise at all.

"Finally, have you given thought to the extent of leakage that can =
occur? The experience has been that the leakage tends to be less in =
schemes where a tangible final output is to be produced than in those =
where direct payments are made in cash or kind. I'm afraid that the =
Income Tax Dept. may simply not be in a position to handle a negative =
income tax scheme, since it is usually much more difficult even than tax =
collection.

"Do give these points some thought, and we can continue our discussions =
later. With best regards..."

ADDRESSING THE CONCERNS OF DR. P.SEN

1. Recalculation of Poverty Lines: Dr. P. Sen feels that poverty lines =
will have to be recalculated to correct for all forms of commodity =
subsidies. Depending in the methodology used to calculate the poverty =
line, this should be done, but in no way does it detract from the basic =
argument in favour of direct transfer. The poor, howsoever defined, must =
be lifted by specific targetting, above the poverty line.

2. Estimation of the change in production and hence in resources =
available for consumption at the field level: The major production =
subsidy relevant to the poor is fertilizer subsidy. It is quite likely =
that the bulk of this subsidy is availed by those above poverty line. =
The marginal reduction in income of these people can have two adverse =
effects: (a) A few villagers might directly fall below the poverty line =
and (b) less money would circulate within the village, thus marginally =
reducing the price of goods and services offered by those below the =
poverty line, thus enhancing their poverty. The overall impact on the =
incomes of the poor 40% of the population is likely to be very small, =
though.=20
But note carefully that direct transfer being made at the end of the =
year, the actual income in the preceding year is to be considered, =
rather than the prospective income. This leads us to the following =
strategy. Let all subsidies continue as usual in Year 1. The possible =
ill-effects of elimination of subsidy would not be observed during Year =
1. Let the survey of Year 1 income be done at the beginning of Year 2. =
Subsidy is eliminated in Year 2. By June-July of Year 2 the direct =
transfers would have all taken place. While the vast majority is lifted =
above the poverty at the beginning of Year 2, some new poor might emerge =
in Year 2. These poor would be at the upper fringe of those below =
poverty line. In Year 3, all would be finally and completely lifted out =
of poverty, on a regular basis. Even if subsidy is removed in Year 1, =
when we have not succeeded in eliminating poverty for 50 years, one more =
year of a slightly higher poverty will not matter so long as all poverty =
is subsequently eliminated.
Since the adverse impact of removal of subsidies can be made to be =
minimal, and the positive effect of direct transfer is enormous, the =
concern against direct transfer is not sustainable. Now I discuss the =
methodology of direct transfer.

3. Methodology for direct elimination of poverty: If it is finally =
conceded by all (including experts) that direct elimination of poverty =
is at least theoretically a more economical option than giving subsidies =
to various activities which frequently are vulnerable to leakages, then =
the question before us becomes: what practical methodology can be used =
for the direct elimination of poverty in India? There can be more than =
one alternative strategy for implementing the desired direct transfer, =
but the one proposed below is worth examining.

3.1 Underlying Mechanism
Underlying this mechanism of direct transfer is the filing of income tax =
returns by all households across the country. It may be pointed out that =
another positive spin-off of this methodology is that income tax =
collections in the country will increase as the wealthier farmers begin =
to pay tax, too, thus reducing the net cost of poverty elimination. =
Since the income tax department is currently ill-equipped to handle such =
a large scale operation, the task can be delegated through an MOU to the =
State governments, which usually command a vast army of civil officials =
at the village level.=20

3.2 Identification of the Poor
State Governments possesses a considerable complement of "field" staff, =
such as village level workers belonging to the Education, Land Revenue, =
Agriculture, Food and Civil Supplies, Rural Development, and other =
departments. On a similar pattern to the Census Operation, an Income Tax =
operation can be organized each year by the State Governments. It is =
suggested that the voters list be used as the basis of the =
identification process, as was done in Dhubri District in 1986-87 and =
beyond by me, as Project Director, DRDA (details are in the book, =
"Dhubri Advanced Information System", published by D.R.D.A. Dhubri in =
1988). Suitable, easy to fill forms can be designed to capture the =
required information. A specialized training programme will have to be =
organized thereafter. It is necessary to bear in mind that perfection =
cannot be expected in the estimation of household income, and suitable =
proxies may have to be used. Also a crosscheck in the field would have =
to be made by senior officers. The data so collected can be transferred =
into computers at the Block level (where computers are now being made =
available through the Ministry of I.T.) or at the =
Sub-Divisional/District level, or given to private data entry operators =
for entry, if necessary, in a prescribed software.  =20

3.3 Payments to the poor
The computerized data and forms can then be sent to the Income Tax =
Office at the State Capital where it will be a matter of a few hours or =
days to process the data and identify not only the poor but to "net out" =
transfers needed at the household level, and issue a printed statement =
to the banks at the State headquarters, with authorization to credit the =
accounts of such persons in the amount necessary to bring the concerned =
family just above the poverty line.=20

Note that Nationalized banks today have tens of thousand of branches =
operating widely across the nation. Virtually all branches have the =
experience of dealing with the illiterate poor. Many of them operate =
old-age pensions, rural development loans, and other accounts. There is =
also no difficulty in principle in banks and field functionaries of the =
State Government helping all the poor in the country open accounts with =
designated Bank branches. Further, discussions with Bankers indicate =
that there is no leakage/ corruption at the Teller's window, i.e.,  the =
Banks are not likely to cheat at the time of disbursing this money to =
the account holders.

3.4 Suggestion
Since Meghalaya is a small and relatively well-administered State, it is =
suggested that Rs. 40-50 crores can be allotted for this State to launch =
a Pilot Project for direct elimination of poverty, after due =
preparation. It may be mentioned here that the middle classes in =
Meghalaya are hugely pampered. Public sector undertakings in fields such =
as electricity, hotels, buses, housing finance, etc., are making losses =
which exceed by far the amount required to eliminate poverty in =
Meghalaya. If we add the other forms of pampering of the rich and middle =
classes in the name of the poor, and the wastage of funds allegedly =
spent on poverty alleviation (I am not counting the leakages to the =
wealthy through contractors), the amount spent on pampering of the rich =
and powerful is much greater.



--------------------------------------------------------------------------
This is the National Debate on System Reform.       debate@indiapolicy.org
Rules, Procedures, Archives:            ../debate/
-------------------------------------------------------------------------