Creating a consumption class out of the poor

The late management guru CK Prahalad told us that there is a market at the bottom of the pyramid. Indian companies discovered that with the Re1 shampoo sachet. Ratan Tata believes that there is a huge market for the bottom-of-the-line Nano. But there is something missing here: the bottom below the bottom of the economic pyramid, where the fight is for the next meal. Subsistence living means there’s no market.

This is job No 1 for our anti-poverty planners: when you lift the poor off the survival floor, you should also be trying to create a market out of them. A small experiment in Delhi makes for an interesting case study on how this could be done. We all know the poor need subsidies, but subsidies have a pejorative feel about them. They make the beneficiary sound like a beggar. Can subsidies be handed out with a greater sense of dignity? Can they do something more than just provide temporary relief from poverty?

According to a recent report in The Economic Times, a few poor families in Delhi were given cash vouchers of around Rs3,000-4,000 each to enable them to shift their children from free municipal schools to private ones. The first-cut results suggest that two-thirds of the parents not only used the vouchers to change schools, but half of them also spent additional money from their own pockets to provide their children with private tuitions to help them make the grade.

The takeout: when opportunity knocks, the poor are more than willing to open the door.  From mere receivers of political largesse, they can be transformed themselves into investors in their own future.

India subsidises a whole host of goods and services — from kerosene and cooking gas to fertiliser and food, education and health services. Much of it may be money down the drain. For several reasons: First, the beneficiary starts to think of it as a permanent entitlement, not a temporary aid. Second, the state machinery that delivers the subsidy treats him with contempt. You may be given substandard grain or adulterated kerosene, but you can’t complain because, buster, you are getting it cheap or free.

Third, anything free or cheap will be overused or misused. Five decades of cheap fertiliser have led to their overuse, leading to long-term damage to the soil as well as a vested interest in the subsidy. Since more and more fertiliser has to be used to maintain productivity on degraded land, the dependence on cheap fertiliser grows exponentially. Subsidies breed subsidies.
Fourth, subsidies are tougher to target and deliver than cash.

Fertiliser is cheap for all farmers, and not just poor farmers. A subsidised ration shop forces the government to carry the cost of storing and transporting grain and pulses from one place to another. The cost, thus, goes up.

One of the prime reasons for the success of the National Rural Employment Guarantee Act (NREGA, for short) is that it is cash-oriented. India has experimented with food-for-work schemes, but it is cash that works best. According to the rural development ministry, in 2009-10, NREGA beneficiaries crossed 50 million. Right-wingers don’t like political giveaways, but look what they have achieved. With NREGA workers earning cash, we have created 50 million new consumers.

Cash converts the dole-receiver into a consumer just as education vouchers have converted free-loaders into investors. NREGA has created new consumers for a wide array of consumer goods in rural areas.

Looked at from a systemic viewpoint, NREGA will be inflationary in the medium term, and will push up wages all around. Migrants to the city now regularly head for their rural homes, thus pushing up urban wages. But this is how new middle classes are created. NREGA has set the ball rolling for monetising a larger part of the economy than before. Right-wingers should be happy that populism is clearing the path for capitalists to find new markets.

Now consider what could happen if every subsidy is converted to cash. The urban poor will get cash equivalent of their kerosene and food subsidies. Once you credit cash to their new, no-frills bank accounts, you have ways of checking if they really are poor.

The same can be done with the fertiliser subsidy. It is easier to identify poor farmers when they have to come to collect the subsidy in cash than if you were pricing all fertilisers cheap for everybody. By paying cash, the government could actually be saving money.

The best part: when the poor have cash, they can demand service, they can demand quality goods. They can have dignity as they metamorphose from recipients to spenders.