‘Want to empower the poor? Give them cash’

Raghuram Govind Rajan, 48, currently the Eric J Gleacher Distinguished Service Professor of Finance at the Booth School of Business, University of Chicago, and an honorary economic adviser to Prime Minister Manmohan Singh, wants a bold reform of India’s current leaky subsidy regimes.

Among the first to have warned of heightened risks caused by high Wall Street compensation, which encouraged reckless risk-taking behaviour of bankers, especially in light of the unregulated financial derivative products that eventually lead to the financial crisis of 2008, Rajan wants the government to live up to its promise of empowering the poor by giving them cash, and thus giving them the choice of how to spend it.
Excerpts from an interview to DNA:

We are at the 20th anniversary of reforms in India. When Narsimha Rao took over as PM, the mood was downcast. We are again at a similar point where a political catharsis seems to have crept in. Do you think this is the time for the UPA government to launch a new round of reforms that could bring back the roar in the growth story?
I think the Indian economy is doing well. It is easy to sound very pessimistic. But 8.5% growth plus a little more is very respectable. But I think the danger is that we take the growth for granted. And we assume that it will go on no matter what happens in Delhi. Now it is easy to become pessimistic in India because a lot of reforms that happen in India happen not in a big way, not in a giant scale. But I do think that some reforms that need to happen will happen only by good governance. And I feel we are in the phase of debating these things. We have debated them enough.

What are the critical reforms the government should initiate?
Clearly, the thing uppermost on the mind is the land acquisition. Keeping this in mind, we find a way to take social justice. Now we need to find some way where can maintain social justice while taking land for industrial purposes, given that there is much higher industrial productivity for industrial land than agricultural land. There must be better ways of rehabilitation. Now, I do think those who are worried about rehabilitation process, the environment, etc, have a point. But I think we need to have a dialogue, which is progressive than the one which puts a full stop. That is the number one priority. The process of rolling out projects primarily related to land acquisition is very short term. In the long term, we should realise that we are also in the race with other countries to improve human capital, which includes better schooling both at the primary and secondary schooling level. We also need to create world class universities that have the ability to create new technologies, universities that propagate new ideas, which means setting up institutes in humanities and social sciences and not just technological centres. Education is a big part. Healthcare is also a big part in order to improve human capital. How to provide cost-effective services to all is the question. The issue of malnutrition is most important, because if we don’t fix this issue of malnutrition, we are creating a liability for long term. I think if we do these well, if we can find ways to include all these dimensions, there is no reason why our growth rate should be 8-8.5%; it can be 11%. However, if you don’t do them, then there is also no reason why our growth can’t go down to 3-4%, which is back to Hindu rate of growth. Eventually these constraints would become binding because if industry can’t find enough skilled people, industries can’t expand. If we don’t get people out of agriculture into industry, these will become constraints.

As regards land acquisition, there is an existing proposal that states that 26% of profits should be shared with the local community. Do you think this is a win-win situation for all?
Some sharing process by which the local community benefits from the growth has to be there. Now, the history of rehabilitation projects across the world is not a happy one. We need to think cleverly and try different approaches. However, we must not hold progress indefinitely hostage to say that a few people will be dispossessed. Agreed, when you see those people, you can feel it. And that is why safeguards are important. But then, to wait for a scheme which will under all circumstances make them much better-off, is hard. You have to settle for something, which should give them enough of an opportunity. Now, industrial activity always generates huge amounts of wealth and sharing it in some way which is more equitable is important. Unfortunately, this is the place where leaks are tremendous. And picking that governance process which can tackle this is most important to do. And this is why you can legislate whatever scheme you want, but if you get around it, there is no point in it. You need to find a structure so these are not violated.

In recent times, the Indian government has been held hostage by NGOs and the ministry of environment. Many large projects are on the slow burner…
I think the debate is important and I think all voices represented in that debate is the hallmark of democracy. But an efficient democracy, at some point, decides that the debate has to end. And we need to move forward. So, I would say we need to collect all the voices, inputs and come up with something that might not please everybody, but that benefits many, and then move forward. You cannot be held hostage by every minority interest.

After much hand-wringing, India spends about 1.5% of GDP on public health. Given the malnutrition and disease challenges that the country faces, is that enough?
The percentage is not as important as how it is spent and who it is spent on. US is spending 15% of GDP on healthcare. It is not clear if it is getting value for it. But what should be the priority of government is to decide if running those hospitals is the best way. They can give people vouchers that they can use and spend in these hospitals. By and large, we must think what the right role of the government in every area is. For example, in healthcare, the regulatory aspect is very important. How do you make sure that a quack does not operate on gullible people? There is a lot of antibiotic prescription in India by people who don’t have any training. How do we deal with such problems?
We need to have careful of qualifications. If somebody is a quack he should be put out of business. So, more than running the clinics, government should check if the clinic is run by somebody who is qualified.

The union budget is round the corner. You have been advocating that the FM must take a hard look at subsidies, particularly petroleum subsidies, stop expanding big programmes and launch new ones…
I hope those schemes are not launched (laughs). In truth, why are people objecting to some of these (the populist measures)? Not that they are against redistribution, but because they are very poorly redirected. If you do way with all this, and give people cash, by some calculations, you can give poor people Rs2,000 a month. Kelkar and Ajay Shah (Vijay Kelkar and Ajay Shah) have done such calculations and found that.

Is this the most efficient way?
How better is a household going to make decisions than if they have cash in hand? As soon as you give somebody cash, you give them respect. Because money talks. If they walk into a dispensary and it’s not good, they will go out to a private dispensary and get services. The issue is do you trust the poor enough or not. Today, we don’t have the ability to do it because we don’t know who the poor are; identification is a part of the problem and there are tremendous leakages, because you are transferring cash. Over time, by the time you get things like UID, it will be far simpler to transfer cash.

Won’t this give rise to inflation? Also, won’t this lead to a rise in fiscal deficit?
What I am saying is cut the subsidies. Right now what you are doing is giving subsidies. Look at what happens to kerosene subsides. What do people do with it? They over-consume it. Then it creates a black market, consequences of which we saw recently when a government official was burnt alive. Who is paying for all this? It is the taxpayer. And it is an inefficient subsidy. This doesn’t make any sense. Now that brings me to the second question — we are hitting 10% of GDP consolidated fiscal deficit and we have no cushion. We need to build some cushion so if any adverse thing happens — say we get a bad harvest, or to the world financial market. And this is where we can’t keep building the deficit. That is why, reduce the fiscal deficit, cut the worst expenditure. And the worst expenditure is these subsidies. They distort behaviour. Now the fertilisers subsidies. We are poisoning our land with the kind of fertiliser subsidy. Free water is another. We’re over watering our land because of some states are promising free water. Some other states are promising free electricity. And sooner than later, we will realise that there is no such thing as a free lunch. Indian politicians will say it again and again that somebody has to pay for it. And the government has to decide if the people pay directly by paying higher prices or indirectly because we have distorted the prices.

Is it realistic?
The finance minister said that he wants to do something in the last budget. It’s time he does something. There is a talk of expanding food subsidies. I will say, wait till the time we have a distribution system. No point burdening the distribution system. Also you can collect taxes in a better fashion. There is only a fraction of people in Delhi, much smaller than you would expect, who are paying taxes. So, the efficiency of tax collection is something the government is working on. So, trying to focus on things like GST, which will bring more business under the umbrella, will be a good way to increase tax collection. The important thing is that we don’t want to increase the taxes people pay. We are a relatively low tax-paying country. But you want to broaden the tax collection. More people are paying. Revenues would be more buoyant.

In our recent conversation with Jeffrey Sachs (American economist), he advocated lifeline tariffs, where instead of giving subsidy on the market price, making limited amount of the kerosene, power or water available to households and leaving the market price untouched. Would you agree?
That is rationing. That is a part of a way to go. But I would go further and say that why don’t we go the whole way and give the poor money? So we give money to the people that remain below the poverty line. And as you move up the ladder we withdraw the money slowly. We don’t penalise income generation, but you cannot be on dole forever. I would say trust the poor. They’re perfectly capable of making decisions on their own. They might find it hard if you give them Rs100,000, for they might find it difficult to spend it cleverly. But give them an amount every month. So, if you’re talking about empowering the poor, then empowering them by making those decisions is the best way possible. Then decide whether they want to buy kerosene. This will also help the private distribution channel to become stronger in providing some of these things. Why should you buy cheap grain only from public distribution system? May be some stores can figure out how to provide good quality cheap grain. If people have the money, why won’t they sell it to them?

There is a talk that India needs banks which are larger in size…
You need to be very careful of creating any bank that is excessively large in India, because you don’t want to create something too big to fail in India. Size to my mind is perhaps not that important as profitability. We want profitable banks that are healthy because they are profitable. So I won’t just merge banks. What if they don’t have a common culture? I would rather see banks grow that are profitable because they are able to find new businesses. So, organic growth to my mind is something important and we should allow it. I am also in favour of allowing smaller banks that can find new ways of playing it and growing, and I am less worried creating gigantic banks. I think whatever we need will emerge; whatever, we don’t need won’t.

Did you see Peepli Live? (Aamir Khan-produced satire takes potshots at the media, politicians, economists and bureaucrats).
Yes. It was very nice. I thought it had very interesting commentary.