Stronger social protection will aid economic revival
STRATEGY Inclusive growth dividend will protect the vulnerable and drive economic recovery
In the first part of this series, I argued for an “Inclusive Growth Dividend” (an idea I proposed in an essay with Paul Niehaus and Sandip Sukhtankar, and in a more detailed paper with Maitreesh Ghatak) that can round off India’s social protection framework. Though this is a universal income transfer, we called it an IGD because it differs from UBI in important ways. Unlike “basic income” which connotes an amount that is enough to live on, “dividend” clarifies that this is one component of a portfolio of people’s income streams. “Inclusive growth” reflects the goals of universality, progressivity, and shared prosperity. Since the amount is the same for all citizens, the value of the IGD is much greater for the poor, but it is a shared benefit for the entire population that will grow with the overall economy.
An IGD could be transformative for India in several ways. Even at the modest value of ₹120/ month (or ₹500/month for a typical household), it would meaningfully reduce poverty — augmenting consumption for the poorest 50% of the population by over 10%, and for the poorest 10% by 20%. Since mothers would receive allowances on behalf of their children, IGD would sharply improve female empowerment and agency — especially in rural India. It would directly contribute to universal financial inclusion by activating dormant Jan Dhan accounts, and allowing the poor to accumulate savings. It would also promote access to credit at lower interest rates (since creditworthiness will improve as a result of predictable cash flows), and increase the ability of the poor to make productivity-enhancing but risky investments (such as planting a new crop) by providing some consumption insurance.
An IGD also has many advantages relative to alternative designs that aim to deliver larger income transfers to fewer (poorer) people. First, it avoids targeting costs and reduces the risks of mistargeting. Second, the IGD amount is meaningful enough to mitigate poverty, but too small to adversely affect work incentives. Third, targeted programs have to be phased out as people earn more, which creates disincentives to work because of the loss of benefits. there is no such problem with an IGD. Finally, sociological evidence suggests that non-beneficiaries strongly resent welfare programs that reverse the income ranking of people in a community. An IGD elegantly avoids the last two challenges by being universal and lifting all boats equally.
Successfully implementing an IGD will have the added benefit of augmenting both the capacity and credibility of the Indian State. Delivering an IGD every month will represent the first time that the Indian State has reliably delivered a benefit to every citizen. On its own, this will be a signature achievement. More importantly, the capacity to do so will dramatically increase the policy options available to the government to respond to future scenarios.
The current moment of nationwide economic hardship is especially appropriate for an IGD. Historically, times of economic hardship have been associated with an increase in social strife and conflict as people compete over a shrinking economic pie. IGD can mitigate this strife and serve as a powerful symbol of social solidarity that all Indians experience together regardless of their station (an option for the wealthy to “give it up” could add to the solidarity).
DRIVING ECONOMIC GROWTH
In addition to protecting the vulnerable, a stronger social protection architecture will build the platform for a broader economic recovery. The government’s current economic strategy for businesses has largely focused on expanding credit access for micro, small, and medium enterprises (MSMES). While the approach is fiscally prudent, this strategy is missing one critical element: measures to boost demand. Even with credit guarantees, firms are unlikely to hire workers and ramp up production unless there is adequate demand in the economy.
Commentators such as Haresh Chawla and Rathin Roy have highlighted that India’s economic performance over the past two decades has been a top-down growth story. Specifically, the top 5-10% of the population earns enough to drive consumption. This demand trickles down to sustain the next 30-40% working in smaller (mostly informal) enterprises, while the bottom 50% leads a hand-to-mouth existence.
By putting more money in the hands of the poor, an IGD could help reverse this pattern and provide a bottom-up boost to the economy. Not only will it increase income, it will also provide predictability of future income — a key driver for demand. Recent evidence on unconditional income transfers provided to entire communities in Kenya finds an economic multiplier of 2.7. More generally, both theory and evidence suggest that a broader consumption base promotes economic development by allowing firms to recover the fixed costs of investing in more productive capital and technology. Thus, while the government may be wary of making additional fiscal commitments at a time of shrinking revenues, an IGD is likely to have a substantial multiplier effect on the economy by boosting domestic demand, and thereby deliver a high public return on investment.
Another way in which social protection can contribute to growth is through supporting migration. The heart-rending scenes of migrants traveling back to their villages have led many to call for reducing migration. Though well-intentioned, this will be a mistake because reducing migration hurts both workers and employers. Throughout the world, cities are engines of growth and migration to cities the most common pathway out of poverty. Thus, the appropriate policy response to the migrant crisis is to build a stronger social protection architecture that is nationally portable. Having a portable PDS and IGD in place (and augmenting allowances before the lockdown) could have prevented the crisis of return migration by providing migrant workers means to sustain themselves during the job-losses caused by lockdown. The Government of India has correctly prioritised the implementing of nationwide PDS portability, which will strengthen this key pillar of social protection.
An IGD will add a crucial component of flexible income support — especially since PDS grains alone are not enough to survive with no other income. Research in recent years has shown that even modest income support to the rural poor can sharply increase their overall productivity and income by covering the search costs of finding better opportunities. Thus, a portable IGD is likely to boost both incomes and aggregate productivity by empowering workers to seek the best possible livelihood in any part of the country.
CREATING A WIN-WIN
The Prime Minister’s stated goal of “Sab Ka Saath, Sab Ka Vikaas, Sab Ka Vishwaas” is a laudable one. Yet, translating this ideal into practice is not easy. An IGD provides a practical and implementable way of doing so through its combination of universality (sabka saath; with everyone), promoting broad-based development (sabka vikaas; universal progress), and building public confidence in the government by credibly delivering a benefit to every Indian every month (sabka vishwaas; for everyone’s trust).
A key policy goal in responding to the hardship caused by COVID-19 and the lockdown imposed to slow its spread should be to both support the economy and the vulnerable in the short run, and promote long-term development goals. An Igd-led nationally-portable social protection architecture will do exactly this. It will support the poor, give them the means and confidence to migrate to better job opportunities, boost demand and productivity, help the economy recover, build social solidarity and state capacity, and lay the foundations for broad-based long-term prosperity.
This is the concluding part of a series on a new social protection framework for India. Karthik Muralidharan is the Tata Chancellor’s Professor of Economics at UC San Diego. Vishnu Padmanabhan contributed to this piece.