In a 12-page open letter to Prime Minister Narendra Modi, global equity research and brokerage firm Bernstein has warned that India’s reliance on welfare schemes is doing more harm than good to the economy.
“A rupee locked into broad, politically timed cash schemes is a rupee that does not build roads, logistics, irrigation, power distribution, public transport, schools or hospitals – areas where multipliers are higher and productivity gains more permanent,” the firm said in the letter.
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It argued that the subsidy, where a small productive group of taxpayers is used to provide cash to the wider population, mainly to win votes, either reflected the “diseases of democracy” or the “economic failure of the nation”.
The firm attributed the rise of cash transfer schemes to the inability to secure jobs and social security. She added that state-run cash transfer schemes have expanded so rapidly that they are now beginning to reshape fiscal priorities, and not necessarily in ways that will support growth.
Cash transfers
The firm noted that more than half of India’s states have announced unconditional cash transfers to women – often in the run-up to elections – with a total annual expenditure of around ₹1.7 to 2.5 lakh crore or about 0.5% of India’s GDP.
In Madhya Pradesh, the Ladli Behna scheme is promising ₹1,500 per month to approximately 13 million women. It is up to 700 billion rupees for the entire period. Maharashtra’s Ladki Bahin scheme, which was launched later but covers roughly 25 million women on similar salaries, is comparable in scope.
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In Bihar, the incumbent JD(U)-BJP government announced a cash transfer of Rs ₹10,000 to women in the state weeks before the assembly elections in the politically important state last year. Pre-election transfers alone were estimated at approx ₹125 billion within a few weeks.
“Bottom line, these very cash schemes across states are now in the same fiscal rut as some of India’s biggest social sector schemes. This is money that could otherwise be added to hard infrastructure, urban capacity, human capital or research and development,” the brokerage firm pointed out in its candid letter.
not “for free”
However, the company clarified that this was not an argument for the complete abolition of social programs. Indeed, there is ample evidence to show that well-designed cash transfers can reduce vulnerability, facilitate consumption and increase local demand in the short term.
But when these programs start absorbing 2-3% of GSDP in some states, they will inevitably squeeze capital spending, narrow fiscal space and increase inflationary risk if supply is insufficient. And for an investment-starved emerging economy like India, they are proving to be a very expensive way to buy growth.
This means that targeted and time-bound support will always be needed for outbreaks of emergency or to absorb major global shocks.
“The point is to make large, unconditional, election-synchronized transfers a permanent feature of government budgets. If this happens, we risk locking ourselves into a low-productivity equilibrium where a growing share of taxes funds today’s consumption rather than tomorrow’s capabilities,” the firm said in the letter.
If this goes unchecked, India’s per capita income growth will be stunted even as overall GDP growth looks respectable.
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