India's welfare balm

By Arvind Subramanian and Josh Felman

PROVIDENCE — During the height of the COVID-19 pandemic, many Indian economists and commentators believed the economy would skyrocket as soon as life returned to normal. But, despite the country’s robust recovery in the two years since the pandemic’s peak, the predicted boom has not materialised, nor does it seem imminent.

The latest data shed light on the country’s economic predicament. While many analysts have estimated India’s potential annual GDP growth at 7-8 per cent, the most recent figures indicate a subdued rate of 4.4 per cent. Private investment remains weak; credit uptake has slowed in recent months after a brief spurt; and while high-value service exports have soared, manufacturing exports’ global market share has plateaued.

The employment and inflation figures are also sobering. India’s worker-to-population ratio, perhaps the best measure of job opportunities, has declined steadily from about 44 per cent in 2016 to 37 per cent today, according to the Centre for Monitoring the Indian Economy. Moreover, many industrial workers have been forced to shift back to agriculture, as the manufacturing sector’s share of total employment is still below pre-pandemic levels. And the increasing number of students with college degrees that are unemployed or underemployed attests to the predicament of millions of tuition-paying middle-class families. For them, the demographic dividend risks turning into demographic disappointment.

Meanwhile, inflation has persisted at 6 per cent for most of the past three years, driven by soaring food prices, which disproportionately affect the poor. Typically, such figures spell anxiety for political leaders. Food-price inflation has contributed to the ouster of previous Indian governments, most famously when soaring onion prices helped dislodge the BJP-ruled Delhi government in 1998.

This time, however, there has been remarkably little demand for political change. There seem to be three explanations for this.

First, most Indians seem to believe that the government’s economic reforms will eventually yield large dividends. International firms, edged out by an increasingly inward-looking China, are considering relocating to India, thanks to improving infrastructure and connectivity as well as the lure of generous government subsidies. Apple, which is in the process of moving its iPhone production to India, is a prominent example. If the current trickle turns into a wave and enough domestic and foreign enterprises succeed in becoming globally competitive, manufacturing could be rehabilitated, allowing India to finally follow the export-led development path that guided East Asia to riches.

Second, the economy is just one of many issues that affect voter behaviour, along with leaders’ personal characteristics, the political alternatives on offer, and the avenues available to citizens to express their disapproval.

The third possibility remains underappreciated. Prime Minister Narendra Modi’s unique approach to redistribution, which one of us dubbed “New Welfarism”, emphasises funding for items such as toilets that are essential but normally provisioned privately, as opposed to public goods such as primary education and basic health care.

To be fair, very few Indian governments have paid much attention to providing public goods. After all, educational and health reforms take years to deliver measurable results and often produce meager political returns, giving policymakers little incentive to pursue them.

Instead, governments have focused on building social safety nets. Modi’s immediate predecessor, Manmohan Singh, flush with tax revenues from rapid economic growth and determined to spread the boom’s benefits more widely, introduced a nationwide rural employment guarantee scheme and converted existing food-subsidy programmes into expanded legal entitlements. Both served India well during the pandemic as millions of newly unemployed migrants were forced to return to their rural homes.

The Modi government inherited this safety net and maintained it, but without enthusiasm. Rather than strengthen the existing schemes, the government focused on providing cash payments and subsidies for cooking gas, toilets, electricity, housing, and water. This effort has been extraordinarily successful, with access to these goods and services increasing significantly, even if some of the government claims are exaggerated.

What the different elements of New Welfarism have in common is that they are “attributable tangibles”. Stuff, not fluff, is being given; cash is delivered efficiently using India’s seamless digital infrastructure. Unlike education reform, the goods benefit people today, rather than at some point in the future. Given that many of them fulfill basic needs, Modi’s strategy has arguably improved Indians’ quality of life significantly.

The surge in cash transfers has been critical. According to government data, roughly $45 billion in direct cash payments were delivered in the fiscal year that just ended, benefitting about 700 million (not necessarily distinct) people via 265 public schemes. If transfers from state governments were included, these figures would be even larger. Taken together, the cash transfers are tantamount to a universal basic income, an idea that one of us advocated while serving as the Indian government’s chief economic adviser several years ago.

Against this background, New Welfarism’s role starts becoming evident. Initially, delivery of attributable tangibles and improvement in people’s standard of living contributed to the increase in Modi’s popularity, especially as the government’s unrelenting marketing made the benefactor unmistakably clear to the beneficiaries.

Now, New Welfarism is playing an equally important role in dampening disaffection. Anxieties about the limited employment opportunities and high food prices are lessened by the cash flowing into bank accounts, providing an assured minimal level of purchasing power.

An exaggerated Marxist formulation of New Welfarism might position it as the new opium of the masses. A more restrained explanation would say that, though it began as an economic boost, New Welfarism now is becoming a soothing balm.

Arvind Subramanian, a senior fellow at Brown University, is a distinguished non-resident fellow at the Centre for Global Development and the author of “Of Counsel: The Challenges of the Modi-Jaitley Economy” (India Viking, 2018). Josh Felman is principal at JH Consulting. Copyright: Project Syndicate, 2023. 

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