DBT 2.0: A Model To Free India From Poverty

TV Mohandas Pai and Nisha Holla

Apr 15, 2020, 12:37 PM | Updated 12:35 PM IST

Prime Minister Narendra Modi.
Prime Minister Narendra Modi.
  • With this masterstroke, India will move away from a 70-year legacy of inefficient planning while empowering our most vulnerable citizens with increased purchasing power.
  • India has the digital infrastructure, the political will and the economic growth rates to eradicate poverty and extreme deprivation today. The taxpayer-funded subsidy system is buckling under 70 years of socialist bureaucratic policies and overkill, and needs to be replaced with a straightforward, less-bloated framework.

    Prime Minister Narendra Modi has already cleaned out part of the system with direct benefit transfers (DBT) founded on the India Stack.

    A new DBT 2.0 model, which subsumes all the subsidies into one, is imperative to transfer purchasing power to India's poor and let them live with dignity. The administration also owes it to India’s honest taxpayers to not waste their hard-earned taxes in a leakage-ridden subsidy system, and instead ensure a complete transfer of the tax-funded subsidies to those genuinely in need.

    India's Journey With Poverty

    After economic liberalisation in 1991, India has maintained a formidable growth trajectory in driving development, literacy, income, and purchasing power.

    Before 1991, negligible development and ever-increasing poverty were the hallmarks of the disastrous economic policies of the Nehruvian era. Jawaharlal Nehru actively suppressed Indian capital, established unsustainable capital-intensive projects, and did not develop labour-intensive industries to provide people with employment opportunities and wage growth.

    Instead, an increasing number of people were kept dependent on the agriculture sector, which was already decimated by the British crown's predatory policies before 1947. Even though the first Five-Year Plan provided a useful framework, the agriculture sector was not given a chance to recoup under Nehru — leading to famine, malnourishment and abject poverty.

    The terms of trade were steeply set against the sector preventing India's farmers from making a decent living. While the world was industrialising and prioritising skilling and educating their populations, Nehru did neither. As a result, India fell further behind.

    Between 1950 and 1980, the world economy grew at 4.5 per cent while recovering from the Second World War, other Asian economies like Japan and Korea industrialised and became strong, but India grew at 3.5 per cent (1 per cent lesser than the world); our population grew at 2.5 per cent and per capita income at 1 per cent.

    This was derisively called the Hindu rate of growth as if to take attention away from the fact that it was badly-developed socialist state policies that kept India poor. Economic liberalisation in 1991 changed India's trajectory as it moved away from socialist policies towards globalisation and capital formation.

    Another contributory historical reason for India's substantial poverty burden is the lack of focus and spending on primary education and primary health in the Nehruvian era. In contrast, China focused heavily on educating its population including women.

    Chairman Mao famously said, "Women hold up half the sky" in 1949 and ensured the girl child wasn't left behind. The pathetic state of affairs of women's literacy today at 70 per cent (which only accelerated from 43 per cent after economic liberalisation in 1991) is in stark contrast to China's 96 per cent.

    If our first prime minister had focused on primary education and primary healthcare in the first decade of Independence, like the much despised Mao did, then India would have been a very different place today. We would have had lower population growth rates and a higher standard of living, as studies from around the world show women's education leads to lower fertility.

    In 1991, our gross domestic product (GDP) was Rs 6.25 lakh crore. With a population of 83.86 crore in 1991, per capita income was barely Rs 7,500. With the economy opening, India grew at a nominal growth rate of 12.5 per cent year-on-year (YoY) from 1991 until 2020, while population growth rates averaged 1.6 per cent YoY during this period.

    GDP grew from Rs 6.25 lakh crore in 1991 to Rs 205 lakh crore in 2020. Per capita income grew from Rs 7,500 in 1991 to Rs 1.5 lakh in 2020. This is phenomenal growth and has had a significant impact on the reduction of poverty and deprivation in India. Our nation is undoubtedly one of the world's premier poverty-lifting success stories after 1991. All Indians and governments post-1991 have to be justifiably proud of this achievement.

    Explosive economic growth has also provided India with the foundation for one of the largest subsidy- and income-support programmes for the poor in the world.

    The classic definition of poverty by the World Bank and other multilateral institutions is having less than $1.9/day to subsist on. In 1991, the World Bank estimates 47 per cent of India's population fell under this category. Post-1991, the percentage of poor (with <$1.9/day) in the population fell to 22 per cent in 2011.

    A Brookings Institute report on 'Rethinking global poverty reduction' shows that The World Data Lab, which collates World Bank, IMF and Indian government survey data estimates India's poor, per this definition, at 5 crore in 2019.

    This is a dramatic decrease from the 2011 estimation of 22 per cent of the population to 4 per cent in 2019. This is a tremendous achievement and significantly driven by National Democratic Alliance-1’s (NDA-1’s) development and digital focus.

    Since 2014, Prime Minister Modi and the NDA-1 government have done more for India's poor than any other government in its five-year term in Independent India, as discussed in our article here.

    It has provided crores of people with a roof over their head, water in their tap, data connectivity and digital inclusion, road connectivity, increased food security, electricity, LPG cylinders for cleaner cooking, access to education, financial inclusion, affordable healthcare, maternity benefits, and more.

    Many Indians got access to such basic amenities for the first time in their lives between 2014 and 2019.

    NDA-1's digital push enabled by the JAM (Jan Dhan+Aadhaar+mobile) trinity has been instrumental in pushing India towards becoming a middle-income country. With the JAM Stack, Prime Minister Modi has cleaned out the system substantially over the last five years.

    About 125.75 crore unique Aadhaar cards have been issued — the most massive one-time identification exercise ever carried out in the history of humankind. A total of 375 crore documents have been verified via DigiLocker.

    A sophisticated technology network now exists by implementing state-of-the-art electronic transfer mechanisms like UPI, and opening Jan Dhan accounts for Aadhaar-enabled citizens.

    The digital architecture has opened up innumerable ways to push poverty out once and for all and enable every one of India's citizens to fully participate in the economy with bank accounts, digital payments and perhaps the most significant achievement of all – direct benefit transfer (DBT).

    To date since 2014, the government has disbursed a whopping Rs 9.66 lakh crore directly to the bank accounts of the most vulnerable citizens through DBT.

    DBT is a tried and tested method. Its value proposition is clear – to date, the savings enabled by the system by reducing leakages is estimated at Rs 1.7 lakh crore. States like Telangana and Odisha are successfully utilising DBT to provide their citizens benefits tailored to their unique situations, as discussed later in the article.

    Here we present a model for poverty-free India that fully utilises the JAM trinity to modernise the archaic systems India's subsidies programmes run on, cut out systemic inefficiencies, and empower India's most vulnerable.

    New India needs a bold vision from Prime Minister Modi, with poverty eradication at its core as discussed in India’s Grand Reconstruction Budget. With the proposed DBT 2.0, absolute eradication of poverty and deprivation is now in sight.

    Defining Poverty

    While the classic World Bank definition of poverty (<$1.9/day to subsist on) is useful to compare the progress of different countries; in India, we want to eradicate poverty and extreme deprivation. This means no citizen must be left wanting for basic necessities.

    With this objective, we can also define poverty as a lack of purchasing power. People have purchasing power by leveraging one or more of three things:

    1. Skills or vocational training, based on which they can find gainful employment and earn a decent wage
    2. Education, by which they can access formal employment
    3. Income-generating assets, like land, securities, and others

    The lack of income-generating assets, education or higher level of skills leaves people with only one option – unskilled or low-skilled labour for day-to-day existence and reliance on subsidies from the government.

    By our calculation below, approximately 68 crore people in India are in this situation today – 43.8 per cent of the population – where without the massive subsidies they receive, they will not be in position to have a decent standard of living.

    Many of them may have more than $1.9/day but do not have a higher level of skills, education, or income-generating assets; leading to low purchasing power and reliance on government subsidies.

    In conclusion, though India’s war on poverty and extreme deprivation has been widely successful, a large section will still need help from the government and taxpayers. We must now focus on improving their purchasing power.

    A Study Of Subsidies

    Today, in 2020, when we face one of the biggest global crises of our lifetimes, India must take the opportunity to study its bloated subsidy system, buckling under the weight of 70 years of multiple schemes and regulations, and streamline it to tackle the challenge of poverty directly.

    A study of the 2020-2021 budgets of the Union government and aggregate state governments shows the following annual subsidies totalling to approximately Rs 7.5 lakh crore.

    Table 1: Budgeted subsidies by the central and state governments. (Source: Budget documents of the Union and states)
    Table 1: Budgeted subsidies by the central and state governments. (Source: Budget documents of the Union and states)

    Food subsidies feature prominently in both central and state budgets – and come up to a total of Rs 250,000 crore (excluding government borrowing from the National Small Savings Fund).

    The central government provides fertiliser subsidies of Rs 71,300 crore and allots Rs 61,500 crore to MGNREGA for livelihood support of rural workers. Fuel subsidies for LPG and kerosene amount to Rs 40,000 crore.

    Farmers receive minimum income support via DBT of Rs 6,000 per year through the PM-KSNY to a total of Rs 75,000 crore annually.

    States like Karnataka, Uttar Pradesh, Telangana, and others supplement this government of India farmer DBT – totalling to Rs 50,000 crore combined. Power and water subsidies are under state government list and run to the tune of Rs 1 lakh crore each, all states put together.

    The central budget accounts for Rs 21,175 crore in interest subsidies for farmers, while states provide a loan write-off amounting to Rs 50,000 crore.

    A grand total of approximately Rs 7.5 lakh crore is spent on subsidies by the central and state governments combined. This is 3.6 per cent of our gross domestic product (GDP) in financial year (FY) 2020; a phenomenal amount of money that could be utilised to increase purchasing power in the hand of Indians instead of continuing to rely on more than 450 schemes of distribution.

    The more the schemes and distribution lines the greater the leakages and middlemen inefficiencies. The National Statistical Office (NSO) in 2011 shows leakages in food public distribution system (PDS) estimated to be a whopping 46.7 per cent. Other schemes also show high leakages.

    This is unacceptable. Though leakages have steadily reduced under Prime Minister Modi’s NDA-1, especially with digital-first strategies like DBT, managing so many schemes is both confusing and unnecessary in today’s digital era. Moreover, many undeserving people may be included in the subsidy system and needs revaluation.

    The administration must relentlessly pursue a new strategy that simultaneously gets rid of cumbersome and loss-inducing procedures while increasing the purchasing power of India’s most vulnerable citizens. Honest taxpayers have selflessly contributed to this system for years and are owed a more efficient utilisation of their hard-earned capital.

    A Study Of Populations

    Data from the Census and Civil Registration System indicate that India’s population is approximately 137 crore today. To understand who the vulnerable citizens are, the following exercise is indicative. This is only an approximate calculation for study purposes.

    We are assuming in our model there are three people on average depending on one income-earner making a typical family of four. It may be more or less and varies by urban and rural settings, and by state.

    Further, a fair number of families are double-income households. With the self-help group (SHG) movement and MUDRA schemes, many women in rural areas are also bringing in primary or supplementary income. A detailed data analysis is required by the government to account for all these variables.

    Model 1 indicates there are 67.8 crore people in need of support, approximating 17 crore beneficiaries or families at four to a family.

    Table 2: Model to approximate the number of people in India requiring government support. (Source: World Bank, Census, CRS, EPFO, ESI, IT Returns)
    Table 2: Model to approximate the number of people in India requiring government support. (Source: World Bank, Census, CRS, EPFO, ESI, IT Returns)

    Industry/Services: There are approximately 137 crore (A) in India today. World Bank estimates 23.8 per cent of India’s workforce depend on industry for a living. Including their dependents by proxy that is 23.8 per cent of the population or 32.6 crore (B). Similarly, 33.5 per cent depend on services, amounting to 45.9 crore (C). In total, they add up to 78.5 crore (D). Four groups are secure and do not require benefits or subsidies and are mostly in industry and services, so we assume this fully for calculation purposes. We will subtract these from (D).

    Secure Population: There are four secure groups known in the system:

    1. 2 crore government pensioners (totalling to 4 crore assuming they support one other person).
    2. 2.5 crore employees of the governments and parastatals together (assuming one family is four people, that amounts to 10 crore).
    3. 8 crore enrolled under EPFO and ESI schemes (32 crore with family)
    4. 2.1 crore people who file IT returns under the heading business and do not avail EPFO or ESI (8.6 crore with family).

    They add up to 14.6 crore, or 54.6 crore with families (E). By subtracting these numbers from the total industry/services dependent population (D), we have a balance of 32.9 crore (F) who require support.

    Agriculture/Rural: World Bank estimates 43 per cent of India’s workforce is dependent on agriculture. By proxy, assuming 43 per cent of the population (A) depends on agriculture, that is 58.5 crore (G). In rural areas, approximately 25 per cent of people do not avail food security benefits (H). Applying that logic on (G), rural people requiring benefits is 43.9 crore (G-H) or 11 crore families which includes the 9.21 crore farmer families that get DBT minimum-income support through the PMKSNY or Pradhan Mantri Krishi Sinchayee Yojana.

    Total requiring support across India adds up to 67.8 crore (F+I) or, on average, 17 crore families. We can perhaps round this down to 15 crore families.

    Another way to look at who requires subsidies is tracking food security beneficiaries, detailed below in Model 2.

    Table 3: Model to approximate the number of people availing food security in India. (Source: World Bank,Census, CRS)
    Table 3: Model to approximate the number of people availing food security in India. (Source: World Bank,Census, CRS)

    Starting from 137 crore (A) – since India is approximated at 34 per cent urbanisation, this translates to 46.6 crore people (B) living in the urban areas. Approximately 50 per cent of these avail food security benefits amounting to 23.3 crore (C). Meanwhile, 66 per cent of the population is in the rural area – 90.4 crore (D), where 75 per cent avail food security benefits – 67.8 crore (E). Total population availing benefits are 91.1 crore or, on average, 23 crore families.

    There is a difference of 6 crore families between Model 1 and Model 2, possibly because food security and other benefit schemes are based on old data.

    Some of these schemes have not been changed for decades and need to be cleaned up. Even the latest schemes use the 2011 Census data which, as discussed above, is outdated given the development and digital leap India has made in the past decade.

    India’s GDP has grown from Rs 87.45 lakh crore in FY 2012 to Rs 205 lakh crore in FY 2020, while per capita income has risen from Rs 68,322 to Rs 1.5 lakh in the same period. Bureaucrats must discontinue the use of the 2011 Census to make subsidy distribution decisions as this distorts genuine need.

    The use of readily available databases like EPFO, ESI, NPS, DBT-JD accounts, and others provide a more accurate picture. The upcoming 2021 Census is the perfect opportunity to study which of these 22 crore families (from Model 2) are actually in need and determine whether the number is closer to the 15-17 crore families calculated in Model 1.

    A New Centre-State DBT Model

    Today, Rs 7.5 lakh crore worth of subsidies is disbursed through more than 450 schemes. This is inefficient, outmoded and a thorough drain on India’s resources. Middlemen efficiencies have always plagued India’s PDS, and it is time to take the new digital JAM infrastructure to its logical conclusion by moving to a DBT-first model.

    We propose that policymakers subsume most/all subsidies into one scheme, move everything to digital and send beneficiaries their portion of all subsidies via DBT, and reduce the distribution of subsidised commodities like food, fertiliser, and so on.

    This must also contain the caveat that every five years, there will be a revaluation (using AI/big data analytics) of whether beneficiaries continue requiring this support or whether they have obtained a job or income-generating asset, making them self-sufficient.

    This model has to be implemented as a Centre-state partnership where the central government must sign a memorandum of understanding (MoU) with each state. India’s states are vastly different across indicators – population and demographics, literacy and education, economic dependence on agriculture, economic growth and per capita income, and others. Table 4 shows the per capita GDP growth of India’s highest- and lowest-performing states.

    States on the lower end have a larger share of workforce- and economic-dependence on agriculture and a combined population of 48.36 crore. States on the higher end have advanced industry and services sectors (with higher GVA or gross value added) and a low combined population of 30.12 crore, which is why there is such a big difference between per capita incomes of the two groups.

    Bihar, with Rs 48,000 per capita income is very different from Telangana, at Rs 2.56 lakh, or Maharashtra, at Rs 2.39 lakh. It is essential for the Centre to sign an MoU with each state – to account for the unique demographic and economic conditions of the state’s citizens.

    Each MoU must yield a thorough study of the population of the state and how many people in urban and rural areas require this income support. Again, the 2021 Census will be crucial in establishing these parameters.

    Table 4: Per capita GDP of highest- and lowest-performing Indian states. (Source: RBI, Union and state budget documents, Census, CRS)
    Table 4: Per capita GDP of highest- and lowest-performing Indian states. (Source: RBI, Union and state budget documents, Census, CRS)

    Farmers will now receive a higher DBT payment that subsumes their fertiliser, water, power, interest, and other subsidies into one. How much they receive will depend upon acreage, crops grown and other parameters.

    States like Telangana and Odisha have already built DBT models for this, which can be replicated across the country. In this manner, each MoU will study and analyse how to subsume subsidies into one DBT payment.

    Prime Minister Modi has announced that farmers’ incomes will double by 2022 which is now possible by this DBT 2.0 system which subsumes all subsidies into one transfer. Table 5 shows different models for the new DBT system.

    Even DBT at the lower end of Rs 4,000/month yielding Rs 48,000/year, is equivalent to Bihar’s per capita income of Rs 48,093. DBT of Rs 6,000/month yielding Rs 72,000/year surpasses Uttar Pradesh’s per capita income of Rs 69,425. DBT 2.0 will increase India’s per capita income and bring dignity back into the lives of crores of our fellow Indians.

    Table 5: A new DBT model that subsumes all Indian subsidies into one DBT payment.
    Table 5: A new DBT model that subsumes all Indian subsidies into one DBT payment.

    This new system will transfer money and purchasing power directly into the hands of the people. They will now be empowered to decide what to spend the money on, and that is the real power of the DBT system. They now have the choice whether to buy rice or dal, tomato or potato, private school or government school, bus or train, the local market or the vegetable cart, and on.

    These choices may seem trivial to the elite in cities. Still, the power to make these choices and not just take what is being handed to them will make a generational difference to the layperson receiving subsidies today.

    Crores of people who today face the tyranny of government bureaucrat officials in charge of public distribution/other subsidy benefits will be liberated under this new system.

    These officials believe only they have the privileged training and power to allocate resources in society; this thinking is dangerously tyrannical and leads to inefficiency, diminished power in the Indian citizen, and fundamental freedom of choice.

    For 70 years, the Indian citizen has been made a supplicant, having to beg many officials for their rightful due via different subsidy programmes again and again for basic sustenance. The preamble of the Constitution guarantees the Right to Dignity to every Indian citizen. However, through the subsidy system, crores of Indians have been stripped of this dignity.

    The subsidy system is designed based on the ideas of state-sponsored programmes floated by leftist economists and others, who believe that only they have the intelligence and ability to make decisions.

    In their arrogance, they assume that the common people can’t make their own decisions – forgetting that people have survived for thousands of years. They have the will and the intelligence; they only lack the purchasing power.

    India now has the digital infrastructure, thanks to Prime Minister Modi, to fix this once and for all. No longer must Indian citizens bow to the false privilege of tilted bureaucratic choke points to receive their rightful dues.

    The time has come for PM Modi, a tall visionary working towards a poverty-free India, to enhance a massive DBT programme that subsumes the complicated system of subsidies and schemes into one.

    With this masterstroke, India will move away from a 70-year legacy of inefficient planning while simultaneously empowering our most vulnerable citizens with increased purchasing power.

    India doesn’t lack the resources to execute this – as evident by our massive Rs 7.5 lakh crore subsidy programme today – but is hampered by a bureaucratic system still tied to a colonial mentality of suppressing the less fortunate.

    India needs strong political leadership to execute this bold vision and empower the ordinary citizen. With this, India will shine in the twenty-first century global order with one of the most successful large-scale poverty eradication programmes in history.

    This piece was first published on the Sunday Guardian and has been republished here with permission.

    TV Mohandas Pai is Chairman, Aarin Capital Partners and Nisha Holla is Technology Fellow, C-CAMP.

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