Myopia of the elite: Raghuram Rajan’s take on the PDS versus DBT debate.

R Rajan (Pic Courtesy:Business Line
R Rajan (Pic Courtesy:Business Line

Raghuram Rajan is an eminent economist. Along with the awe-inspiring tags of Harvard and IMF, he is also famous as the man who foresaw the future. It is said that he had predicted the global meltdown: the great recession, much before the associated cascade of events were triggered.

A few days ago, at the St. Xavier’s College in Mumbai he shared his ideas about governance, growth and a topic immensely popular with policy-makers these days, financial inclusion. Under his command RBI constituted the Nachiket More committee to exhaustively detail the pathway to financial inclusion in India.

Financial Inclusion:New Buzz word among policymakers. (Pic: arthapedia.in)
Financial Inclusion:New Buzz word among policymakers. (Pic: arthapedia.in)

Much like other routine speeches by eminent persons, Mr Rajan also started with indisputable, universally accepted facts and observations. Corruption is bad and growth is good etc. Presenting his analysis of the problem of corruption, he did make some unique remarks on the intractable nature of it from public life in India.

The uncouth and rowdy local politician continues to garner votes because the inroads he has made deep within the power structures enable him to provide certain services to the poor in lieu of their votes and even if the delivered products and services are of abject standards, a ghostly reflection of what they ideally should be, the poor has no other choice, according to Mr Rajan.

Professionals like Meera Sanyal fail miserably in elections.(Pic: indiafacts.co.in)
Professionals like Meera Sanyal fail miserably in elections.(Pic: indiafacts.co.in)

Further, the promise held out by the new ‘middle class professional’ candidate is too risky. With their subsistence level of economy, the poor just can’t afford to invest their trust in these new ventures and the bright professionals with good intentions end up losing their deposits during elections.

However, there seems to be something akin to a unique trait among the highly-qualified professionals. The moment they step out of the narrow range of recognised technical expertise, they start groping in the dark and unwilling to accept their lack of knowledge about the social and philosophical aspects of life, just start to shoot in all the wrong directions.

Something similar happened in the later part of Mr Rajan’s speech, which is important to observe as the crux of policymakers speech lies in the concrete means that they prescribe to reach a particular end.

Taking the example of Pubtlic Distribution System (PDS), Mr Rajan expressed his doubts about universalising it. Many experts have argued for opening up the fair-price shops (FPS) to the middle-class members of the society. A few such members will then become the hyper-local and most relevant points of surveillance, ensuring that leakages are minimal and quality of food grains is good. The silent and easily suppressed poor class will stand to benefit due to the involvement of the educated elite in the provision of social services not just as a patronising activist but as a beneficiary of equal standing.

States like Tamil Nadu successfully implemented universal PDS(Pic: thehindu.com)
States like Tamil Nadu successfully implemented universal PDS(Pic: thehindu.com)

Many have also argued in favour of sending middle-class children to the government public school in the neighbourhood so as to help in the most significant reform of the education system in the country. While the government schools employ relatively more qualified and certified teachers, the quality of education being provided remains abysmal as poor parents lack the social standing and the authority which flows from it to hold the teachers accountable for the quality of education.

Despite massive investments SSA potential remains unrealised as elite refuse to participate (pic: thehindu.com)
Despite massive investments SSA potential remains unrealised as elites refuse to participate (pic: thehindu.com)

New lines of communications, based on equality will open up between the middle and the lower classes, simply through more interactions and frequent visits to same places. Both these classes will be able to learn from each other and understand their complementary roles in nation building.

However, Mr Rajan brushes off this model of ‘co-beneficiary, co-existence’ in one swift stroke by saying, “…the poor may not even patronize facilities frequented by the middle class because they feel out of place. And even when all patronize the same facility, providers may be able to discriminate between the voluble middle class and the uncomplaining poor.” He then spoke about the power of money and how empowering it is. “Income could increase an individual’s status and increase the respect they are accorded by the teacher, the policeman or the bureaucrat,” he said, oblivious of the caste, region and religion based social hierarchy of Indian society.

Divisions in Indian society are too extreme(Pic: sumit4all.com)
Divisions in Indian society are too extreme(Pic: sumit4all.com)

The universal PDS model is flawed because among other reasons, the FPS owner will eventually start catering more to the needs of the middle class thus elbowing out the poor and over time the poor will start receiving the left-over food grains, Mr Rajan implied. The emergence of such a nexus between shop owners and middle class customers is a possibility which can hamper the success of universal PDS model.

Mr Rajan has a solution. Switch over to Direct Benefits Transfer (DBT). Put money in poor person’s hands and let him go directly to the market where …”A poor household with cash can patronize whomsoever it wants, and not just the monopolistic government provider. Because the poor can pay for their medicines or their food, they will command respect from the private provider,” he said. Being the incumbent Governor of India’s central bank which last checked is yet to abandon its commitment to social justice and development, the basis of his prescription should ideally be a number of field-surveys of the actual Kirana stores of the cities, towns and villages of our country. However, he didn’t make it clear during his speech. It seems he probably distilled this recommendation, supported by equal vigour by other supply-side economists too, during his years of residency in the USA, where even local groceries look like elite departmental stores of India.

Ills of kirana stores were discussed by supply-side to favor FDI in retail (pic: indiresearch.in)
Ills of kirana stores were discussed by likes of Mr Rajan to favor FDI in retail (pic: indiresearch.in)

If a FPS owner is going to elbow out the poor in favour of the middle-class customers, what stops a private kirana store owner from doing the same and even worse. Even in big cities, the treatment meted out to customers from disadvantaged sections of the society is harsh and discriminatory. Shop owners often don’t even allow shabbily dressed poor people to enter the shop premises and force them to make the entire transaction while standing outside the store.

Anyone who has regularly bought from such stores can recall such instances of discrimination against the customers from the lower strata of the society. In towns and villages their plight is compounded as for each locality there is hardly more than one or two kirana stores which exercise their monopolistic power even on the middle-class and the so-called better off customers.

But Mr Rajan is convinced of the benefits of DBT. Going further he even recommended issuance of electronic coupons, to ensure the poor are not spending their money on things they are not supposed to.

Above all, it is disconcerting to find the governor of RBI, an institution firmly committed to the uplift of poor and disadvantaged as one of its primary goals, to speak so fiercely in favour of limited government and private sector usurpation of services like health and education. A good private sector job, for example, may give a household the money to get private healthcare, education, and supplies, and reduce their need for public services,” he said.

Global finance growing at the cost of real economy will ensure recessions are frequent and deadlier in future ( pic: economicnoise.com)
Global finance growing at the cost of real economy will ensure recessions are frequent and deadlier in future (pic: economicnoise.com)

Apart from those who can invest heavily in their education and skill up gradation, the promise of a stable and good paying private sector job, without extracting excessively from the employees, has largely remained meaningless for the majority.

Private sector jobs are too vulnerable to business cycles, inevitably moving from one recession to another, to replace the need of public provision of basic services like nutritional security, health and education.

Link to Mr Rajan’s speech : http://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=908

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