May 28, 2015

The government says it’s taking “incremental” steps toward reform, but the plan to reshape payouts for the poor is nothing short of a revolution.

This week marks the first anniversary of Narendra Modi’s right-of-center government in India. He promised thorough economic reform, and many people inside and outside India believed him. Money poured into the country, with foreign direct investment up by more than a quarter in 2014. Now, after a year in office, worries are mounting that his reforms of markets and property rights aren’t happening quickly enough. But the biggest change happening in India is much more fundamental — and it may take much longer to complete.

Modi’s victory represented a generational change in Indian politics, with voters electing for the first time in 30 years a government with an absolute majority in the Lok Sabha, the lower house of the Indian parliament. And it was the first time ever in the history of independent India that a party other than the long-ruling left-of-center Congress party was elected with a parliamentary majority.

Modi’s Radical Plan to Remake Welfare in India

In the wake of Modi’s huge win and a campaign premised on the economy and governance, it was widely expected that he would usher in a radical transformation of the Indian economy, completing its transition away from socialism and toward a fully-fledged market economy. That transition began in 1991, when in the wake of a macroeconomic crisis, the Congress-led government did away with the worst excesses of central planning but left many sectors unreformed. More recently, in the 10-year rule of the Congress-led government from 2004 to 2014, the emphasis was not on economic reforms but on creating a large number of entitlement based welfare schemes — a right to employment, food, education, and so forth.

Modi’s meteoric rise seemed to signal an end to all that. But a year on, both supporters and critics of the Modi government contend that his approach to economic reforms — especially on land, labor, and capital — has been measured and gradual, too slow for the gung-ho supporters who imagined he’d be another Margaret Thatcher, gleefully slashing one welfare scheme after another. His government instead now projects a message of moder­­­­­­­­­ation. Arvind Subramanian, a former International Monetary Fund economist who is now the government’s chief economic adviser, coined the term “incrementalism” to describe the approach to economic reform.

In some areas, such as reforming India’s arcane and restrictive labor laws, which make it difficult for firms to fire workers, “incrementalism” is an accurate description. Only recently has the central government initiated a process of public discussion around reforming labor laws — a process that some powerful states oppose and which promises to play out over the coming year or more.

However, those who claim that Modi is fundamentally an incrementalist, have missed the real significance of a crucial — and far more radical transformation — that’s quietly underway.

This transformation involves the conversion of in-kind entitlement-based welfare schemes into cash transfers , much greater fiscal devolution from the central government to state governments, and a phased replacement of welfare giveaways with social insurance that has stricter conditionalities like schemes in advanced economies such as the United States. Furthermore, there’s a shift in the central government’s own spending priorities toward infrastructure development. If successful, this package of measures will fundamentally change India’s welfare state and the relationship between the central and state governments in India’s federal set-up.

It’s hard to understand just how radical this transformation is without realizing how ingrained paternalism and giveaways from the government are in the post-independence Indian psyche and political economy. Whether it’s a right to 100 days of paid employment for agricultural labor (which in the past has mostly involved unproductive activity like digging holes in the ground) or a creaky and corruption-ridden public distribution system (which entitles people to a certain amount of free grain from government-approved stores), everything has revolved around patronage flowing from the central government down to the states, to the districts and to the local communities that receive these handouts. Often, the end recipient must kowtow to a local official or pay a bribe, and much “leakage” occurs along the way.

If Modi is successful, this chain of patronage will be broken and individuals in need will simply receive money directly transferred to their bank accounts.

If Modi is successful, this chain of patronage will be broken and individuals in need will simply receive money directly transferred to their bank accounts. The poor will no longer need to participate in a transactional client-patron relationship with a local official.

The use of technology to bring Indians into the financial system is the key to this new approach. It’s a low-hanging fruit that has long waited to be plucked. According to the World Bank’s latest data, only 53 percent of adult Indians have a bank account, compared to 79 percent in China. The government’s Jan Dhan Yojana (financial inclusion) plan has the ambitious target of rolling out bank accounts to millions of citizens left out of the financial system. So far, almost 147 million new bank accounts have been established in the first year of the plan, making it likely that the target of 150 million new accounts in the first year will be achieved.

Bank accounts are linked to the Aadhar (unique biometric identification) card, an initiative launched by the previous government. The bank account and unique ID will be further linked to an individual’s mobile telephone number, thereby allowing them to access funds deposited directly into their account by various government schemes. The combination of all three — called the “JAM Trinity” — is a centerpiece of the Modi government’s plan to completely overhaul the social welfare system.

While transforming entitlements to direct cash transfers is bold, re-conceiving social welfare as social insurance is straight up radical in India. In the wake of the JAM, Modi’s government recently launched three new social security schemes that provide life insurance protection for a small premium to people who have access to a bank account. If in the future these life insurance schemes are extended to cover unemployment insurance, that could provide momentum for labor reform: reassure laid-off workers that there’s a safety net to catch them.

What’s most significant is the way in which Modi explained the purpose of these schemes: that the poor don’t need a handout but need empowerment, which will allow them to help themselves getting out of poverty. This is a distinctly center-right, conservative understanding of the government’s role in helping the disadvantaged; it represents a distinct break from the prevailing socialist mindset that revolves around rights and handouts rather than individual responsibility.

Modi’s language of empowerment stands in stark contrast to that of Rahul Gandhi, a fifth-generation political dynast and the rival Congress Party’s leader-in-waiting, who continues to speak of patronage and entitlements. Recently, he handed out checks to the families of distressed farmers and said that his party would take care of them. It’s not all that different from a feudal lord reassuring his serfs that all will be well.

To a society and political culture steeped in this kind of patriarchy and paternalism, Modi’s attempted social revolution holds great political risks.

Societal and economic gains inevitably lag behind the initial investment. Transforming an entitlement-based system into one linked to cash transfers is going to have teething pains. Some reports suggest that people trying to open bank accounts have been turned away or asked for bribes. There will surely be people who are frustrated and disenfranchised. And Modi may also face pushback from the states required to fund these social welfare programs through their own increased revenue, thereby putting the onus on regional governments schemes work as intended and money is spent wisely.

Though big reforms of land and labor laws are important, what’s equally important is enabling a change in mindset so that average Indians no longer expect to be passive recipients of government largesse. If Modi succeeds, the relationship between Indians and the state, which thus far has been paternalistic and almost feudal, will be fundamentally changed for the better: and this will be the most radical transformation of all.