One major thing that most people expected from last week’s announcement of the economic package was cash transfers. In line with the earlier report on the Kutch Model, this government is not one for cash doles and has continued to take that line through these announcements. This has been flagged by many leaders and economists and common people do have questions on the same.
What do poor people need the most in these trying times? Is it not cash? Why doesn’t the government put enough cash in the hands of people? What if the government just gave poor people cash with no strings attached and let them decide how best to use it? What is the point of giving credit to stalled businesses?
In this article we will try and understand the government’s rationale and also why it is unwise to just mindlessly put cash in the hands of the people.
Why cash doles are believed by people as best stimulus option
There are two sides to an economy – supply and demand. Supply side is the business enterprise which gives products/services to consume and jobs for many. The demand side is where people buy these products/services. This pandemic has disrupted both these cycles. Companies are not able to produce products due to lack of staff and people are unable to go out and buy as most shops are shut and there are restrictions on freely moving about.
This has resulted in many people getting reduced salaries and their employment is uncertain. There is literally no income for casual labourers. Therefore, to boost demand for products/services, popular opinion is for the government to give money to enable people spend and revive the demand side of the economy.
What is the catch in the above approach?
- The first problem with using cash stimulus is that it is not sustainable. The demand in the economy will increase to the extent of the cash. But what after that? What happens once the cash is exhausted? There will again be a dip in the economy till the employees start working again and start over their normal lives. Who will support the fall in demand then? So, should the government focus on putting businesses and workforce back on track or give temporary free cash to increase demand?
- The second problem with using cash stimulus is that whether the government can afford free cash payouts. As per data from the Controller General of Accounts (CGA), India’s fiscal deficit touched ₹10.36 lakh crore at the end of February. Amid the brunt of the Covid-19 impact and the lockdown, government revenues are likely to take a substantial hit in March. Imagine a family which is borrowing every month to foot its expenditure. If you are the head of the family, would you prefer to give them meals by cooking or give them cash to buy outside and eat? If they are old enough, will you prefer to give them jobs or give cash without giving them opportunity to earn?
This leaves us with the questions – Can the government fully compensate for the loss? How much cash is enough cash till that period? What is the expense for which the cash is required? The answer is that cash transfer no matter how high the amount would be called out as inadequate.
Why can’t the government just print currency notes & distribute it to poor to end poverty?
‘Nothing that is free is actually free’. Everything has a cost. The most under-rated cost is the cost of inflation on daily life. If cash is the solution to poverty, why doesn’t all Government across the world give cash to poor people and solve the problem of poverty for ever? The reason it is not done is because, free cash is never free! The reason lies in the basics of economics – demand and supply. In short, it will lead to price inflation. Free cash will lead to an artificial inflation in the prices of goods including food items. Venezuela is a great example of what happens when government abuses its power to print cash to revive economy. Now Venezuela is in tatters and a failed state!
Has the present Governments (State & Centre) spent anything on fiscal stimulus till now?
It isn’t as if the Government of India has not spent from its pocket at all during this period. It has transferred limited cash to the most vulnerable sections of the society. Rs. 500 for 3 months for 20.4 crore women, Rs. 2000 to 8.7 crore farmers, Rs. 1000 to 3 crore senior citizens, free LPG cylinders worth around Rs. 500 for 8.3 crore families, apart from significant increase in direct procurement from farmers and milk producers and increased MNREGA spends. While we focus on the Centre’ package, we would do well to remember that 42% of the Centre’s taxes are distributed to the respective State governments and all the states are giving their best efforts in addition to the above direct benefits. The valuable contribution of the State government has not been given its due by the media. It is time that the media considers their effort and money too as a part of India’s response to this pandemic!
Cash vs Other Value Benefits
Consider the following thoughts: If you were the government with limited cash in hand due to multitude of welfare programmes and freebies and scholarships, would you focus on reviving businesses and jobs or focus on cash pay out to a huge population? (“Give a poor man a fish; you feed him for a day. Teach him to fish, and you feed him for a lifetime.”)
This is not a case for stopping cash transfer altogether. Gentler versions of targeted cash transfers combined with supply-side interventions will give better results than plain cash transfers. What seems prudent in the light of these facts about direct cash transfers is that, the best bet for recovery would be to ensure that both businesses and employees get back on track on their own strength for which the government should act as an enabler. Once the employees get their jobs back, that by itself will give the jumpstart needed to revive the demand side of the economy better than cash doles!
Efosa Ojomo in his blog had said:
“Cash transfers are just the latest iteration of the dated notion that poor people can’t fend for themselves—and will never be able to—so, the wealthy must provide the resources they need. In fact, poverty is not fundamentally a resource problem. And pushing resources into poor countries—whether in the form of schools, hospitals, new water installations, or cash—does not result in sustained development
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At best cash transfer programs are akin to using Band-Aids on a wound with a serious infection. Rather than look to short-term solutions that have no chance of scaling, why not learn from countries that were once poor and are now prosperous? Singapore, South Korea, and China didn’t lift over a billion people out of poverty by handing out cash. The United States, Europe, and Japan didn’t either. They all created prosperity by unleashing the power of innovation and entrepreneurship.”