What Narendra Modi Can Do for Development


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Nearly one month after the landmark 2014 Lok Sabha election, India waits for newly-elected Prime Minister Narendra Modi to make good on his election promises. During his campaign, former Chief Minister Modi vowed to catalyze economic growth, curtail corruption, and defend the poor, a platform that surely helped him earn the largest margin of victory in the country’s history. Now, in the face of slowing economic growth and rising income inequality, Modi is expected to apply his development prowess for the rest of India.

But how?

The answer is simple: subsidy reform.

Since India’s independence from Britain, subsidies have had a major presence in India’s budget. India’s 2014-2015 interim budget estimated $21.2 billion in subsidies for food and petroleum alone. Until Modi’s election, this trend showed no sign of changing.

Next month, the Modi government is set to unveil its first budget, the first likely indicator of Modi’s fulfillment of campaign promises. Recently, Mr. Modi has hinted that his economic policies and corresponding budget will be unpopular with India, most likely due in part to the diminishing role of petroleum and agriculture subsidies.

India is host to a myriad of subsidies. From petroleum to education, India even subsidizes Muslim citizens to make the Haj. Of these, some of the most controversial are food subsidies. Within this broad scope, there are subsidies for fertilizer, irrigation, and electricity as well as in-kind food subsidies. The Government of India has barely reformed its food subsidy policy since the mid-1970s, with the exception of the 2013 National Food Security Act. The National Security Act provides food to two-thirds of India’s population, though only 22% live beneath the poverty line.

Designed with combating poverty in mind, subsidies are expected to boost production and increase efficiency while bolstering India’s recently declining growth rates. However, in reality, the inverse is true. Indian subsidies in agriculture are distributed unequally across the states. For example, the states of Assam and Madhya Pradesh, receive disproportionate agricultural subsidies, with the former receiving 600 rupees per agricultural person and the latter receiving 40 rupees per agricultural person. Both states, with active agricultural sectors, receive unequal subsidies for their efforts, leaving Madhya Pradesh to be one of the country’s more prosperous states and Assam one of the least developed.

Further, it is unlikely that in-kind food subsidies even reach India’s poorest. As early as 1985, the public distribution system was responsible for a mere 15% of the allocations meant for the poor, a track record that has worsened over time.

Though it may seem that business-centric Modi has neglected the poor in lieu of increasing foreign investment and freeing the labor markets, the new Prime Minister ’s policy reforms could be a key to reducing poverty. In a recent speech to Parliament, Modi alluded to administrative changes to increase the efficiency of the state-run Food Corporation of India. These reforms could come in the form of a nation-wide cash transfer system that could increase distribution efficiency and restore foodstuffs to market prices. With demonstrated effectiveness in neighboring Indonesia, cash transfers allow more targeted assistance and more effective poverty reduction. Though it is unlikely that Modi will eradicate subsidies altogether, it is clear that he is dedicated to their reform.

For better or for worse, Narendra Modi’s victory is a sign for changing times in Indian politics. The Modi government’s new budget is expected to be introduced in early July, but the transition from planning to implementation will be a challenge. Parliament must review and approve the budget, meaning that the Modi’s budget could be met with opposition before it even reaches the Rajya Sabha. Though scaling back subsidies and bolstering growth are ambitious, the greater obstacle could be a lack of political will.




Breaking Up the Breadwinner

For the last few decades, female empowerment has become an ever increasing component of international development. Many studies have proven that conditional and unconditional cash transfers to women have had substantial impacts on human development through education and health. Under Bolsa Familia and Progresa/Oportunidades, cash transfers are given to mothers based on whether their children go to school or get preventive health care. These programs have been proven to increase school attendance. In a different realm, micro-finance institutions, such as Grameen Bank and BRAC in Bangladesh, have focused their lending to women. This is largely because women are considered to invest more wisely and repay loans more often than men.

Much of the research rests on the assumption that men and women have different preferences, generally speaking. The idea is that men prefer to spend more money on consumption goods, like clothes or alcohol, while women prefer to spend money on goods that benefit the household as a whole, such as education or healthcare. Experiments have seen this played out in numerous, creative ways. Esther Duflo and Christopher Udry showed that in Cote d’Ivoire, men and women farmed different crops, with male crops being sold for profit and female crops being used for consumption by the household. Essentially, an increased production of female crops led to more food consumption and nutrition, while male crops had no effect on food consumption and nutrition. In another study in South Africa, grandmothers were more likely improve the nutrition of children, and especially young girls, compared to the grandfathers.

Within this context, a new paper by Matthias Doepke and Michele Tertilt has come out with the provocative title “Does Female Empowerment Promote Economic Development”? The argument behind the article is that different spouses don’t have separate preferences but that they have different comparative advantages in the household. In the model by Doepke and Tertilt, one spouse has a higher wage while the other spouse has a lower wage. Human capital, such as education and nutrition, is considered to be a comparative advantage for the spouse with a lower wage, which tends to be the wife. A transfer from the husband to the wife tends to lead to more investment in education and nutrition, along with consumption by the wife for herself. All this is at the expense of the husband spending money on himself.

OECD gender wage gap

At an economy-wide level, the husband is considered to have more physical capital, such as land or farming equipment, while the wife has more human capital, such as education and child rearing. The distinction between the two is that the land, farming equipment, or other physical assets are passed onto the children. Theoretically, cash transfers between spouses increases spending in general, at the expense of savings and investment that could be used on physical assets. If the economy as a whole is more service-based or dependent on education and knowledge, cash transfers would be more beneficial to economic growth in general. However, if the economy is based more on physical capital, such as farm land or industrial equipment, then transfers to the wife may be slightly detrimental as there would be less to leave to the children. No matter the economic structure, growth is affected by higher inequality between the spouses. Once there is no wage difference between the spouses, there is no effect on transfers, meaning that no matter the situation, wage parity is a desirable outcome.

All cash transfers, conditional or unconditional, are not necessarily bad or should be stopped. The structural context of employment, equity, and capital affects female empowerment’s effect on economic development. Places such as Latin America, where the service sector is a more important component of the economy, are more likely to increase sustained growth through female empowerment. There are many assumptions inherent in this article, particularly since this is an economic model not based completely on empirical evidence. The overall environment is just important as the cure.