Income Support Schemes And The Butterfly Effect

Can the flap of a butterfly's wings in one dimension set off a tornado elsewhere, asked Edward Lorenz, American mathematician and meteorologist. The idea, called the ‘Butterfly Effect,' in popular culture translates into how seemingly limited changes in policy can have much wider consequences.

That is the question that must now be asked as India considers cash transfer for the farm community. While the government is yet to reveal any details (or even confirm that such a scheme is being discussed) media reports widely speak of ongoing consultations over an income transfer scheme.

Will this lead to stronger income growth? Will it spark inflation? These are among the questions that come to mind when one hears of an income transfer program. Such schemes, while new to India, have been tried in other emerging economies. Their impact was detailed through a series of studies consolidated in a paper by the United Nations Development Program in 2015.

Consumption And Income Multipliers

Procampo, one of the cash transfer programs introduced by the Mexican government in 1994 to negate the impact of the North American Free Trade Agreement (NAFTA), used cultivated crop area as the basis of the cash transfer. To study the impact of this, Alain de Janvry and Elisabeth Sadoulet studied 25 lakh small farm holders. The idea was to measure the marginal income effects of a unit of transfer.

On an average, they found that a transfer of $1 resulted in additional income of $2 — $1 directly and $1 indirectly, depending on quantum of land that the farmer had. While the smallest farmers generated an equal amount in income effect, small and medium farmers were able to multiply income faster as they did not have to consume the transfer immediately on account of having existing assets. Higher education, technical access and market connectivity also skewed the income multiplier further.

Price And Inflation

In Programa de Apoyo, yet another food aid program introduced in Mexico, recipients received either cash or food equal to about 10 percent of the household income. From their research, Jesse M.Cunha, Giacomo De Giorgi and Seema Jayachandran concluded that changes in local prices as a result of the program were neither universally good nor bad for households, because poor people in developing countries are often involved in the production as well as the consumption of food.

Food-producing households benefited under cash transfers by selling their crops at higher prices and were worse off under in-kind transfers as they were selling their crops at lower prices.

Growth And Investment

Brazil's Bolsa Familia direct transfer program has been one of the biggest and used up 0.5 percent of Brazil's GDP annually. Joaquim Bento de Souza Ferreira Filho and Daiana Innocente da Silva looked at the supply side impact of the program. Household consumption increases as the direct income transfer allows for higher consumption across goods and services. However, this increase in consumption is offset by a decrease in investment if higher taxes are levied to collect the amount transferred.

Alternatively, if the burden of adjustment goes to the external sector if investments are fixed. In this case, higher household consumption will cause higher imports and lower exports, deteriorating trade balance further.

The Indian Experiments

Closer home, even as a slew of states announce farm loan waivers, some others are already leaning towards income support aids.

• Telangana's Rythu Bandhu scheme grants Rs. 4000 per acre per farmer each season to purchase agricultural inputs.
• Jharkhand Mukhya Mantri Krishi Yojna proposes to grant Rs. 5000 per acre per farmer for Kharif crops.

The schemes in their present form have their drawbacks. “Given that the transfer is linked to size of the farm holding, it may result in sharpening rural inequality and exclusion of landless farmers from such a subsidy,” note economists Surjit Bhalla and Karan Bhasin in their research paper, “Towards a Targeted Basic Income Policy for India.”

• Odisha's Krushak Assistance for Livelihood and Income, inclusive of landless households, proposes to transfer Rs. 5000 to every family in every cropping seasons for five seasons.
• The Bhavantar Bhugtan Yojana by the state government of Madhya Pradesh transfers the price differential between the crop's minimum support price and the selling price, to the beneficiaries account.
• Sikkim has promised a universal basic income program but details of the same are not yet known.

Each of these schemes is too recent to judge their broader impact.

Possible Implications For Indian Economy

In assessing the impact of such an income transfer on the economy, Credit Suisse, in a report on Jan.15, said that a lot would depend on the design of the scheme.

However, with food being the largest part of consumption spending across low income segments, an impact on the food economy is likely. One way this could play out is that demand for basic food items like milk, meat and eggs, as well as fruits and vegetables could rise.

This, in turn, would have an impact on inflation and, therefore, the interest rate trajectory. The extent of impact would depend on the size of the stimulus.

“Weak food prices have slowed the transfer of income from the rich to the poor. An income transfer scheme would offset the slowdown in that channel. There is also a monetary angle here—the cash availability in the mostly informal rural economy is also dependent to some extent on food purchases. Thus, such a transfer could also stimulate growth,” wrote Neelkanth Mishra, India economist and strategist at Credit Suisse.