Tag: cash transfers

How to improve regulation of utilities – comparing Delhi and DC

The Business Standard reports that the Delhi government has rejected the license applications of Uber, Ola and TaxiForSure. The snippet doesn’t say much more.

Contrast this with Washington D.C. which has passed a law that Uber has hailed as “model”. So what gives between the two capitals?

The answer is simple – it is the privileges accorded to the politicians. As a result of colonial hangover, Indian politicians have been mollycoddled with all kinds of perks such as houses in prime localities, chauffeured cars and the like. Thanks to such perks, bureaucrats are cut off from the market in general, and thus fail to understand any market failures.

The solution is simple in theory but hard to implement – basically cut the perks for government officers and instead compensate them further in cash, with the market value of the facilities that are now being provided for them. Clever structuring can make this cash-neutral. On the one hand, the bureaucrat now has a choice with respect to the kind of facilities he requires, leading to a more efficient allocation of resources.

More importantly, the bureaucrat is now part of the broader market, and thus exposed to the same market failures that plague the common man. If the transport commissioner of Delhi had to catch an auto rickshaw to get to work every day, we might have seen a completely different response in the Uber case.

Making Zero Rating work without disruption

The Net Neutrality debate in India has seen a large number of analogies being raised, in order to help people understand and frame the debate. Internet services have been variously compared to television, postal services, highways, markets and what not. Things got so bad that that at some point in time people had to collectively denounce all analogies, for they were simply taking away from the debate.

One of the analogies that were being drawn in an argument in favour of Zero Rating was to compare it to e-commerce companies that provide free shipping, for example, or the deep discounts provided by services such as Uber or Ola. If you ban zero rating, other legitimate activities such as free shipping will be next, critics of net neutrality argued, arguing that there would be no end to this. The counter-argument is that free shipping doesn’t disrupt the basic structure of the market while zero rating does. Here is a way in which zero rating can be made to work without disrupting the market.

And it is a rather simple one – cash transfers. Rather than an e-commerce company subsidising your browsing of their website directly (by paying the telecom provider to make your access free), they can instead refund your costs of browsing their sites in terms of a discount. Going back into the analogy space, this is similar to malls that charge you heavily for parking but then offset your parking fees against any purchase you make in the mall.

So Flipkart, for example, can estimate the amount of bandwidth a particular user would have spent in browsing their app (not hard to track at all, especially if the user uses the app), and any purchase on their site can be appropriately discounted to that extent (and maybe a little more to cover for browsing that didn’t lead to a purchase).

This works in several ways. In the current proposed model of Zero Rating, the e-commerce company doesn’t know how many users will access it, using each ISP, so there is uncertainty in the amount that they have to pay the ISPs for such access. By moving to a user-wise subsidy model, they know exactly what users are using how much, and this enables them to target the subsidies much better. Another way in which it helps the retailer is that it doesn’t waste money spending on bandwidth for people who only browse the website without buying (of course, if they wish to, they can subsidise such usage also, but since it can be so obviously gamed, they won’t do it).

More importantly, what such a system ensures is that the internet is not broken. You might recall my earlier post on this topic that zero rating results in “walled gardens” that leads to a broken internet which reduces the overall value of the internet. With a cash transfer scheme (rather than direct subsidy), such distortions are avoided, and the internet remains “free” (of any barriers, not free of cost) and maximum value of the internetwork is realised.

So as described above it is well possible for e-commerce players to subsidise users’ browsing of their apps without distorting the internet, and without using zero rating. And as shown above, doing so is in their interest.

PS: This post also came out of the same discussions from which my earlier post on 2ab had come out.

Why Cash Transfers Should Not Replace Midday Meals in Schools

Admin Note: This is not a typical RQ post, in that this has no numbers. Yet, since this is policy related I think it makes sense to put it here

I’m normally a big fan of cash transfers. I’m glad that the Indian government has started implementing it for things like fuel subsidies and certain other benefits. After all, by simply providing the subsidy in cash (market price minus intended “subsidized price”) the government achieves the subsidy while not really having to bother about managing the supply chain. I would have been less unhappy with the Food Security Bill had it been designed as a cash transfer scheme, rather than giving further responsibility to the much-maligned Public Distribution System. With the midday meal system in schools, though, I make an exception.

Following the tragedy in the Bihar school this week, people have called for the government to scrap the midday meal scheme in schools and provide students a cash subsidy instead. Some people have argued against it quoting economies of scale (for example, ISKCON, under its Akshaya Patra scheme, provides midday meals to children in Bangalore schools at the cost of Rs. 6 per child per day, and that amount cannot but much food in the market). That aside, there is a fundamental economic argument against providing for children’s midday meal in the form of cash.

Every year, during Christmas time, journalist Tim Harford (of Financial Times, BBC Radio 4, etc.) writes an article that states that gifting induces a net weight loss, and the economically ideal way of gifting is to gift cash. For example, if I give you Rs. 100 in cash, you can do whatever you want with that cash. Instead, let us say that I use the Rs. 100 to buy you a gift (let’s say a pen). Now, irrespective of how much value you see in the pen, you don’t have the option any more of spending that Rs. 100 on anything except the pen I’ve got you. So you are in effect poorer than you would be had I simply given you the Rs. 100 rather than buying you the pen.

The question now is whether I want you to buy more pens or less. If for some reason I believe that buying more pens is good for your health, I can do my bit in encouraging that behaviour by gifting you pens rather than gifting cash. If on the other hand I don’t have a view on whether pens are good for you, I will gift you cash.

Government subsidies work the same way. If the government wants to encourage consumption of a particular good or service, it subsidizes it directly. If, on the other hand, the government doesn’t have a particularly strong view on whether a citizen should consume more or less of a particular good, but only wants the citizen to be able to afford that particular good, it provides cash. With the current form of the food security bill (where the government has promised to give foodgrain at subsidized prices) the government is implicitly stating that it wants to encourage people to eat more foodgrain (which flies in the face of data which shows that most Indians already eat too much cereal and too little of other nutritious foods). If the intention were only to ensure that people can afford food grains, a cash transfer would have sufficed. Similarly, by moving to a cash transfer scheme for cooking fuel, the government has signaled that it doesn’t particularly encourage the use of cooking fuel, but it simply wants to make it affordable for whoever wants to consume it (without distorting markets).

While the stated aim of many states in implementing the free mid-day meal in schools is to encourage attendance, there is a more fundamental reason to it. It is in the country’s interest to ensure good health and nutrition of children, in order to enhance their possible contribution to the economy when they grow up (studies have shown that malnutrition and poor health leads to lower educational attainment which leads to lower capacity to contribute to the economy). In this light, it is in the country’s direct interests that children are well fed, and the school is a location where children gather and can be fed (this is where the economies of scale bit comes in). That it encourages attendance is only a positive externality.

Now that it has been established that it is in the country’s interest for the child to be well fed, and that the midday meal in school is a good opportunity to thus feed the child, this presents a classic case for giving a “direct subsidy” rather than a cash transfer. That meals served within school premises are not tradable goods and hence won’t distort markets is a bonus.