Switzerland is the first country to go for a referendum in 2016 for implementation of the concept of Universal Basic Income (UBI). The proposal was rejected by a majority of 77% people voting against the concept. But this is only one side of the story. There is a growing concern today over the anticipated job loss with the arrival of industry 4.0. The job loss and increased automation are closely interlinked. Mark Zuckerburg advocates the idea of UBI to compensate the loss of jobs due to automation. Milton Friedman, the famous economist supports the idea of UBI, as it will help to reduce poverty. It would be fascinating to see if the companies going in for more and more 3 D technology and robotics would like to include the cost of compensation towards job loss in their business plan or leave it entirely to the Government.
Rahul Gandhi’s idea of Nyuntam Aay Yojana (NYAY) or minimum income scheme is, however, a bit different from the UBI scheme, nonetheless, conceptually both the schemes aim to alleviate poverty of the downtrodden people of the society. UBI warrants a minimum amount of cash transfer to the accounts of all citizens of a country irrespective of their present income level. It also aims to subsume all the other subsidy schemes, such as, food, fertilizer, Fuel etc. In comparison, NYAY is aimed to target a segment of population based income level. The scheme proposes to transfer an amount of Rs. 72,000 to the bank account of five crore families earning below Rs. 12,000 per month. Taking an average family size of five, the scheme will extend benefit to 25 crore people which constitute 20% of population. India’s GDP is estimated to of the order of Rs. 190 lakh crore. The proposed expenditure towards NYAY is Rs. 3.60 lakh crore or around 1.9% of GDP.
Before going into the nitty-gritty of the scheme, let’s look into similar such schemes implemented in India and abroad. Among the BRICKS nations Brazil is the first country to introduce a cash transfer scheme known as Bolsa Familia (Family Grant). The scheme was implemented in 2003 as part of their poverty alleviation programme. About 30% of Brazilian people is covered under the scheme. Bolsa Familia, depending on the family income, transfer cash every month to the bank account of the female member of a family. The objective of the programme is to promote food and nutrition safety for the lowest rung of the people in Brazil. There is only one condition attached to the cash transfer,i.e. the beneficiaries commit to keeping their children and teenagers in school and taking them for regular medical checks. The programme is estimated to cost 2.5% of the Government expenditure, and about 0.5% of GDP.
Back home, Telengana Government’s Rythu Bandhu Scheme introduced in May, 2018 aimed at helping marginalized farmers to tide over indebtedness and buy better seeds and fertilizers. The farmers are given Rs. 4,000 per acre twice a year, one for kharif season and the other for rabi season. Not to be undone, Naveen Pattanaik introduced Krushak Assistance for Livelihood and Income Augmentation (KALIA) in Odisha on similar lines. The amount of cash transfer under KALIA scheme is Rs. 5,000 per seasonal crop. An idea of a guaranteed basic income for the poor was included in the Economic Survey, 2016-17 when Arvind Subramanian was the Chief Economic Adviser to Modi Government. Arvind Subramanian proposed to implement a similar concept to the UBI by replacing all the existing subsidies.However, the idea could not garner support from Niti Aayog which declared it unfeasible due to paucity of fund and difficulties in execution.
The NDA Government in their union budget of 2019 announced the scheme of Kisan Sanman Nidhi under which payment of Rs. 6,000 as financial assistance would be made to all the farmers in three equal installments. An amount of Rs. 75,000 crore has been earmarked in the central budget to meet the expenditure. Under this scheme 12 crore farming families having less than two hectares of land will be benefited. Introduction of such a scheme by Modi signals a paradigm shift in the policy of Central Government over cash transfer. The assurance from Congress on farm loan waiver, subsequent loss of power of BJP in three states and Rahul Gandhi’s announcement in Chhattisgarh (a week before the date of union budget) to implement a minimum income guarantee scheme if voted to power, perhaps, dug deeper into the thought process of the ruling party, compelling them to do a course correction. Otherwise, Prime Minister Modi has always been a firm believer of the growth theory to eradicate poverty. A debate between Jagdish Bhagwati and Amartya Sen surfaced in 2014 when Modi came to power. While Jagdish Bhagawati always voiced in favour of accelerated economic growth, the benefits of which, he thinks, would percolate down to the people living below poverty line, Amartya Sen, on the other hand, thought investment in social sector, providing subsidized food and free health services and universal education would help to eradicate poverty. Modi replaced planning commission with Niti Aayog and made Aravind Panagariya, known to be in the same league as Jagdish Bhagawati, its Vice chairman.
Modi voiced his concern against farm loan waiver and MGNREGA scheme introduced by UPA after becoming Prime Minister. He was not against the idea of creating man days as a method of subsistence, but he wanted to translate the man days into tangible production in a planned manner. However, his Government failed to make any perceptible change in MGNREGA other than implementing Aadhar Card for purchase of man days and payment by cash transfer to individual’s bank account. BJP Government in UP, after winning the election, decided to waive off farm loan amounting to Rs. 38,000 crore in 2016. Central and various state governments, in the past ten years, have waived off farm loan amounting to Rs. 2.2 lakh crore without bothering to analyse the inherent structural deficiencies in the farm sector. The hurriedly taken decision in the union budget of 2019 to pay Rs. 6,000 to the farm families is a step aimed to counter the Congress move of minimum guarantee scheme.
Having said that, it would be worth deliberating to analyse the intricacies of Fiscal Responsibility and Budget Management (FRBM) at the centre and state level. Quantum of subsidies in the total budgetary expenditure today stands at 12%. The Government is spending Rs. 1.8 lakh crore towards food subsidy alone, another Rs. 20,000 crore for LPG, Rs. 70,000 crore for fertilizer. With the addition of Rs. 75,000 crore towards Kisan Sanman Nidhi, the Government is already spending a staggering Rs. 3.6 lakh crore on explicit subsidy alone. If we add the projected expenditure towards NYAY, the total quantum of subsidy of the Central Government will be Rs. 7.5 lakh crore which is 25% of the budgeted expenditure. Please remember the Central Government spends only half of this amount towards capital expenditure. The Government allocates only 2% for health care and 3.5% for education. No political party has ever raised any concern for such a low budgetary allocation towards education and health services.
Rahul Gandhi’s Finance Minister is bound to get jitters in doing his fiscal management act to execute NYAY. The proposed fiscal deficit for 2019-2020 is 3.4% of GDP vis-a-vis the original target of 3.1% set by Arun Jaitley . International credit agency Moody’s has already criticized the Government for missing the target of fiscal deficit. The target has obviously been missed due to allocation of Rs. 75,000 crore under PM-Kisan Sanman Nidhi. With the introduction of NYAY, the fiscal deficit is likely to shoot up to 6% with the present level of tax collection. No doubt, India has a very low tax- GDP ratio compared to all the developed countries. The tax- GDP ratio is 17% in India, whereas, it is 26% in USA and 34% in UK. But tax-GDP ratio is generally low in the developing countries, because the tax base is relatively lower. A tiny percentage of people pay income tax in India. The total number of tax payers does not exceed 65 million which is 5% of 1.3 billion people. 0.6 billion people engaged in agricultural sector are exempt from paying income tax. No political party has the gumption to introduce agricultural income tax. It’s no big deal in taxing the rich farmers to pay for the cash transfer to landless agricultural labour. But who is going to rake up an issue such as this which has almost been forgotten during our existence of 70 years? What we must not forget is that a vast majority of lawmakers are stake holders in the farm sector. They will never allow to introduce agricultural income tax.
There is not much scope to enhance rates of corporate tax either, as the Government is committed to reduce the rate of corporate tax to 25% progressively. With the introduction of GST, there is hardly any scope to mop up additional resources from indirect tax segment. Congress and other opposition parties have been vociferous in their demand to reduce tax rate since its implementation. According to Rahul Gandhi GST is Gabbar Singh Tax which should immediately be reduced to 18% max. Any increase in the excise duty on petroleum has always been opposed by all the political parties in unison. Increase in customs duty will severely impact bilateral trade. We are already at the back foot with the US Government regarding our duty structure- any attempt to meddle here may have serious repercussion on our bilateral relationship. In such a scenario, finding a reasonable fiscal space becomes the biggest challenge. The total tax collection of the Central Government is 12% of GDP (17% when tax collection of the states is added), out of which about one third is transferred to the states. So out of the remaining, 25% will go towards NYAY, in case the Government fails to raise further resources through taxes.
So how do you find resources to fund Rs. 3.6 lakh crore to fund NYAY? Rahul says he has consulted a number of economists who have said the scheme is doable. He has taken the name of Raghuram Rajan. Raghuram Rajan is known for his conservative approach in his macro economic management. During his tenure in RBI, he has given priority to control the inflation over economic growth by following a tight money policy. He refused to reduce the repo rate in spite of a downward trend in rate of inflation. Raghuram Rajan has appreciated the idea of Congress as a means to eradicate of poverty, but cautioned on the need for effective fiscal management. In his interview to India Today he has stated, ” The Government that comes needs to see what the fiscal space looks like. As of now, it is very tight. You can not add scheme upon scheme. A view should be taken post elections within the fiscal space available.” If you can not increase tax revenue you have the option to cut down subsidy in food, fertilizer, LPG and release the amount for NYAY. But this means you take out the money from one pocket and fill the other one. He gets only some add on benefits. The other option is to cut down expenditure on capital formation. This will impact future economic growth. You can resort to borrowing or print notes. An additional infusion of Rs. 3.6 lakh crore in Indian economy in one year without commensurate output will have a severe impact on inflation. As this will be a continuous process, we can not rule out the possibility of spiraling inflation gripping our economy. With an estimated fiscal deficit of 6% of GDP and with the addition of another 4%, if we combine the share of the state, rate of inflation is likely to touch double digit figure. There will be upward movement in the lending rate of banks and financial institutions making credit dearer. Further, deviation from our commitment to fiscal discipline and targeted fiscal deficit and Government borrowing under FRBM Act will lead to downgrading our rating from the present level of Baa2 ( Moody’s rating in 2017 indicating investment grade with stable outlook) impacting cost of borrowing and FDI inflows.
The moot point is that cash transfer doesn’t change the job market. The Garibi Hatao programme initiated during Indira Gandhi’s time in the 1970’s was based on an entirely different perception. Post Bangladesh war, food was a scarce commodity, as such, subsistence of the people was a genuine problem. Today, the number of destitute and starving people are virtually non-existent. What the unemployed and under employed people are asking is access to middle class living standard. Take the case of Sujoy. He is a young boy of 18 years engaged in washing cars in our residential complex. He earns Rs. 8,000 approx in a month. He is looking for a respectable job so that he can buy a motor bike. There are many such sujoys who are disgruntled with the job market scenario and apathy of Government machinery. The opposition too, in stead of trying to find out solution by way of structural changes in the economy, is trying to look for easier solution through dole economy.
Be that as it may, there’s no doubt that NYAY is an important strategic move by the grand old party, because cash is always the king. Not to be undone by the Telengana’s Rythu Bandhu, Odisha’s KALIA and Modi’s PM-Kisan Sanman Nidhi, Congress has resorted to the best political ploy for the 2019 election. Time will tell whether this will be a game changer. Only niggle for Rahul Gandhi is the timing of the announcement. As the scheme is meant for a target population, the challenge is how soon can they reach the voters and convince them with the scheme to cast their votes in their favour. It’s easier said than done. Majority of the target population live in the villages. They are not tuned to social media like the urban population. Moreover, the workers at the grass root level may not be aware which are the families earning below Rs 12,000. Mind it, if you earn a rupee more you lose your entitlement to receive ‘nyay’! Till such time, the new Government is formed, NYAY will continue to remain a political gambit sans economics.
3 thoughts on “Nyay- Is it Good Politics and Bad Economics?”
Very good analysis
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This scheme can be implemented by curtailing the expenditure on subsidy being given to politicians by way of canteen subsidy, free travel, providing xyz security, pension to ex politicians, reducing public expenditure on publicity, etc.etc.
Expenditure incurred towards these heads are minuscule compared to the total fund required to implement an ambitious scheme, such as, Nyay. We do not have much option to fund such a scheme. Yes, it’s agreed, cash is a problem. If cash is to be distributed, the Government should be bold enough to discontinue subsidy on LPG, fertilizers and amend the food security bill to reduce the no of beneficiaries to 20% of population from the present level of 60%. This will release approx 2 lakh crore from subsidy budget. In addition GST has to be made more broad based to bring the informal sector to the formal sector. This will help to increase income tax collection also. Finally, they should implement agricultural income tax to tax the rich farmers. Hopefully, we will be able to get a revenue to the tune of Rs. 3 lakh crore by taking these harsh measures. There is no free lunch.