Can Congress' basic income scheme end India's poverty?

Can Congress' basic income scheme end India's poverty?

The Congress President announced the Nyuntam Aay Yojana (NYAY) on Monday. If voted to power in the 2019 Lok Sabha elections, India’s grand old party, plans to implement this scheme.

What is this scheme all about?

The plan is to give ₹6,000 per month to every family which falls below the poverty line. The question is how was this number arrived at. In an interview to the Business Standard, Praveen Chakravarty, who is the head of the data analytics department of the Congress Party, explained the logic.

He said that almost everyone earns ₹5,000-6,000 per month as a family. The Congress Party thinks that a minimum income of ₹12,000 per month is reasonable. In that sense, the plan is to pay ₹6,000 per month to every family which is below the poverty line, to get them to a level of ₹12,000 per month. So, to that extent this is a basic income scheme, with the below poverty line families getting a fixed amount of money every month, with no conditions attached to the payment.

In case of the just launched PM-Kisan scheme only landowners who own less than two hectares of land, stand to benefit. In the case of NYAY, anyone below the poverty line will be eligible for ₹6,000 per month, this will include landless labourers as well.


What is the scheme trying to address?

The scheme is trying to address poverty, especially in the eastern part of the country. Take a look at Figure 1, which basically plots the per capita income of different states in 2017-2018. The per capita income of many states is missing because the data is not currently available. In 2017-2018, Bihar had the lowest per capita income of ₹38,860 per year (or just about ₹3,500 per month). Uttar Pradesh came in next with a per capita income of ₹55,339. Now compare this with other states. Karnataka had a per capita income of ₹181,788 whereas Maharashtra had a per capita income of ₹180,596.

So, clearly there is a problem. People living in heavily populated states like Bihar and Uttar Pradesh, are simply not making enough money and this needs to be addressed.

Why does the government need to give money to citizens?

Large states like Maharashtra, Gujarat, Tamil Nadu, Karnataka and Haryana, which have done much better than other states, have had some sort of business and industry going in the state. Haryana has also benefited on account of the agricultural revolution and the fact that the state borders New Delhi.

The problem is that poorer states can no longer follow this formula, simply because India is going through what economists refer to as premature non-industrialization. As the Economic Survey of 2014-15 pointed out, “Uttar Pradesh’s maximum level of industrialization was about one-third that of Brazil and Indonesia (both have similar populations to UP); and the decline began at 15-20% of the income levels of these countries."

In this scenario, the states with a lower income, need to be supported by the government, and there is clearly no denying that. Of course, this comes with the corollary that any basic income scheme cannot eradicate poverty.

Where is the money going to come from?

As the old adage goes, in economics there is no free lunch. Someone is going to foot the bill for delivering NYAY. NYAY is to be delivered to 20% of the population or around 50 million families. At ₹6,000 per family per month, the total bill works out to ₹3.6 trillion. The forecast gross domestic product for 2019-20 is ₹210.1 trillion. Hence, the bill for NYAY will work out to around 1.7% of the GDP.

The question is how a bill of ₹3.6 trillion or 1.7% of the GDP is going to be financed? The Congress Party in its media interactions seems confident about being able to finance NYAY. Economists who have talked about the idea of a basic income in India in the past, have primarily talked about doing away with subsidies and raising taxes, in order to be able to finance any basic income scheme.

Let’s try and take a look at how this would work in the case of NYAY. The total food, fertiliser and petroleum subsidy bill for 2019-20 stands at ₹2.97 trillion or 1.41% of the GDP. Once NYAY is implemented, it makes sense to do away with the subsidies, given that people will get money directly into their bank accounts. The point is this is easier said than done.

Any government trying to do away with fertiliser subsidy will immediately be labelled anti-farmer. The food subsidy is the really tricky part. At ₹1.84 trillion, it is the largest of the subsidies offered by the central government.

How does it work? The Food Corporation of India (FCI) along with state procurement agencies buys rice and wheat directly from farmers at a minimum support price, announced by the government. This rice and wheat bought, is then sold through the public distribution system (more popularly referred to as ration shops) at a much lower price. The government the compensates FCI for this subsidy through the food subsidy allocated in the budget.

If this subsidy is done away with or even cut, then the rice and wheat buying by FCI and other state procurement agencies, will have to be cut or done away with. In this scenario, what happens to the FCI and other state procurement agencies? Will they be dismantled? Further, what will happen to the public distribution system?

These are questions that will need to be answered before NYAY is launched. In fact, the public distribution system works well in states like Chhattisgarh and Tamil Nadu. What will happen there?

The state of Punjab benefits the most through FCI buying rice and wheat directly from farmers. In fact, given that the FCI has a very good procurement system in Punjab, the farmers grow a lot of rice, in what is basically a semi-arid region. What will happen in the state of Punjab, if the procurement system is done away with?

These are very difficult questions with answers which may perhaps even be politically suicidal.

What about taxes?

When it comes to basic income, economists have called for different kinds of taxes, from tax on agriculture income, to re-introduction of wealth tax and estate duty. These forms of taxes are fairly unpopular and it remains to be seen if any government will introduce them and face the wrath of the taxpayer.

Nevertheless, one thing that can be done is to take a look at the tax incentives available to corporates. Along with every budget, the government puts out a Statement of Revenue Impact of Tax Incentives under the Central Tax System.

When it comes to central excise duty and customs duty, the data is available only up to 2016-2017. In that year, the revenue impact of major tax incentives stood at ₹1.46 trillion. While, it is easy to point out that such exemptions exist, it won’t be so easy to do away with them.

Another good source of revenue can be central public sector enterprises, which are sitting on a huge amount of land and other assets. Vijay Joshi, Reader Emeritus in Economics, University of Oxford, in his book India’s Long Road estimates that the value of enterprises owned by the government is around 40-45% of the GDP. The problem is that in all these years, no government has really managed to sell public enterprises to private companies, which is where they can hope to earn a good premium over the prevailing price.

If the government gets around to the idea of selling public sector enterprises, a lot of money can be raised to finance.

The trouble is the Congress Party has never believed in the idea of selling public sector enterprises (not that the BJP does either).

To conclude, NYAY is basically a scheme, whose time has come. Having said that, it will be very difficult to implement. Identifying the people who are actually eligible for the scheme will be difficult. Hence, it is important the scheme is piloted well and then implemented throughout the country.

Many systems which have been put in place will have to be challenged and junked. The problem is that with every system there come people who have benefitted and continue to benefit from the system, and hence, have a huge nuisance value. Will the Congress Party, if elected, be able to overcome this nuisance, is something that remains to be seen.