Explained: What is minimum income guarantee and how it may work?

India’s main opposition party The Indian National Congress has raised the stakes for the incumbent Narendra Modi government. On Monday, Congress president Rahul Gandhi promised a minimum income guarantee for every poor person if the party won the 2019 elections. The Modi administration is also reportedly preparing to unveil its own income support in the upcoming interim budget.

What is the promise from Congress President Rahul Gandhi?

Congress has promised to give the country’s poor a minimum amount of money from the government as monthly income, but hasn’t specified how much it will be.

Is it the same as universal basic income (UBI)?

It is unlikely to be the same as UBI, which by definition would mean an assured amount of money from the government to every citizen of the country. However, minimum income guarantee may only be available to people below a certain income threshold.

How much will it cost the government?

It is difficult to ascertain the cost without the details of the programme.

India’s total population is 1.36 billion, of which 22% of people below poverty line. Assuming that the government supports only those below the poverty line, it will still have to pay nearly 300 million people a fixed sum of money every month.

India Ratings estimates that the BJP's potential income support scheme, to be released in its budget, could end up costing at least ₹1.5 trillion a year - or 0.7% of GDP - in the absence of other support schemes.

Separately, SBI’s Chief Economist Soumya Kanti Ghosh recently estimated that about 143 million farmers get one kind of subsidy or another. Accounting for possible omissions for lack of proper identification of beneficiaries and for those who have no land or documentation, the report said that the cost of giving direct cash transfer in lieu of subsidy will be about ₹1.2 trillion a year.

Meanwhile, Pranab Bardhan, professor of graduate school at the department of economics, University of California, Berkeley, estimated that if a scheme like the UBI were to be implemented, the government would have to pay ₹16,000 per household and it would cost ₹2.1 trillion a year, or 1.25% of the gross domestic product (GDP).

Government has 940 centrally sponsored schemes, according to a report from former Chief Economic Advisor Arvind Subramanian in 2016. According to that estimate, the cost of giving every citizen some money every month would cost the exchequer about 4-5% of GDP.

Who will bear the cost?

If the central government raises taxes on the rich, the additional burden will be on the really well-off. However, it may affect the political donations that help parties fight elections.

Raising the burden of middle-class taxpayer may have a political cost and won't win votes.

If the government borrows money to fund additional expense, the burden will be on every taxpayer in the form of higher interest cost, weaker rupee and higher inflation.

Can India afford such a huge burden?

In theory, something like a minimum income guarantee can be funded by three ways: withdrawing or reducing existing subsidies or by raising taxes on richer sections of the people.

So to give poor people given minimum income, would everyone else lose subsidies or pay more tax?

Not necessarily. And certainly, no one will lose all subsidies.

The subsidies available from the state governments will continue. If at all, only the central government subsidies may be withdrawn once it implements minimum income guarantee.

So, if you live in Tamil Nadu or Punjab and get subsidised electricity, that will likely continue.

Raising taxes will be a different matter.

So which of the central government subsidies remain?

As of now, the biggest subsidies that the central government offers are on food, fuel, fertilisers, liquified petroleum gas (LPG) cooking cylinders, as well as on tax and interest rates to specific sections of the population.

One cannot say for sure how the government chooses to rationalise the existing subsidies.

Can they withdraw food subsidy?

Unlikely. Food subsidies are made available through the public distribution system, or ration shops, and are unlikely to be dismantled. 52.3% of all households purchased cereals from ration shops in 2011-12 compared to 27% in 2004-05, according to a Niti Aayog report from 2016. It won’t be a politically savvy move to increase the cost of food for half of the country’s households in one go.

India also has a law that gives every citizen a right to affordable food, with the National Food Security Act 2013. So no government can withdraw food security without going back to the Parliament for permission.

Do we still get fuel subsidy?

While petrol and diesel prices have been deregulated, kerosene prices are subsidised as it is used mostly by the very poor and bought at ration shops. While the cost of kerosene subsidy was budgeted in February 2018 at about ₹4,500 crore, withdrawing the support will only hurt the poorest.

What about the subsidy on cooking gas?

The subsidy on LPG cooking cylinders is already transferred online to the eligible buyers. Current prime minister Narendra Modi pushed millions of Indians to adopt LPG cylinders instead of coal hearths. [hyperlink]

Now, it will be a politically sensitive decision for any party to withdraw benefits on basic necessities like LPG, especially after literally forcing them to use it.

What about fertilisers?

Fertiliser subsidies are once again availed by farmers and the recent rural distress will make it difficult for the government to withdraw any farm subsidy.

Moreover, India imports 28% of all the fertilisers it needs, according to India Ratings and Research. On one hand the global prices of fertilisers have been rising, and the weaker rupee has made these imported fertilisers even more expensive. Withdrawing fertiliser subsidy will make farmers really angry.

What about health and education subsidy?

Ayushman Bharat, a scheme that was launched in 2018, is a centrally sponsored insurance programme targeting 10 crore families across India who are either poor and deprived or identified as urban workers' families. It covers hospitalisation cost up to ₹5 lakhs a year, and is likely to continue.

Primary health centres are at funded by state governments.

Central government subsidises higher education in places like IITs, IIMs, AIIMS, JNU etc, which are also likely to stay.

What are interest subsidies?

Often, the state-owned banks offer cheap loans to different sections of the population and the government bears the difference in interest rate.

But don’t India’s farmers already get a lot of subsidies?

Yes, India’s farmers are entitled to minimum support (MSP) price on their produce. Even if the market price of the crop is less than the MSP, the government is supposed to make for the difference.

However, while many governments have either promised or increased the MSP, the net impact on the farmers has been minimal. “No matter how hard the government tries, it cannot procure even 25% of the production of various kharif crops, except in paddy and cotton, as a robust procurement system does not exist for other crops,” experts at Indian Council For Research On International Economic Relations commented in July 2018.

Therefore, withdrawing key subsidies, including those on fertilisers or interest on loans, will make the minimum income guarantee a zero-sum offer for the farmers.

Will MGNREGA continue?

Yes, it’s an employment guarantee scheme, not a subsidy. People are assured a certain number of days of work every year, for which they are paid.

Is the Congress' promise a political gimmick?

Minimum income guarantee will allow poor people to poor people to access basic necessities.

Of course, this is assuming that the minimum amount given to the people is enough to cover their basic expenses. Further, the government will have to ensure that the infrastructure is in place to implement a massive programme like this in a complex country like India.

The biggest problem in India is that it is very difficult to accurately identify those who need such a programme. So to analyse the merits of the promise, we will need more details.



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