The Congress party announced an ambitious unconditional
cash transfer (UCT) scheme ‘NYAY’ last week. Under the scheme, the bottom 20 percent of households in the country will receive an unconditional transfer of Rs 6,000 per month on top of all entitlements and schemes they are availing currently.
Predictably, the scheme has been supported by those on the left as an important social intervention to reduce inequality and criticised by those on the right as an unthought out populist election gimmick due to lack of details of how the scheme will be funded.
And it is not a small fiscal commitment that the Congress party is making. Taking the numbers announced by the
Congress at face value, the NYAY scheme will cost around Rs 4 trillion (5.5 crore households to be covered out of a total of 28 crore households in the country which make up the total population of just over 130 crore) annually, which is just over 2 percent of India’s GDP. This one entitlement program would be more than all the current subsidies provided by the central government. That is how large this scheme will be, as it is currently being envisaged.
Given that this scheme will sit on top of all existing schemes, it implies that the Congress party is assuming a correspondingly higher fiscal deficit or some alternate revenue source to fund this scheme (the details of which are not available in public domain). A 2 percentage point higher fiscal deficit on top of a consolidated fiscal deficit of around 6.5 percent of GDP currently will result in a fiscal deficit over 8.5 percent of GDP. And this will just be the reported fiscal deficit – the actual deficit will perhaps be closer to 10 percent considering all the expenditure that is currently being routed off the balance sheet. It is not rocket science that this level of fiscal deficit on a sustained basis will be an economic disaster. Safe to assume, this is not something that has been contemplated.
The second option is to increase taxes to fund this scheme. The central and state governments currently collect around 18 percent of GDP as taxes. Thus a 10 percent additional tax collections, through say a 10 percent across the board new ‘NYAY’ surcharge, will more or less fully fund the NYAY scheme. This will mean a surcharge on all GST rates, a surcharge on corporate tax and all income taxpayers. The highest income tax rate will then be around 40 ercent from the current 35 percent. The corporate tax rate will similarly inch towards 40 percent as against the promise to reduce it to 25 percent. Increase in taxes is not pretty, but a 10 percent surcharge is not a draconian measure by any stretch of the imagination.
And there are other ways to raise resources without necessarily increasing taxes. For example, the collections under the GST Compensation cess are around 1 lakh crore currently or 25 percent of the cost of the NYAY scheme. The compensation cess is supposed to end after 5 years and we have entered the third year. The government could for example instead of eliminating the GST compensation cess, use that money in another couple of years for funding the NYAY scheme. This will not be an increase in taxes but rather a no reduction in taxes. The government could also focus on monetising unused public assets in the public sector. Calculations made by the team at Dhan Vapasi (
www.dhanvapasi.com) suggests that there are more than enough unused assets in the public sector to fund the NYAY scheme. It is also possible that the government subsumes some of the current subsidy programs such as the NREGA or the recently launched DBT for farmers into this scheme post-election (this is not what the Congress party has promised, but politicians typically overpromise during elections), which will lower the need for taxes to increase.
The bottom line is that funding the large expenditure under the NYAY scheme is not as insurmountable a challenge as it is made out to in the media. Even at the worst, it will not result in tax rates touching 70 percent. That does not mean all is well with the scheme. But before, I must state that in principle, I find the concept of UCT or basic income very appealing. It is possibly the least distorting social intervention a government to target the vulnerable sections of the society. And unlike other schemes which mandate certain behaviour or spending pattern and are paternalistic in nature, a UCT empowers people by allowing them to decide what's best for them. So the issue I have with the NYAY scheme is down to the specifics of the proposed scheme – its scope and quantum – rather than principled opposition to UCT.
The first issue is over the scope or coverage of NYAY. The Congress party wants to implement its UCT scheme to the bottom 20 percent of the households. A big question is the identification of those households. The reason this is an issue is two fold – first, there is a lack of any reliable income data in the country. So identifying who is entitled and who is not becomes a matter of judgement subject to large errors. And second, because only 20 percent of the households are ‘entitled’, there has to be a gatekeeper who decides who should be entitled and who should not be entitled. And this gatekeeper agency or person can and almost certainly will indulge in rent seeking. The simple solution to this is to widen the coverage such that people automatically self-select and only a few need to be excluded using easily identifiable criteria. The problem with this approach is that this will significantly increase the cost and make it unimplementable in the current form – a significant restructuring of the entire gamut of social schemes of the government will be required. And no political party in India wants to take away benefits from people, even if a superior alternative (UCT) is being offered to the people. Restructuring existing social interventions will require spending too much political capital.
The second issue pertains to the size of the payment and its impact on the economy. The NYAY scheme promises payment of Rs6000 per month per household, to 20 percent of India’s households. The current daily average wage rate in rural areas for males is just over Rs 300. So, the NYAY scheme effectively promises to pay roughly 20 days worth of an adult male’s labour to every month, without anyone in that household having to do any work. Given that a daily labourer will most likely not find work for all the days in a month, this is close to full month’s wage being paid. And we are comparing this will all-India average. Several occupations and regions will earn significantly less than the all-India average wage. This coupled with the fact that female labour force participation is low, implies that the payment under NYAY is fairly generous relative to the current household income. In many cases, it might be almost equal to or perhaps even more than current household income. This is also clear when juxtaposed against the NREGA scheme which is meant to address rural distress and also covers a similar number of households – around 5.5 crores. The average daily wage rate was just Rs 180 in FY19 and on average a household got paid for only 50 days of work in a year or 4 days a month.
The point is that NYAY scheme promises a fairly generous amount of UCT to a very large number of households. And this is one of the problems with the NYAY scheme, for it will almost certainly distort the labour market. A large number of households are going to overnight receive a full month’s worth of labour as UCT, will change their behaviour. It will reduce the supply of labour, especially in cases where the supply was due to financial distress. From a societal perspective, a reduction in distress employment is positive. And that is the outcome that a UCT chases. No debate here. But that labour was doing some productive work in the economy. Withdrawal of that labour will push up wages so that demand for, and supply of, labour is back in balance. And this increase in wages will push up inflation. And that will push up interest rates, especially now that the RBI is mandated to keep inflation low. And that will kill growth with a very high probability of a hard landing, given the RBI’s mandate to keep inflation in check as its number one policy objective. And lack of economic growth, as we have seen a number of times, hurts the very section of people whom schemes such as NYAY want to help.
A similar scenario played out during the implementation of NREGA when over a period of 3 years 5 crore households got almost 50 man-days of wages per year from almost zero before. And while there were other factors also at work, this was one of the factors contributing to double-digit inflation and the consequent hard landing in 2013. The intervention through NYAY will be on a much bigger scale than the intervention through NREGA – while the number of families covered will be the same, NYAY will effectively pay over 200 days of annual income as against 50 days of wages being paid under NREGA. And the wage rate would be 50 percent higher. Think of what might happen to the labour market if suddenly the NREGA wage rate is increased more than 50% and people were being paid for 4x the number of days they are being paid currently. Anybody who argues that this will not impact labour supply and as consequence wage rates and then inflation is being naïve. Given the scale of this scheme, its implementation in the current form will be an abrupt shock to the economy. And its consequences will not be pretty.
And the pilot studies done in India on basic income do not provide any guidance on this for they were on a very small scale. Both the studies in Madhya Pradesh done 8 years ago had a UCT of approximately Rs1000 per family, 1/6
th of what is contemplated now. One of the studies had a sample size of just a few hundred families. These studies are useful to study human behaviour, but not very useful when it comes to understanding what the overall macro impact would be when a scheme goes from a few hundred households to a few crore households.
To sum, there is a need to ‘Make haste, slowly’ (borrowing the title of a very prescient
piece on GST by Vijay Kelkar and Satya Poddar). As they note in that piece ‘We have to be a nation in a hurry to root out poverty by accelerating growth in our economy. As the NITI Aayog points out in its handbook Transforming India, a continuous growth rate of 7.4 percent over the next 16 years until 2032 will still leave us with about 5 percent of the population below the poverty line.’ UCT is thus a worthy policy intervention to aim for – it is something that people across economic ideologies support in principle. But rushing into a UCT, especially in the proposed form, will be a mistake.
Ashutosh Datar is a Mumbai-based independent economist.