Homeviews News

    Analysis: How the Congress can make the minimum income guarantee scheme a reality

    Analysis: How the Congress can make the minimum income guarantee scheme a reality

    Analysis: How the Congress can make the minimum income guarantee scheme a reality
    Profile image

    By Maitreesh Ghatak   IST (Updated)

    Mini

    The Nyuntam Aay Yojana (NYAY), or Minimum Income Guarantee Scheme, recently announced as a poll promise by Congress president Rahul Gandhi has the following features: it fixes a target minimum income threshold for a poor family of Rs 12,000 a month, and proposes to give an income supplement to ensure that every family in the bottom 20 percent will have at least this minimum amount.

    The Nyuntam Aay Yojana (NYAY), or Minimum Income Guarantee Scheme, recently announced as a poll promise by Congress president Rahul Gandhi has the following features: it fixes a target minimum income threshold for a poor family of Rs 12,000 a month, and proposes to give an income supplement to ensure that every family in the bottom 20 percent will have at least this minimum amount.
    Based on the assumption that even the poorest families earn Rs 6,000 a month, an additional Rs 6,000 per month to the poorest 20 percent families will be enough to ensure that all of them will have the minimum income.
    This is different from the PM-Kisan scheme launched by the Prime Minister Narendra Modi recently because that promises to pay a flat amount of Rs 6,000 to all landowning farmers with less than two hectares of land whereas the Congress’ scheme applies to all the poor, irrespective of occupation or land-ownership.
    In theory, the NYAY scheme could only pay the difference between Rs 12,000 and actual family income. So if a family is currently earning Rs 8,000 a month, it will receive an additional Rs 4,000. This would be like a negative income tax — with income taxes you pay more the more you earn, whereas under this scheme, you will receive more the less you earn if you are in the poorest 20 percent of households.
    Finding The Right Beneficiaries
    However, there are problems with measuring income. As we know, most of the poor live in rural and the unorganised sector and we do not have a direct way of verifying their incomes such as through payroll or income tax. Also, there will be incentives to underreport income to receive more under this scheme. Moreover, the non-poor will try to benefit from it.
    An alternative proposal would be to give a flat transfer of Rs 6,000 to every family in the target group. This version would avoid the income verification problem and is also simpler to understand.
    One of the most obvious concerns with the NYAY scheme is funding. The figure currently being discussed is Rs 3.5 lakh crore, which is obtained by multiplying Rs 6,000 by the number of the poor constituting the poorest 20 percent of households, which given India’s population and an average family size of 5, turns out to be 25 crore.
    As a fraction of GDP, that is 2.14 percent while as a fraction of government revenue it is 14 percent. Just to compare, for MGNERGA, the corresponding percentages are 0.32 percent and 2.23 percent while for all subsidies, it is 1.7 percent and 12 percent, respectively.
    While it is a high number, we should remember that the figure we used would be an overestimate if the scheme pays only the gap between guaranteed annual income and the actual income.
    The above calculation assumes that the government will pay out the Rs 6,000 to all the poorest 20 percent families as a flat amount, as opposed to bridging the gap. Still, to fund such a scheme either more tax revenue needs to be raised or some wasteful expenditures need to be cut. There is scope for both.
    The Implementation Road Map
    For example, if we look only at the fertiliser and petroleum subsidies, which are considered neither efficient nor equitable, that is approximately one-third of the maximal estimate of the promised sum. Also, the central government offers a number of tax concessions or incentives on income tax to corporates, individuals and associates of individuals, apart from exemptions on customs and excise duties. These are commonly referred to as ‘revenue forgone’, and estimates suggest that this constitutes 6.5 percent of GDP.
    Another method of funding this scheme would be to have a social welfare tax that is levied on income, wealth or some forms of consumer expenditure. Given that estimates suggest that the black economy is around two-thirds to three-quarters of the country’s official GDP, the argument for taxing luxury expenditure items is particularly compelling.
    Other than funding, operationalising the implementation will be the biggest challenge. If it is not a flat transfer of Rs 6,000, measuring income would be a key concern.
    One solution could be to integrate the NYAY scheme with MGNREGA. NYAY is a cash transfer scheme targeted at the poor, which is unconditional, i.e., to receive it, they don’t have to do anything. Under MGNREGA, you get paid only if you work. As a result, it is self-targeting — only those who really need the money would be willing to do extra work to earn it. On the other hand, it is not ideal for the poor who are unable to work, e.g., children, the elderly, the disabled.
    One can think of a transfer policy that combines the two in the following way. We can have a flat base amount (for example, the Rs 6,000 per month figure that the NYAY scheme is referring to) that is given to all and then we can allow individuals to claim more if they work under NREGA. Those with no income (including none earned via MGNREGA) will receive just the base amount. Others will have more, in proportion to the labour they supply. This would also give a mechanism to implement the NYAY scheme by making it costly for people to receive additional income beyond the base amount and solve the income-verification problem that is inherent in the NYAY scheme.
    Having more cash will help the poor not just with meeting their subsistence needs but also to cope better with risk and relax the borrowing constraints they face. But we should remember that as with any other anti-poverty scheme, in the end, it is jobs, skills, and productivity growth that can reduce poverty in the long run.
    Maitreesh Ghatak is a Professor of Economics at the London School of Economics and an elected Fellow of the British Academy.
    arrow down

      Market Movers

      View All
      CompanyPriceChng%Chng