Originally Published 2019-04-02 06:20:21 Published on Apr 02, 2019
Nyay yes! But at what cost?

Rahul Gandhi’s electoral silver bullet to numb the BJP into relative disarray is a mega welfare scheme to transfer Rs 72,000 to each of the 50 million or 20 per cent of the poorest households. It costs Rs 3.6 trillion or 1.8 per cent of GDP.

The motivation is political – to upstage anything the BJP can offer along the lines of Narendra Modi’s 2014 unfulfilled election promise of depositing Rs 1.5 million into the bank accounts of the poor by bringing back “stolen assets” stashed abroad. Further, Nyay will not nudge out any existing “socio-economic subsidy”– a clever tactic allowing maximum electoral play.

So how big is the subsidy burden of the union government? The union budget baldly states Rs 2.6 trillion or 1.3 per cent of GDP – 71 per cent to lower the retail price of food for the poor; 29 per cent to lower the price of fertiliser for farmers and the residual 10 per cent to lower the price of cooking gas. But it doesn’t end there.

Domestically produced natural gas is administratively priced lower than the landed cost of imported gas. This device keeps the electricity price and the price of inputs for fertiliser production lower than the market cost. Also electricity supply to low income house-holds and farmers is priced well below cost by state utilities. Public sector banks provide cheap loans – “directed lending”- for agriculture and small industries at interest rates up to 4 percentage points below the normal interest rate.

The middle class and the rich are partly saved from paying income tax by making specified savings and investments in government debt or equity; house purchase. Income from rented property and capital investment in owned businesses is eligible for tax deductions which effectively increase the nominal entry point for paying tax from Rs 0.25 million to Rs 0.8 million. Neither wealth nor inheritances are taxed. The CPI(M) and sections within the Congress agree that such tax deductions for the well-off should be ended.

Cynics say the Congress is unlikely to get a majority on its own so there is no cost to dreaming. But Rahul Gandhi is an honest person, albeit politically naïve. It is very likely he genuinely believes that a directed cash transfer can “end poverty”. But it cannot unless we trade-in the existing non-merit subsidies for the mega transfer.

The World Bank “dreamt” about ending poverty for decades. But China showed the way. Not by providing subsidies, despite it being a Communist economy. They multiplied jobs like rabbits. Copying the Chinese way is becoming increasingly difficult. The world has entered a recessionary phase. China has huge spare capacity backed by massive foreign exchange reserves. They can outbid any export competition.

Our merchandise exports have stagnated over the last three years. We desperately need jobs for which public investment is necessary in infrastructure – especially rural infrastructure, like cold chains; storage; better equipped, digitally linked –markets and food processing industry– to improve economic growth and income in this employment intensive sector.

The union government spends just Rs 3.4 trillion – 12 per cent of its net receipts of Rs 28 trillion, on capital investment. This is well below the needed 20 per cent allocation. Nyay can be funded by slashing public investment, temporarily. But the short term cost of lost jobs and the medium term cost of lost growth will make it a pyrrhic victory.

The other “soft” option for funding Nyay, is to reduce the outlay on Centrally Sponsored Schemes. These are implemented in partnership with state governments consuming Rs 8.6 trillion this fiscal. These target citizen “well- being” – improved health and education outcomes, rural infrastructure, drinking water and sanitation. Terminating them would push us further down the comprehensive UNDP index of poverty, even if we temporarily end income poverty next year.

The 2018 UNDP report on the Multidimensional Index of Poverty estimates that 47 per cent of Indians are either poor (27.5 per cent) or vulnerable to fall into poverty (19 per cent) due to a mishap or economic shock, like job-loss.

The two groups cannot be distinguished for the purpose of a selective welfare transfer. Defining poverty by a snapshot of an individual’s income at a point in time and comparing it with either the World Bank’s poverty line of $1.90 per day or the older, indigenous Tendulkar line is bad targeting. Individuals keep moving in and out of red-lined income poverty. The UNDP methodology has more stable metrics – ownership and the quality of real assets like a house, a bicycle, or a phone; access to clean drinking water and sanitation; access and attendance at school; child mortality and nutrition. It is a fairer method to identify the poor.

If Nyay is to alleviate the distress of the poor it’s coverage should be twice that of the proposed scheme – 100 million households with a lower grant at Rs 60,000 per household – at Rs 6 trillion or 3 per cent of the GDP, equal to the entire public investment and the defence revenue budget put together.

There is another way. The government could print and distribute money. The fiscal deficit (FD) would increase to 7 per cent of GDP from below 4 per cent today. But we have been there before. FD was 6.6 per cent in fiscal 2010 when the UPA government spent its way out of the 2008 global financial crisis. Like then, inflation shall shoot up from under 3 per cent today; consumption demand would increase improving business bottom lines; we would return to a negative interest rate regime, associated lazy bank lending and irresponsible investment

The rich would accumulate more fat by passing on inflated prices to consumers reducing the buying power of the Rs 72,000 transferred to the poor. Soon thereafter public sector bank assets would get stressed. Public funds would be used, yet again, to bail them out. Economic slow-down and a further job crunch would follow.

We should learn from History or be condemned to bear the cost of our ignorance. Back to the future it is.

This commentary originally appeared in The Times of India.

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Sanjeev Ahluwalia

Sanjeev Ahluwalia

Sanjeev S. Ahluwalia has core skills in institutional analysis, energy and economic regulation and public financial management backed by eight years of project management experience ...

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