Prof. S. Subramanian (National Fellow, Indian Council of Social Science Research) emphasises the importance of dealing directly with the question of enhanced taxation and some estimate of the likely order of magnitude of the required enhancement – in order to accommodate an income transfer scheme.
Q 1. Can you explain why NYAY is necessary when we already have so many other poverty alleviation schemes? Why should we not just increase the budget for the existing schemes?
(I take it that by ‘NYAY’ is meant not so much the specific programme recently announced by the Congress Party as the idea of a universal basic income (UBI).) The income needed to satisfy some basic necessities of life far exceeds the official (Rangarajan) poverty lines, and the population in deficit, even according to these modest official lines, is substantial. Existing schemes of poverty alleviation are clearly inadequate to address the problem of poverty. There is every case for improving existing anti-poverty schemes and, indeed, for expanding their size, but it is not clear why this should be at the expense of a UBI, which is premised on the distinctive notion that having discretionary access to a quantum of income-as-cash is an important human functioning that deserves to be realised. A UBI is a direct route to this end; and the (radical) insistence that basic services and employment guarantees are the only means to the end is in some ways as dogmatic as the (conservative) insistence that growth-followed-by-trickledown is the only means to the end. It is true that ‘income’ has for far too long been seen as the only meaningful indicator of development, but the legitimate backlash against that notion should surely not be a denial of the belief that income, too, matters, and matters very substantially, in any discourse on capability achievement and individual freedom. Of course, the choice between this or that approach to poverty alleviation is often necessitated by the objective reality of feasibility constraints, but on this more later.
Q 2. Do you think that the money would be better utilised if instead it is used to improve the existing public education and health services? Or, have we simply given up on trying to make public education and health delivery functional?
This question is related to Q. 1. There should be space for both basic services and basic income. I am not sure it is a good idea to pit the one against the other. But what about the obtrusive reality of budgetary constraints? Q. 4 below directly addresses this issue.
Q 3. Would you prefer an alternate scheme that distributed the same amount of money through cash transfers over a larger number of households by reducing the amount to each recipient? If yes, why?
Yes, I would. As I have written elsewhere, the NYAY scheme in its present form is logistically very ambitious. Before elaborating on that, it is important to draw attention to a lack of clarity on precisely what the nature of the envisaged income transfers under NYAY is. Initially, we were given to understand that all households among the poorest 20% with monthly incomes of less than Rs. 6,000 would be given a flat sum of Rs. 6,000, while those with incomes above Rs. 6,000 and less than Rs. 12,000 would have their incomes topped up to Rs. 12,000. Subsequently it was clarified that all households in the poorest 20% of households would be entitled to a flat transfer of Rs. 6,000 per month (or Rs. 72,000 per year). There is a problem with this scheme of transfer: an eligible household with a monthly income of Rs. 11,999 would be entitled to a transfer of Rs. 6,000, bringing its income (post-transfer) up to Rs. 17,999, or Rs. 18,000, say. On the other hand, an ineligible household with a monthly income of Rs. 12,000 would stay on Rs. 12,000. Two households with virtually identical pre-transfer incomes would end up with drastically different post-transfer incomes. This is a serious violation of the principle of ‘horizontal equality’. It seems then that the flat-sum-of-Rs. 6,000-transfer was a bit of a convulsive response to scepticism on targeting that had been expressed on the NYAY’s initial ‘topping-up’ scheme. But this response is clearly unsustainable, and it appears that the original ‘topping-up’ scheme is what applies.
But under ‘topping-up’ we have a severe problem of targeting. We need to be able to identify not only the poorest 20% of households, but, within, these, those with incomes of less than Rs. 6,000, and the precise incomes of those in the Rs. 6,000-12,000 range, so that their incomes can be topped up to Rs. 12,000. It would be idle to wish away the resulting problems of ‘adverse selection’, and the sense of injustice that must be expected to legitimately inform the feelings of those erroneously excluded from the benefits of the scheme. This is why I suggest that the ‘NYAY’ scheme is excessively ambitious from a logistical point of view.
A fiscally more ambitious programme, in which every household is entitled to a smaller transfer, would be a great deal less logistically ambitious. This is why I would prefer a genuine UBI to the sort of partial and targeted transfer scheme now contemplated under ‘NYAY’. Some further details are spelt out in the response to Q. 4.
Q 4. Do you have any concerns about the fiscal burden of this extra expenditure? Do you think that the existing tax rates would have to be changed or the existing subsidies eliminated to accommodate NYAY?
In many ways, this question seems to be the one most widely regarded as salient by both ‘experts’ and the general public, and yet also the one that has been least specifically addressed. Conservative commentators have supported cutting expenditure in order to accommodate an income support scheme – sometimes even to the point of seeking a replacement of all extant welfare schemes with a cash income transfer scheme, without much in the way of detail on what quantum of income support per person should suffice to compensate for the withdrawal of existing food security and employment guarantee programmes. Q. 4 above is directly related to Q. 9 below, which expresses the fear that an income support scheme could simply turn out ‘to be a Trojan horse to weaken or destroy the existing schemes like NFSA and MNREGA’. The latter contingency, in my opinion, would make the idea of an income support scheme a fraud on the public.
We were always taught that fiscal imbalance in a budget was amenable to correction by (a) a reduction in expenditure, or (b) an increase in revenue, or (c) a combination of both. In terms of detail – even at the level of back-of-the-envelope calculations – one perceives a certain general reluctance to squarely address mechanism (b). This reluctance, on the part of the right, scarcely requires any explanation. The reluctance on the part of the left is more complex, and perhaps has something to do with vulnerability to predictable criticisms of ‘hare-brained-ness’, ‘quixoticism’, ‘unrealism’, ‘obliviousness to political feasibility’, and the like.
However that may be, it seems inescapable that we must deal directly with the question of enhanced taxation and some estimate of the likely order of magnitude of the required enhancement. Here, it is hard not to be sympathetic to the sentiments expressed by Pratap Bhanu Mehta in a recent Indian Express article on the subject: ‘The thing that is hard to state politically is the idea that India needs to raise taxes. Tax rates need to be sensible. There is no getting around that fundamental fact. But it tells you something about the deep asymmetry of power in our society that this truism cannot even be articulated. Apparently, a marginal infusion of cash in the hands of the poor will destroy them. But the slightest tinkering with taxes in contexts where it is hard to even imagine what the marginal value of income is, will apparently cause economic catastrophe.’
Hare-brained or not, here are some orders of magnitude. Let us suppose we have a UBI guarantee scheme of Rs. 10,000 per year for each Indian citizen. This is a non-trivial amount for really poor people, and if it is marginal for the rich, the latter could be invited to voluntarily renounce the transfer. With a population of 1.35 billion, the annual income guarantee bill should be of the order of Rs.13.5 trillion. India’s GDP (gross domestic product) is around Rs. 200 trillion, which makes for a bill-to-GDP ratio of 6.8%. With time, inflation and population growth will cause the numerator to rise, but inflation and growth in per capita income will also cause the denominator to rise. Assuming an equi-proportionate rise in both numerator and denominator would make for a basic income share, as Debraj Ray terms it, of about 6.8% over time. Let us also say we need to raise public spending on education and health by a further 4% of GDP. The enhanced social welfare bill should then by nearly 11% of GDP.
India, with a tax-to-GDP ratio of 17%, is one of the most under-taxed countries in the world. A question to be directly addressed is: would raising the tax-to-GDP ratio from 17% to 28% be a lunatic prescription? I would say that that is primarily for political parties to answer. Why must we, as professional economists, spare them the necessity of answering the question?
It appears that ‘revenue foregone’, that is, concessions and exemptions to direct and indirect taxes, which cater principally to business and corporate interests, could account for 6% of GDP. According to figures available in the Haroun Rich Index of entities with a net worth exceeding Rs. 10 billion, and assuming that the wealth of this cohort grows at least 10% per annum, if the combined wealth of the richest 831 entities were to be capped at its present level with a wealth tax of 10%, then that could yield upward of 2% of GDP. What if the wealth of the richest 100,000 families were taxed? Surely it should be easier to target the richest 100,000 families than the poorest 50 million families?! What about inheritance tax, agribusiness tax, and an increase in corporate tax? Not to mention the ever-present rumour that there is a substantial amount of black money in the system? Everything considered, the arithmetic of meeting 11% of GDP by increased taxation does not appear to be insuperably defeating.
Is this a crazy suggestion? I ask this question in a spirit of some genuine enquiry. Unless we are prepared to raise the question explicitly and publicly, and to venture to answer it explicitly and publicly, we may be running the risk of deferring to a pre-determined if unwritten script which proscribes the raising of the issue.
Q 5. What would you say to people who are worried that an infusion of cash would increase demand but not the supply and cause a price rise?
Any fiscal stimulus which raises aggregate demand by putting purchasing power in the hands of the population, especially the poor, must be expected to have inflationary consequences in the short run, which may have to be addressed by monetary policy involving inflation targeting and interest-rate management.
Q 6. Which of the existing subsidies from the central government are dispensable and substantial enough to be considered for elimination?
Please see answer to Q. 4.
Q 7. Targeting the bottom 20% seems to be a herculean task. Which data can the governments use to identify the bottom 20%? What sort of targeting mechanism would you suggest?
As stated earlier, I am very sceptical about successful targeting. It is indeed a herculean task, which is why a universal scheme of the type outlined in response to Q. 4 might be expected to mitigate the problem of ‘adverse selection’.
Q 8. The proposed scheme is bound to generate perverse incentives for a significant part of the population. They would try to show that they are a lot poorer than they are or even to lower their incomes in order to qualify. How would you construct the scheme to minimise the damage from this obvious problem?
Q 9. How would you ensure that this scheme does not turn out to be a Trojan horse to weaken or destroy the existing schemes like NFSA and MNREGA?
By appealing to other social scientists to present a solid, united, and insistent bloc against a Trojan horse policy!
Q 10. The deficiencies in the existing poverty alleviation schemes stems from weak State capacity. Will NYAY also not be hampered by the same?
Very likely so. But the slogan ‘therefore scrap welfare programmes’ is a facile, petulant, and churlish one, which requires a great deal less sustained effort than an insistent demand for State accountability in the cause of more efficient and less corrupt practices in the implementation of these programmes.
This post is part of I4I’s e-symposium on NYAY: https://www.ideasforindia.in/topics/poverty-inequality/decoding-congress-nyay.html