If no effort is made to consider how a minimum income guarantee is financed, then the expenditure would lead to cuts in public investment & higher borrowing.
Proposals for minimum income guarantee, promised by Congress President Rahul Gandhi, Universal Basic Income, discussed in the Economic Survey 2016-17, Farmer Income support, proposed by Niti Aayog, or a Quasi Universal Basic Rural Income, proposed by former chief economic adviser Arvind Subramanian and co-authors, all mean a large increase in expenditure.
Given the upcoming elections, rural distress and lack of job growth, it is expected that the government will propose a large cash transfer programme. If no effort is made to seriously consider how it is financed, then the expenditure would lead to cuts in public investment and higher borrowing. This would involve decisions varying from rationalising subsidies to raising taxes. Some may suggest that it is not important to stick to fiscal targets and imply that some of the additional expenditure may be funded by higher borrowing.
Proposals for cut in expenditure are necessary
Income support and direct cash transfers to the economically weaker sections (EWS) and farmers are undoubtedly the least distortionary way to provide government support. There can be little argument about the proposal that wasteful subsidies, especially those enjoyed by the economically well off, should be reduced and cash should be transferred to the EWS. To ensure that they do not become worse off due to higher inflation and even fewer jobs due to bad fiscal management, the proposals for cuts in expenditures should be made along with those for cash transfers and not put off for another day.
Failing that, the biggest share of expenditure on cash transfers to farmers or the EWS is likely to come from cuts in public investment and higher borrowing. While it is seductive to believe that the rich will pay more taxes, and subsidies can be significantly reduced, that may contribute only a small share considering the administrative and political difficulties involved.
Fiscal prudence seems to many to be an unnecessary virtue and there will be those who would encourage profligacy. The combined fiscal deficit of the Centre and states is already about 7 per cent of Gross Domestic Product (GDP). Borrowing more is not without risks. Those advocating greater deficits do not consider that higher government borrowing could raise interest rates further, hurt investment and jobs and be inflationary.
This would doubly hurt the EWS and jobless. A larger fiscal deficit could spill over to a larger current account deficit causing macro instability. The economically weak are among the worst sufferers of a macroeconomic crisis.
Similarly, collecting more levies from the rich in the form of wealth taxes, inheritance taxes, higher corporate taxes, higher income taxes and cesses can all be done, and the rich can be relentlessly chased by tax inspectors till they either pay up more than the nearly 50 per cent that is being charged already on profits (through corporate tax, dividend distribution tax, long term capital gains tax, etc) or move their businesses abroad. And, going after the middle class may give an increase in the number of people filing returns.
However, whether these efforts actually give us higher revenue collections enough to pay for large expenditure programmes remains to be seen.
As Economic Survey 2016-17 shows, at our level of economic development, India is already collecting taxes in line with tax GDP ratios seen in other countries. Unless there is high GDP growth, it is unlikely that the tax GDP ratios will go up significantly, irrespective of whether we raise rates or increase inspections.
So then how is the additional expenditure to be financed? Few would actually say do so by borrowing. Good economics compels us to say it should be done by reducing subsidies that don’t reach the economically disadvantaged. But how much can be realistically saved by reducing subsidies?
In 2018-19, the largest subsidy bill was for food and fertilisers.
The estimated subsidy for food alone is Rs 1.7 lakh crore. Many reports have found wastage in the PDS, leakages, wastage, rat infestation and shortage of warehouses. According to the government, PDS distributes highly subsidised grain to 75 per cent of the rural population and 50 per cent of the urban population. Information available in February 2017 showed that 81,34,91,135 beneficiaries had been targeted.
The first question before an income support scheme that seeks to reduce food subsidies and replace them with direct benefit transfers will be that of coverage. Will all the beneficiaries of the Targeted Public Distribution System be beneficiaries of income support? A back of the envelope calculation suggests that if these beneficiaries are given even Rs 300 per month, Rs 3 lakh crore would be needed every year for the cash transfer.
If the food subsidy bill is to be reduced, the government will have to raise issue prices for the Above the Poverty Line (APL) category in PDS. Will the government be willing to do this?
Fertilisers, which belong to the class of production subsidies, are the second highest and cost Rs 70,000 crore.
These, along with water and electricity are not meant for poverty eradication.
The biggest recipients of fertiliser subsidies are big farmers as they use more of these products.
Will the government be willing to cap fertiliser subsidy for each farmer? Similar issues will arise for LPG subsidy. Will the LPG subsidy be removed for the APL?
It is questions like these that will decide whether income support will be a fiscal time bomb and push India into a macroeconomic crisis, or whether the promised subsidy cuts will actually take place.
Ila Patnaik is a Professor at the National Institute of Public Finance and Policy.