The Congress on 25 March 2019 announced a minimum income guarantee programme that promises to give up to Rs 72,000 a year or Rs 6,000 a month to 20 per cent of India’s poorest families if voted back to power. While ambitious, a policy such as Nyuntam Aay Yojana (NYAY) requires some careful thinking and analysis.
Minimum income support is a sign of development. Developed countries all over the world have some form of basic income support for their citizens. The United Kingdom has job seeker’s allowance, which provides minimum income support — between £3,000 and £6,000 — if the person/couple is aged 16 and above. The United States has a welfare or temporary assistance for needy families (TANF) that provides cash for a limited time to low-income families working towards self-sufficiency. Besides looking into whether or not such policies are feasible for a country like India, what needs to be also ascertained is how robust are the soundness of the policy announced by Rahul Gandhi.
Households in the poorest 20 per cent of income distribution earn more than Rs 72,000 per year.
The Congress promising Rs 72,000 a year to the poorest 20 per cent of Indian Households raises doubts on the underlying assumption to arrive at the number. This proposal assumes that 20 per cent of Indian households are earning less than Rs 6,000 per month. While there is no credible income distribution data in India, the Centre for Monitoring Indian Economy (CMIE)’s consumer pyramid data delivers record-level data of a large household survey conducted in India. The sample size was 1,58,624 households during 2015-16. This is a panel of households with an objective of building longitudinal data series based on regular surveys.
The survey captures data on household demographics, which include member-wise characteristics, household amenities such as water and electricity, household income and expenses, and household assets and borrowing by households. Using the CMIE sample survey data, it is estimated that the average income of the lowest 20 per cent household group is Rs 90,000. Only the bottom 4 per cent of the sample households earn less than Rs 72,000 annually.
Households belonging to the poorest 20 per cent of income distribution essentially belong to the informal economy.
The government, should it come to that, would need some mechanism to filter out households that earn less than Rs 12,000 a month. That would be difficult because neither do these households pay any taxes (since they fall below the taxable income threshold) nor are they on any payroll database.
Most households in the poorest 20 per cent category get their monthly income in cash without anything to show as proof of income. How then does the government distinguish between those genuinely earning below Rs 12,000 per month and those who are just “lemons” would be a matter of great concern. In such a scenario, unless the employer confirms the earning (which in itself is an avoidable cost for the employer), there will be a rise in number of households wrongfully claiming to earn less than Rs 12,000 a month. This will not only burden the government but also give rise to corruption. In short, the minimum income support will not be feasible in India as long as we have a large population working in the informal sector.
What is the incentive of earning or even working?
Social security programmes all over the world are criticised mostly for disincentivising an individual or having adverse consequences than intended. While the promise to pay or make the income reach up to Rs 12,000 a month is ambitious, it comes with its own disadvantages. A person earning Rs 6,000 a month may have no incentive to work and earn even that amount as he/she is better off not working at all and getting the entire sum of Rs 12,000 from the government. Econ 101 suggests that when you provide direct income support, a large number of households go out of the labour force for lack of incentive to work. In such a case, the Congress might be better off providing either a temporary support scheme like TANF in the US which provides support until the family reaches a sustainable level or laying down certain per-conditions for support, e.g., minimum number of days worked etc.
While the intent of the Congress is applauded, such a policy needs to be well thought through not only because it has economic implications but also fiscal implications. It is estimated that such a programme is likely to cost Rs 3.6 lakh crore per annum to the government. Such a policy could be financed either by raising more taxes or cutting down on fiscal expenditure on productive investments or rationalising subsidies. India’s tax to GDP ratiois already expected to reach 12 per cent. With very little room for raising taxes any further, it seems doubtful whether Indian tax payers, with their increasing scrutiny of the government, would like to see their hard-earned money be used in such a helicopter drop manner.
The author is a research fellow at National Institute of Public Finance and Policy (NIPFP). Views expressed are personal.