The debate on inequality and redistribution of wealth, ahead of the 2024 Lok Sabha elections, has focused on whether India needs more taxes to boost its spending on uplifting the poor. What has been missed out in the high-pitched political rhetoric is how much welfare spending India already does, and how this has been achieved without resorting to inordinately high levels of taxation, or excessive debt levels.
Not quite a welfare state, India has nevertheless been on this road for a while now. And it’s been doing it the way it needs to. Rather than borrowing more or trying to raise tax revenue through rate increases or redistributive taxes, the country has made improvements in social welfare through better targeting.
Over the last two decades or so, India has paid considerable attention to each element of what makes a welfare state — free healthcare, free education, free food, income support for the unemployed, and pensions. The country has managed to cover large parts of the population in almost every one of these categories.
This isn’t the impact of any one government but a gradual shift spanning decades. What one government has implemented, the next has widened and improved. It’s also not just the central governments at work, state governments are also doing their part by distributing numerous freebies.
Pillars of welfare state
The fact that such initiatives are politically motivated holds limited value in this particular discussion. The positive outcome—the poor receiving help—is taking place regardless of policy motivations.
So, how much of a priority does the government give to the social sector? And does it need higher tax rates or more taxes to achieve greater outcomes?
There are various ways to look at this issue. The first is to understand what a ‘welfare state’ is and if India falls within these parameters. The second is to compare India’s social sector spending with that of known welfare states like the Scandinavian countries, France, and Italy. Third, a comparison of India’s current taxation and debt levels with these welfare states.
The United Nations uses the Merriam-Webster dictionary definition of a welfare state: “A social system in which a government is responsible for the economic and social welfare of its citizens and has policies to provide free healthcare, money for people without jobs, etc.”
Let’s examine the four key pillars of welfare: food, health, education, and income.
Ever since the National Food Security Act was implemented in 2013, significant expenditure has been allotted to providing about half the population or more with highly subsidised (and now free) food grain. It’s no one’s argument that households need more than the 5 kg of food grain they are receiving, or that the coverage of the scheme needs to be widened further.
In fact, recent household income and expenditure data will likely result in the coverage shrinking in line with real needs. That is, it is highly likely that the income data will show the actual number of people who need free food is lower than the 80 crore who currently get it.
Back in 2002, the 86th amendment of the Constitution inserted an article to provide free and compulsory education for all children in the age group 6-14 years. Building on this, the Right of Children to Free and Compulsory Education (RTE) Act of 2009 legislated that each and every child was entitled to full-time elementary education.
An argument can be made here that the RTE Act should be expanded to include higher levels of education than just elementary school. But, given that expenditure on the scheme is shared between the Centre and the states, the additional financial burden won’t be high enough to require additional taxes.
The Rashtriya Swasthya Bima Yojana (RSBY), the UPA government’s public health insurance scheme launched in 2008, aimed at providing below-poverty-line patients with free medical insurance cover up to certain limits. The Ayushman Bharat Yojana was launched in 2018 as a repackaging of this scheme, with higher coverage and a wider net.
Then, of course, there’s the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), which offers income support to whoever demands it by providing them with a minimum amount of work and income. The UPA government introduced the Act in 2005, and the Modi government has continued to make extensive use of the scheme.
These major areas of welfare are over and above the Centre’s fuel and fertiliser subsidies, cash transfers to farmers, and the free electricity, free water, and public transport schemes provided by various state governments.
Also read: India is becoming welfare state before developed state. But even welfare it does badly
India’s spending on social welfare
The metric in which India fails to qualify as a welfare state is the share of its total expenditure it dedicates to social sectors.
India’s general government — which is the combined central and state governments — allocates about 27 per cent of its total expenditure to the provision of social services. This figure is about 57 per cent for France, 48 per cent in Canada, 49 per cent in Switzerland, and about 57 per cent in Denmark.
India does not need to reach these levels. These are the very highest in the world. Improved targeting of beneficiaries will not only weed out those who don’t need the government’s help but also include deserving beneficiaries who have been left out.
However, overall, the percentage of the Indian population that is being provided a social net is around where it needs to be. There is undoubtedly a need for better infrastructure in health and education, but that can come through a reorientation of capital expenditure.
We do need to pay teachers and doctors employed in government institutions way more than we are. This too is possible using existing resources and any additional tax revenue that can be earned by bringing more people into the tax net. We do not need to raise rates or bring in new redistributive taxes.
Now, the third level of analysis is to see how India is paying for its social sector spending. Are we paying for this level of welfare through taxes that are too high, or by taking on crippling levels of debt? As it turns out, no to both.
India’s median general government debt level since 2000 has been about 74 percent of GDP, far lower than the 88 per cent in France, and 85 per cent in Canada, not to mention the US (99 per cent), Italy (120 per cent), and the UK (81 per cent). India’s debt levels are higher than Sweden and Denmark, but those two countries rely instead on tax revenues to finance their activities.
Sweden and Denmark have a median tax-to-GDP ratio of 27-33 per cent. This median ratio has been just 10.5 per cent in India over the last 22 years.
Yes, the figure is too low for a country like India but the fact is that all our welfare measures are being financed through these tax levels. An improvement in the tax-to-GDP ratio needs to come through a wider tax base rather than higher rates.
When people talk about the welfare state as a great ideal to strive toward, they should look deeply at how long and well India has walked this path. They might be in for a surprise.
Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.
(Edited by Ratan Priya)
Very informative and relevant in today’s context. Even though, India is not covered under a theoratical definition of the welfare state, we are doing quite well on four stated pillars of welfare state. The best part of the infomation is that India has been implementing social welfare policies for the last few decades and we donot have to rely on additioona tax burden and excessing debt. Weldone to TCA Sharad Raghvan and Ratan Priya.