‘NYAY’ Minimum Income Guarantee Scheme – Attack on Poverty or Practicality?

Quickly contextualizing the case at hand, the principal national opposition party, Congress, created a storm of sorts on 25th March, 2019. Its national president, Rahul Gandhi, shocked everyone by unveiling a Minimum Income Guarantee Scheme which his party shall implement if the Congress comes back to power in the ensuing national elections.

Dubbed ‘NYAY’ as an acronym of ‘Nyoontama Aay Yojana’, the scheme strives to conduct a final surgical strike on poverty in India by assuring a minimum income support of Rs. 72,000 (~USD 1030) per annum to 20% of poorest families. As per the announcement and frequent clarifications, the NYAY scheme will cover 50 Million households in India with family size of 5 to help bring 250 Million people out of poverty. 

According to Congress party, the NYAY initiative will not be a repackaging operation of existing subsidy and direct benefit transfer schemes but, essentially, an add-on to them. It will be the world’s largest minimum income scheme under which the money will be directly transferred to the bank accounts of entitled beneficiaries.

Congress is claiming the proposal to be FISCALLY POSSIBLE basis the extensive and painstaking study and consultations undertaken with various economists over last 4-5 months.

Being marketed as a game-changer, the scheme has suddenly caught the national conscience and become the only talking point with arguments both in favor and against. Politically, the scheme is being looked as pro-poor and Congress’ sincere attempt to find its mojo back and get much need tailwind and momentum in its pursuit to reclaim national prominence. Many economists, fiscal experts, analysts and others have lent their support to the scheme over last few days with the latest being Mr. Raghuram Rajan, the ex RBI Governor.

Notwithstanding the claims and announcements made, there are widespread apprehensions about the practicality of a scheme of this scale. The mission and the outer packaging is certainly news-worthy of headlines but there are many kinks in the design which cause obvious unease. For those applying rationale, the implementation challenges are many.

Here is a low-down on some key concerns about the scheme. Congress should spend time to openly address these to make something out of this debate and create a convincing consensus. 

Fiscal Question - On the fiscal balance and do-ability part, Congress and those voicing support claim India has the capacity to implement a scheme of such a scale. At an average pay-out of Rs. 72,000 to one identified family a year, the NYAY scheme would need an additional budgetary allocation of Rs. 3.6 lac crores (~ US 51.5 Billion) each year. Congress claims that the scheme would be rolled out in phases and that the scheme roll-out will cost 1.8% of GDP in any given year.

However in spite of these statements, no one has an idea of source of immediate and long term funding for this. To such queries, the calming answer that such things need to be worked out at the time of implementation doesn’t look assuring enough. Some of the solutions given to fund this scheme till now are:

1.    Possibility to create space for this new scheme, with humungous outlay of Rs. 3.6 lac crores, by stemming leakages and improving delivery of existing welfare/ subsidy schemes.

2.    Imposing a wealth tax on rich to increase tax revenues

3.    P Chidambaram, Ex Finance Minister and one of the key architects of this scheme, believes that the current GDP at Rs. 200 lac (USD 2.9 Trillion) and its high nominal growth of 12% year-on-year will lead to doubling of Indian Government’s revenues in next 5 years. This will create enough space and capacity to fully implement the NYAY scheme.

Each of these lines of thought may look effective and attractive to make this minimum income support possible. To a person not reading between the lines and digging deep into data, a GDP of Rs. 200 lac crores is certainly large and strong to accommodate a seemingly small looking scheme like NYAY, which constitutes mere 1.8% of total GDP.

But devil often lies in the details. It may not be as easy as it is being touted out to be. That’s way a scheme like this hasn’t been talked about before. To understand better, its important to understand the revenue and expenditure profile of Indian Government and know their key constituents.

Let’s look at the income/ revenue profile first.

Above table illustrates the key drivers of central government’s revenue. As can be found, tax based revenues are the key source and contribute ~85% of total central government’s revenue, after knocking off the 1/3 share transferred to the states. Furthermore the top 3 sources of tax revenue for the government are direct taxes (corporate tax, personal income tax) and GST which together contribute more than 85% of total tax revenue.

Thus, if the revenue has to increased in the as-is state, ignoring the GDP growth aspect, that will have to come from the above 3 sources.

In the current state, looking at trends of tax rate changes, populist pressure from middle class, long standing demand of corporate sector for reduction in corporate tax rate and government’s intent to keep inflation tamed, the capacity or potential to meaningfully increase the above 3 revenue sources by 10% or more looks virtually impossible. In a democratic country at the same time, its often next to impossible to take away a benefit, once given, from a wider populace irrespective of the argument offered. No political party would be having the courage to risk its future in trying to bring about such a radical change.

Now coming to the proposal of imposing wealth tax, the Paris-based World Inequality Lab has proposed that a more progressive taxation structure, including a wealth tax on the rich, can help fund this financially ambitious minimum income support scheme. As per its study, a 2 per cent tax on total wealth on households owning more than Rs 2.5 crore of wealth (that is the top 0.1% of households) would yield Rs 2.3 lac crores or 1.1% of GDP. This would certainly be a big one-time mop up.

But the sanctity of these numbers looks doubtful. In the absence of a single identifiable indicator of income and wealth in India, it is very difficult to assess the real wealth of these top 0.1% households to say whether these numbers are precise. Additionally, there might very well be a political reluctance associated with its actual implementation as most of the Indian executive would have to itself face the brunt of such a move. Not to forget at the same time, even is such a ruthless decision is taken and the suggested amount collected during the exercise, this amount shall not even suffice the funding required for scheme for even 1 year.

Now, lets look at the expenditure profile of the government of India.

Now looking at actual past expenditures and what’s planned for FY 2019-20, the total budgeted government expenditure for the next year is Rs. 27.8 lac crores (~ USD 397 Billion). Including all planned expenses of both revenue and capital account, the Indian government would be spending Rs. 7 lac crores (~ US 100 Billion) more than its total expected collections. For this, the government will be taking Rs. 6.5 lac crores in extra debt to fully fund its expenditures. The fiscal debt would amount to 3.4 % of GDP next year.

Now elaborating on the trend-line of fiscal deficit, the Indian budget has been announcing a fiscal deficit for years now. Since 2000 for sure, India hasn’t recorded even a single year of fiscal surplus (revenue > expenditure). There have been attempts and sincere efforts made towards ensuring a lower fiscal deficit but a break-even is nowhere in sight given our macro-economic circumstances.

India has high committed expenditure, of revenue type, each year in the form of interest payments on debt, establishment running expenditure in the form of salaries and pensions and Finance Commission state transfers. For the coming year, FY 2019-20, these expenses are budgeted at Rs. 14.8 lac crores (~ US 211 Billion), amounting to 70%+ of budgeted total receipts. These are contractual commitments and more fixed and uncontrollable in state. Hence, the ability to control or bring down these expenses without adverse consequences is next to zero.

Besides these uncontrollable expenditures, capital expenditure for investment in useful assets that aid growth is budgeted at Rs. 3.4 lac crores (~USD 48 Billion) for FY 2019-20. This is the most important and needed investment to provide booster to economic growth, private investments, defense and infrastructure development and improving the quality of life. At 16% of total budgeted receipts, this component is already low. The growth factor depicts high negative elasticity to this expenditure. Given this, social welfare and income support can’t be made to over-ride this expenditure component at any time.

This leaves the government with only Rs. 2.6 lac crores to spend on social and other schemes of all kind. Compared to this paltry remaining amount, we are spending Rs. 9.6 lac crores towards subsidies, DBT, social welfare and other central schemes. The amount being spent on existing subsidies and direct benefit transfers is already at Rs. 5 lac crores. This means that all such income support schemes in the form of subsidies/ DBT are already being supported outside the revenue receipts through debt leading to fiscal deficits year-on-year.

Given above perspective, its very difficult to fathom how Mr. Chidambaram is so confident of being able to accommodate this additional burden of Rs. 3.6 crores without worsening the fiscal situation as such funding will necessarily have to be supported through additional fiscal deficit. Please note, Congress has repeatedly made clear that NYAY wont scrap or substitute existing subsidy/ DBT schemes. 

Identifying the rightful beneficiaries – This scheme will need to define and identify who exactly is poor. At the family level, which family’s total monthly income is less than Rs. 12,000 for eligibility to NYAY. In a country where the conundrum of exact and total income of an individual has remained unsolved, total income-based method of targeting may make the implementation very daunting and without needed precision. Plus, the beneficiary set would need to be periodically reassessed for eligibility to account for factors like increase in income over time, consolidated direct benefit transfer being made across different schemes and alike. In summary, while beginning the scheme on income based method of targeting itself looks challenging, running the scheme over a period of time will involve a huge administrative and analytical drain on a continuous basis. While false positives might be opportunities to optimize with time, ensuring no rightful person is excluded would be an immensely complicated task. 

Big-Scale Implementation Track Record – A caveat being smartly juxtaposed with every supporting claim is the core need to IMPLEMENT THE SCHEME PROPERLY to make it a win-win without distorting the fiscal balance. This itself causes the biggest concern and worry for the uninitiated. In a country that is beset with myriad examples of implementation failures across government sphere from divestments to farm loan waivers to financial risk management to GST roll-out, amongst others, promising such a scheme to the entire nation without any field results from the ground is fraught with danger.

In a democratic country like ours where elections are due every 5 years and where every vote counts, making outright huge fiscal promises is a dangerous endeavor as any fiscal mis-step will cost dearly and the resulting political uneasiness might further compound the fiscal distress, thereby spirally the condition out of control.

Do we really need a new scheme for an old problem – This case, if looked critically, is really one of old wine in new bottle. The scourge is the old, long staring poverty. To tackle the same, many subsidy schemes and direct benefit transfer initiatives have already been undertaken that continue to this date with assigned budget of more than Rs. 5 lacs crores (USD 71.5 Billion). In this background, its difficult to fathom why a new scheme is suddenly required. This new scheme and the PM-KISAN scheme, already implemented by the ruling BJP, seem to suggest that existing schemes are not helping much in the mission to end poverty.

According to Brookings, an independent body, about 44 people are being pulled out of poverty every minute. Therefore, it will be wrong to say that the design of existing schemes is inadequate. As a counter if that’s really the case, all the old schemes should actually be re-packaged and fully substituted with NYAY and PM-KISAN instead of being merely supplemented by the latter.  

Going with the above argument, its required to assess whether a scheme like NYAY with new targeting design is really required. Merely supplementing the existing schemes with increased budgetary allocation can be an equally tenable alternative while keeping aside the aspect of effectiveness.

What do you want to encourage - Entitlement or Productivity – Its debatable what impact such minimum income guarantee scheme will have on demographic dividend and its productivity. Experience from programs like MNREGA certainly doesn’t present any evidence of meaningful economic value created, physical assets built or increase in labor days per person. Such doles haven’t created a sense of responsibility and obligation to pay back commensurately through labor. A sense of entitlement and one-way appeasement might color the roll-out of this scheme as well.

What about the jobs – The biggest structural problem facing India right now is the lack of job generation commensurate to GDP growth. A budgetary outlay of Rs. 3.6 lac crores can go a long way in creating 2.5 crores new jobs, leading to creation of equal or more economic value, each year giving Rs. 12,000 as earned pay each month. The biggest problem with NYAY seems to be its short-sighted design. Congress could have made a meaningful difference and a real game-changer by scoping out the scheme a bit better.

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Disclaimer – The above thoughts might not present a comprehensive snapshot of the subject at hand. For a subject of this kind, its often difficult to package all points of reasoning and opinion in one piece. But I have tried to cover the large open gaps. Will also update this piece as and when more clarification comes. Would be happy to receive feedback and incorporate the same basis logic.