Budget 2017: Basic income for bottom 50% of public will be a political master-stroke

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Updated: January 19, 2017 11:19:54 AM

What the prime minister’s speech of December 31, 2016, made clear was that India was firmly moving away from the anti-poverty policies pursued by all previous governments.

Though given the recent demonetisation effort, one must add the biggest daddy of all corrupt—the Indian tax administration—to the list. (PTI)Though given the recent demonetisation effort, one must add the biggest daddy of all corrupt—the Indian tax administration—to the list. (PTI)

What the prime minister’s speech of December 31, 2016, made clear was that India was firmly moving away from the anti-poverty policies pursued by all previous governments. The new approach, made possible by technology, is to get away from the Amartya Sen advocated in-kind income transfers to some version of cash transfers.

Two major in-kind poverty alleviation policies in operation are PDS and NREGA. Both involve a large scale government involvement. The former has the government (Food Corporation of India) involved in procurement, storage, transport, and distribution of food. NREGA has the government planning projects, employing people, on what is touted as the largest work programme in the world. What is not as well-advertised (especially by the sponsors) is that both are amongst the most corrupt schemes in the world. Though given the recent demonetisation effort, one must add the biggest daddy of all corrupt—the Indian tax administration—to the list.

Study after PDS study has proven Rajiv Gandhi right in his (informed) 1985 conjecture that no more than 15% of PDS food distribution reaches the poor. What is not well-recognised, especially by the persistent PDS advocates, is that only 50 % of food procured and stored by the government reaches anybody, rich or poor. Where does this 50% go? Towards the generation of black income for corrupt government officials, liquor manufacturers, food mills, etc. Ditto with the NREGA programme where jobs (and income) are allocated to ghost workers and panchayat leaders. Together, the black income generated by these two programmes is more than 1% of GDP, or Rs 175,000 crore.

Helped by technology, and Aadhaar (Supreme Court, please note), the Direct Benefit Transfer (DBT) scheme has gathered considerable momentum over the last few years. A logical expansion of DBT is the policy of Universal Basic Income (UBI), i.e., a guaranteed minimum income to all (population, adult, worker, or variant thereof). Chief economic adviser Arvind Subramaniam has stated that the new Economic Survey will contain a large section on UBI. For those interested in efficient redistribution of income, this news is extremely welcome.

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But should income transfers be universal, i.e., to every individual in the economy, or should they be targeted to specific individuals? And should government still pursue schemes like PDS and NREGA, or should such wasteful and corrupt government schemes be scrapped so that deserving individuals can get more? These two questions will hopefully be addressed in the Economic Survey.

In the meantime, some preliminary calculations to aid our thinking, and formulation, of a UBI policy. The accompanying table contains some basic data for the Indian economy for FY17. If the assumption is made that the distribution of consumption has not changed since FY12 (the real distribution did not change between 1983 and FY12; so, this is an eminently reasonable assumption), then some reasonable calculations can be made about the magnitude, and efficacy, of income transfer policy.

For FY12, data are from the NSS survey. For FY17, approximate (and lower bound) consumption data are obtained from wage data for ploughman and carpenters. The rate of growth in these wages of the poor and semi-skilled indicate an increase of 58% and 69%, respectively, over the last five years. The lower 58% growth is taken as the mean growth in expenditure for all. Consumer prices rose by 40% between FY12 and FY17; this implies that the Tendulkar poverty level in FY17 is no more than 9% of the population.

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This background information for India, circa FY17, yields important policy conclusions. The defining line for the absolute poor should not be absolute—it should increase with the level of per capita income, and should include the lower middle-class as well. The Tendulkar definition of poverty is now obsolete and captures too few of those deserving income transfers.

A poverty line some 22% higher (R1,525 per person per month) than the equivalent Tendulkar poverty line of R1,250 for FY17 yields a national poverty rate of 20%. The average poverty gap with the higher poverty line is approximately R300 per poor person per month. The poverty gap is defined as the difference between the average consumption level of the poor and the relevant poverty line. To reduce this new absolute poverty level (20% of population or 265 million) to zero, the government needs to transfer, on an annual basis, R1 lakh crore. This is only 0.7% of GDP. At present, via PDS and NREGA, the government spends R1.75 lakh crore (R1.35 lakh crore on PDS and R0.4 lakh crore on NREGA).

So, here is an efficient way for the government to eliminate poverty on an ongoing basis, and to help the lower middle-class as well, say 50% of the population. The demonetisation policy will allow increased personal income tax collections, possibly around R1 lakh crore to R1.5 lakh crore a year. Thus, R3 lakh crore are available with the government for redistribution if it decides to scrap PDS and NREGA (if it is serious about rooting out corruption, no better place to begin). [Income tax and data on consumption of automobiles and two-wheelers can easily help the government target the bottom 50%.]

Without any strain on the budget, the government can transfer R3 lakh crore to 265 million people, or approximately R1,000 per person per month. This will result in a 50% increase in consumption for the (median) 50th percentile consumer; and a 65% increase for the 25th percentile consumer. The PDS scheme, at best, transfers R160 per month to each person, rich or poor, lucky enough to receive, the transfer (a subsidy of R20 for each kilogram of PDS food consumed).

The political Opposition is demanding that the Budget be postponed because there are elections in five states in February and March. Even though there is a 2012 precedent, this demand seems most illogical. However, it is not an absurd political demand. Perhaps, the Opposition has broadly done the above calculations and believes that it is likely that a targeted basic income transfer scheme is in the offing. If such a policy is announced, it will be an economic and political master-stroke. Which is why the Opposition will go to extreme lengths to prevail. Unfortunately for them, they don’t have logic, law, or the numbers in Parliament to prevail.

The author is contributing editor, The Financial Express, and senior

India analyst at Observatory Group, a New York-based macro policy advisory group. Views are personal

Twitter: @surjitbhalla

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