Despite Aadhaar & DBT, bad scheme-design ensures half the subsidies go to non-poor; raise tax slabs to help middle class
If Prime Minister Narendra Modi wants to present a pro-poor and a pro-farmer budget later today, he would do well to allocate as much as possible for a quasi Universal Basic Income (UBI) for the country’s farmers and, if possible, to the urban poor. While economists and fiscal purists will cavil at the costs, the choice before finance minister Piyush Goyal is whether he wants to continue with the UPA-era policies of subsidising the non-poor and the design flaws that ensured large-scale waste, supposedly in the name of the middle classes. In the 2016-17 Economic Survey, chief economic advisor Arvind Subramanian pointed out that, in the case of food subsidies, for instance, the bottom 40% of the population got just 28% of the total spending and, in the case of NREGA, this was higher but not much better at 37%.
While some part of this will no doubt be addressed by greater use of Aadhaar and Direct Benefits Transfer (DBT)—amazingly, just Rs20,170 crore of rations have been given using Aadhaar authentication so far this year—there is a much larger design flaw here, one that was aggravated by the UPA. Its National Food Security Act (NFSA), for instance, gave an 80-85% subsidy on purchase of wheat and rice to two-thirds of the country’s population; no one can possibly argue that two-thirds of the country is either poor or near-poor. Nor was the amount high enough to really matter. Since the cost difference between ration- and free-market wheat and rice is around Rs20-25 per kg at most, this meant that each family got Rs100-125 per month as a subsidy; of course, when you multiply this by 80 crore persons, the amounts become really large. And then there is the inefficiency. Pay Rs25 per kg for each family’s 5 kg/person/month, and you’re talking of a cost of Rs120,000 crore instead of the Rs170,000 crore that is the budget target for the year. The difference is justified by the need for FCI to procure wheat and rice, but if this benefits just 5-10% of the farmers, is it justifiable?
And while Modi will want to help the middle classes, this is better done by raising the tax-exemption limit from the Rs2.5 lakh that it is today. In a country, whose per capita income is around Rs1.4 lakh, this means that families who earn less than the average are being taxed. If the government was to keep the relative exemption limit the same as in, say, 2012-13—at that time, the per capita income was Rs79,573—the minimum tax slab should have been Rs3.5 lakh in FY19 itself. If the government was to double the exemption limit, to Rs5 lakh, it would go down very well with the middle classes—according to PRICE’s income-survey, this would take 50-60 million households outside the purview of the taxman—and it may not affect the exchequer as much. In FY17, for instance, while 65% of the income tax returns were filed by those who earned less than Rs5 lakh, they accounted for just 38% of the income declared; in terms of actual tax collections, it will be much lower since the tax rate is much lower. Indeed, just a few weeks ago, the GST Council doubled the revenue threshold for firms to file GST to Rs40 lakh a year for precisely the same reason, to keep millions of firms outside the purview of the taxman; millions of firms who, in any case, don’t contribute as much to tax collections. Should Modi act on them, both UBI and raising the tax threshold are moves that will be politically popular and will also make economic sense.