A quasi-universal transfer, combined with a small increase in taxes on luxury items consumed or used by the wealthy, seems to be the best bet.
By Guy Standing & Renana Jhabvala
India is facing three crises at once—medical, economic and distributional. Unless wise and courageous policies are implemented, there will be a fourth—social violence. The spreading sickness and deaths from the coronavirus is obviously the immediate threat. India has done better than many countries so far, but the upward trend is ominous.
The second crisis is linked. The economic slowdown began before the pandemic struck, as it did in the rest of the world. One can make a good case that a recession was waiting to happen, because the global rentier capitalism had generated a bubble economy in which a plutocracy was taking more and more of the income, and finance was indulging in speculative rent-seeking.
India is like other countries, in that the share of income going to people who rely solely on their labour was declining and uncertain. This meant that with even a minor shock many would be tipped from debt into destitution, bankruptcy and impoverishment. What has happened in recent months is a major shock. The combination of economic slowdown and the lockdown has produced easily the biggest demand shock that the Indian and world economy has experienced in the globalisation era.
All levels of society, except the richest 20%, have experienced a decline in incomes, and an anticipated decline in the months and even years ahead. This is bound to translate into a decline in the aggregate demand for goods and services. Millions are unable to maintain living standards while the wealthy try to increase their saving rate as a precautionary reaction.
Although there is also a supply shock, it is the demand shock that is more threatening. It will have a negative multiplier effect. Many millions have less money with which to spend and millions of others will choose to spend less, leading to others being dragged into unsustainable debt.
This is accentuated by the 40 million or so people returning to their villages, no longer earning money to remit to families dependent on them, and instead looking to their families for support. Many cannot obtain it. The situation is made more fragile because the coronavirus will stay with us for at least the next year and could even spiral out of control, with protective and preventive measures becoming harder to maintain, especially in conditions of an economic slowdown.
This should lead to one vital policy conclusion. Macro-economic policy must boost aggregate demand and do so in a way that will reduce the probability that the coronavirus will devastate communities. The government is now relying on an expansion of MNREGA in order to give employment to the returning migrants. MNREGA involves a number of convoluted procedures and much administration. Additionally, working at MNREGA work sites involves physical contact and close-proximity, thereby increasing the risk of spreading the disease in the rural areas. It would be far more fruitful and safer to transfer cash to the workers listed under MNREGA, especially as the government already has their account details.
Some economists call for an expansion of free food grains through the Public Distribution System. That was a necessary solution through the lockdown, but it is unlikely that it will kick start demand. Abhijit Banerjee advocates a basic income for the bottom 60%. Developing and applying the necessary means tests to identify that 60% would be horrendously complex, and would be arbitrary and inefficient even in the most propitious of times. By the nature of the unprecedented social and economic crisis, millions will face fluctuating incomes, one week putting them above some arbitrary poverty line, and in the next, below it.
Far better would be a quasi-universal transfer, paid to all usual residents of communities and returning migrants, combined with a small increase in taxes on luxury items consumed or used by the wealthy. Providing everybody with modest cash resources will boost demand for basic local goods and services, which is precisely what the Indian economy needs.
Perhaps the biggest challenge is the last mile connectivity, distributing cash through financial institutions to everyone. With the opening of Jan Dhan accounts, most people are now part of the formal financial systems, and it is only after the system begins to pump out cash will the financial system respond to the need to reach the last mile. For those who are excluded from the Jan Dhan system, it is necessary to explore the tremendous potential that the India Post Payments Bank system has in order to make the last mile delivery efficient and people-friendly.
There is something else that is vital to understand. For society to have the required resilience to survive this crisis and to recover from it, everybody must have the capacity to try to respond responsibly. If some groups are left vulnerable and deprived, all groups will be vulnerable and deprived. A basic income would give meaning to the claim that ‘we are all in this together’.
Co-authored with Sarath Davala, Vice President, Basic Income Earth Network, and Coordinator of the Indian Network for Basic Income.
Standing is Professorial Research Associate, SOAS, University of London & Jhabvala is Chair, SEWA Bharat. Views are personal