View: Congress’ NYAY scheme is neither fair nor feasible – The Economic Times

By Arvind Panagariya

Congress’ minimum income scheme, Nyuntam Aay Yojana (NYAY), raises several puzzling questions. Congress president Rahul Gandhi stated his party worked on the scheme for six months and consulted ‘all big economists’, including former RBI governor Raghuram Rajan. But, so far, none has satisfactorily answered any of these questions.

Normally, a cash transfer scheme offers identified beneficiaries a fixed amount of cash. Once beneficiaries have been identified, you transfer the stipulated sum to them. But NYAY adds a twist to this standard scheme. It additionally guarantees every family a minimum income of Rs 12,000 a month.

The first puzzle is whether the scheme would identify all those families with monthly income below Rs 12,000 and uniformly transfer Rs 6,000 a month to them. If yes, then for families with incomes exceeding Rs 6,000, the scheme would overshoot the target income. Why subject the taxpayer to this extra burden? An alternative would be that the scheme would give each identified beneficiary family the difference between Rs 12,000 and its actual income. This gives rise to the second puzzle.

Under the scenario, any future increases in income will attract equivalent reductions in transfers. So, families will have no incentive to increase their future incomes. Indeed, once included in NYAY, they would have the incentive to stop working altogether and let cash transfers ‘do the work’ to the full extent of Rs 12,000.

The third puzzle is that the scheme also fixes the proportion of beneficiary families at 20% of the total. But fixing this proportion arbitrarily conflicts with the goal of minimum income of Rs 12,000 for all families. The 2011-12 National Sample Survey Office’s (NSSO) expenditure survey gives us the latest estimates ranging from the poorest to the richest families. Assuming that the expenditure of each family grew at the same rate as nominal per-capita net national income between 2011-12 and 2018-19, we can derive expenditures of different families in 2018-19.

To the extent that expenditures of poorer households may have grown at slower pace than per-capita net national income, this procedure would only overestimate the expenditures of these families in 2018-19. Calculations show that in 2018-19, a solid 40% of rural and 10% urban families had expenditures below Rs 12,000 a month. Evidently, targeting only 20% families is inconsistent with the goal of ensuring a minimum income of Rs 12,000 for all. The net will have to be widened quite considerably.

NYAY raises two other issues. The first one concerns fairness. An income of Rs 12,000 a month translates into Rs 1,44,000 a year. Adding numerous other existing in-kind transfers such as subsidised food, house, crop insurance, education and health insurance would likely bring this annual figure to Rs 2,00,000.

In contrast, a hard-working family that earns Rs 3,00,000 must pay a tax of Rs 2,500. This tax is now covered by a tax credit, but this may change in the future. How fair is this to hard-working families? And given that taxpayers are all concentrated in urban India, would such a large redistribution scheme not open an urban-rural schism? Nearly all Indians believe in helping the destitute on the margin. But when hard-working families with relatively low-income must help foot the bill for guaranteeing almost the same living standard for 20% of all non-working families, we may be testing the limits of fairness in society.

The final issue concerns financial feasibility. Based on coverage of 20% families and Rs 6,000 a family, proponents of NYAY have placed the cost at Rs 3.6 trillion — 13% of total GoI expenditures in the 2019-20 budget. But many families currently earn less than Rs 6,000 a month, and so will require a transfer of more than Rs 6,000 to cross the threshold of Rs 12,000. Also, a lot more than 20% families will have to be covered by the scheme, thereby making NYAY’s true cost significantly higher than Rs 3.6 trillion. How are such large funds to be freed up?

It’s surprising that the economists who advised Congress haven’t come forward to answer any of these questions. Could it be that despite six months of hard work, they missed these inconsistencies in the scheme? Or, is it that NYAY was never meant to be a serious exercise and that its sole goal was to impress upon the electorate that Congress is not without an economic agenda, even if that agenda happens to have only one item on it?

Perhaps, the only silver lining to NYAY is that Congress has finally embraced cash transfers as an antipoverty instrument. This is in sharp contrast to UPA’s National Advisory Council (NAC), which insisted that all transfers had to be in kind.

The writer is professor, Columbia University, US

via View: Congress’ NYAY scheme is neither fair nor feasible – The Economic Times

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