The Congress will succeed in political hara kiri—it would upset, and alienate, almost half the population, from the 21st to 65th percentile.
I will show how the minimum income guarantee scheme involves some very confused thinking, and knowledge, about the Indian record of poverty, and its alleviation.
It is now official. After the release of the manifesto, the Congress believes that its suggested offering of the Nyuntam Aay Yojana (NYAY) for poverty elimination is a gamechanger, a political winner, and a winner of advanced thinking on the subject. To bolster this claim, and as quoted in Business Standard “Consulted big economists, including Rajan: Rahul”, Congress president Rahul Gandhi said that the Congress had consulted “all big economists, without telling anyone, without giving any speeches”. “We were engaged in this work for six months. Take the list of all big economists of the world, we consulted them…Raghuram Rajan..one by one. The first thing we came to know that there should be a minimum income line. We calculated and the result was that the minimum income line should be `12,000 per month (emphasis added).”
Further, if you look at the hoopla surrounding this master design (names of some leading poverty economists of the world—from Banerjee to Rajan to Picketty—were invoked to show thinking behind the plan), one would infer that this was a major development in thinking. I will show how the minimum income guarantee scheme involves some very confused thinking, and knowledge, about the Indian record of poverty, and its alleviation.
I find it most unusual (but not surprising) for the Congress to not claim credit for poverty alleviation (and near elimination according to the existing, too-low official poverty line). For purposes of discussion, let us analyse India’s poverty alleviation record till 2011-12 (and 2013-14)—the time-period when UPA was in power. Since this is a record going back the last 70 years, let us give most of the credit (and blame) to the Congress party for all the economic developments that have taken place in India. At the time Indira Gandhi coined the slogan garibi hatao in 1971, India was a very, very poor country, with almost 80%-plus of the population absolutely poor, according to the official Tendulkar poverty line. According to this poverty line—approximately a consumption level of `850 per person per month (pppm)— and the same as the World Bank poverty line of PPP$1.9 per person per day, poverty in India was only 12% of the population in 2011-12. This is amongst the best poverty alleviation efforts in the world, and comparable to China which had reduced its absolute poverty rate to 9% over the same-period. You would think that the Congress would be proudly proclaiming from the roof-tops that it had provided a spectacular reduction in poverty. But you would be wrong—and I would not be ashamed.
What is the poverty line in NYAY, eight years after 2011-12? The same in real terms as in 2004-5 and 2011-12. It is `1,400 per person, or `6,000 per month for a family of 4.3 persons. The approximate absolute poverty level in India in 2019-20 that the Congress wants to eliminate—about 3% of the population. The NYAY programme is garibi bachao, not garibi hatao.
One of the major consultants to the Congress master plan of poverty alleviation is Thomas Piketty. His analysis (along with co-author Lucas Chancel) claimed, in the latter half of 2017, that Indian income inequality had worsened to beyond Brazilian and South African depths, i.e., was one of the worst in the world—and had deteriorated the most during the UPA period FY05 to FY14. Indeed, their analysis stops around 2015. At the time this analysis was presented, I was the only person who commented, in seminars and articles in The Financial Express, that these conclusions were very suspect. At that time, I was a newly appointed member of the Prime Minister’s Economic Advisory Council. Not one Congress economist, nor one of the 108 economists busy writing letters and advising the Congress on NYAY, dared to question Piketty. I had said at that time, as I have repeated often times over the last 20 years, India’s record of poverty alleviation is among the best. And that income inequality worse than Brazil’s was a figment of fertile imaginations. Please recognise that you cannot have both inequality zooming and poverty falling precipitously.
Back to the ill-conceived NYAY. It will retain all existing “merit” subsidies. Food is a very large component of the poor woman’s budget (close to 60%). And India has been operating corrupt schemes to “deliver” food to the poor. The corrupt PDS system of foodgrain distribution is supported by a very corrupt MSP system. In the manifesto, the Congress claims that “in the last five years, under the BJP government, the agriculture sector has been driven into deep crisis. Adequate MSP was denied for 4 years” (p.16). In other words—support more PDS, higher MSPs for rich farmers, and NYAY.
Are there better alternatives available? In early January, 2018, Karan Bhasin and I presented a detailed paper on a targeted basic income (TBI) for India. A scheme that was not very costly (only `2.7 trillion or about 1.6 % of FY20 GDP), had the World Bank middle-income poverty line of PPP$3.1 as its basis, and could easily be financed by phasing out corrupt PDS and MSP regimes. The paper is titled Towards a Targeted Basic Income Policy for India and can be accessed at tinyurl.com/yxuxxldh. There are moral, logical, and economic reasons for helping the bottom third of the population achieving a much higher standard of living. This is very doable, and can easily be financed. Note, a TBI is identical to the much-applauded negative income tax scheme—the only difference being that you need not be in the tax net to receive income support.
Instead of a workable targeted income support system, the confused Congress has offered a poverty alleviation income support scheme—but one without increasing the poverty line! This scheme, as Gandhi’s quote mentioned here earlier indicates, is profound, and unique, and never been tried before. “To ensure a life of dignity to all Indians”, the Congress proposes to transfer `6,000 a month to the bottom 20% of households.
A major aspect of this programme is it has been tried before. In 1795, and it failed miserably. As I state in The New Wealth of Nations, (p.151) “The justices of Berkshire, meeting at the Pelikan Inn, in Speenhamland, near Newbury, on May 6, 1795, in a time of great distress, decided that subsidies in aid of wages should be granted in accordance with a scale dependent upon the price of bread, so that a minimum income should be assured to the poor irrespective of their earnings. (author’s emphasis in italics), (Karl Polanyi, The Great Transformation, 1944)”. This guarantee of a minimum income proved the undoing of the system. Each person was guaranteed the same level of income; each person ended up with the same level of income, whether they worked or not. Surprise: Nobody worked, and the scheme failed.
The NYAY scheme (sometimes, a scam is a scheme) is additionally politically flawed. It is bound to fail. Worse, because of its format, it is a self-designed political disaster. (As someone said, if you are going to commit suicide, do it at the beginning!) You decide for yourself from the following simple extrapolation of the FY12 NSSO consumption distribution to FY20.
The following per month family income levels are obtained, after the `6,000 NYAY transfer, for the following percentiles in the distribution (1, 5, 15, 20): `11,620, `14,860, `16,600, `16,850. So far so good—everybody in the bottom 20% has `6,000 extra consumption (income). Now, I want to report the 30th, 40th , 50th and 65th percentile levels of income: `12160, `13,580, `15,070, `14,970, and `16,830. Note that the Congress will succeed in political hara kiri—it would upset, and alienate, almost half the population, the 21st to 65th percentile.
In order to benefit the poorest 20%. Rahul Gandhi and his world-renowned team of advisers are right—NYAY is unique, never been tried. The reason—no one has (stupidly) dared to adopt it!
via NYAY equals garibi bachao, not garibi hatao – The Financial Express