16 April 2019 16:10:49 IST

A management and technology professional with 17 years of experience at Big-4 business consulting firms, and seven years of experience in high-technology manufacturing, Rajkamal Rao is a results-driven strategy expert. A US citizen with OCI (Overseas Citizen of India) privileges that allow him to live and work in India, he divides his time between the two countries. Rao heads Rao Advisors, a firm that counsels students aspiring to study in the United States on ways to maximise their return on investment. He lives with his wife and son in Texas. Rao has been a columnist for from the year the website was launched, in 2015, and writes regularly for BusinessLine as well. Twitter: @rajkamalrao

Why Rahul Gandhi’s income programme won’t work

As an election ploy, NYAY may win votes but can India afford the fiscal impact?

The Congress Party’s Nyay basic income programme, wherein the government would provide a no-questions-asked dividend of about ₹6,000 a month to nearly 50 million poor families, or a total of about 250 million people, is extremely ambitious. The problem is that it will likely not work, at least, not in India.

Every government programme is, at its heart, a redistribution of wealth, and can be viewed through two lenses, moral and economic. The moral argument of the Nyay proposal is compelling. India has continued to witness abject poverty for centuries, and the positive effects of globalisation have not touched that cohort of the population which Rahul Gandhi wants to help. This is the same argument behind the Modi government’s numerous anti-poverty programmes, such as the Pradhan Mantri Ujjwala Yojana, or the Pradhan Mantri Jan Dhan Yojana.

The second lens is based on economics. Does the proposal make sense? And can the country afford it?

The rationale

Even classic libertarian economists, the late Nobel Laureate Milton Freidman among them, are in favour of programmes guaranteeing a Universal Basic Income (UBI). The rationale is that people at the lowest levels of income spend, rather than save, whatever money they can get their hands on necessities — food, clothing, and housing — and this will propel the local economy and national GDP.

In 1962, Friedman supported the idea of a “negative income tax” wherein the government makes a direct transfer of cash to people. A form of this negative income tax — called the earned income tax credit — has now been part of the United States tax code since 1975. Today, a family with three children earning $54,884 not only owes nothing in taxes, but it also receives a net cash dividend of $3,106. The caveat here is that the family has to have income in the first place; so, technically, the credit is an offset against taxes paid and doesn’t qualify as a pure UBI programme.

The purest form of UBI in existence anywhere in the world is in the American state of Alaska, which earns royalty and franchise income from its huge oil reserves sufficient to finance all state expenditure without a state income tax. In addition, since 1982, all Alaskans, including children, have received an annual dividend which is not means-tested, wherein everyone, regardless of income, qualifies. In 2015, when oil prices were at global highs, the dividend totalled $2,072 per person.

Limited implementation

But although the concept of UBI has been discussed by both liberal and conservative economists, the idea has rarely left the hallways of academia. In the US, fringe politicians such as Democratic presidential candidate Andrew Yang are now promoting a proposal to give $1,000 a month to every adult, but nearly 50 per cent of the benefits would be reallocated from existing schemes.

Practical implementations of UBI are extremely few and limited to the wealthiest economies. Finland tried it but abandoned it last year. The city of Utrecht in the Netherlands has agreed to conduct an experiment. Both Germany and Switzerland defeated UBI proposals by huge margins in their respective parliaments. It is hard to imagine that India, where petty corruption is endemic, can somehow successfully launch and sustain an UBI scheme, given the enormous scale of nearly 25 crore people who will qualify as beneficiaries.

Can India afford it?

The more pressing question is if India can afford it. Estimates are that the programme will cost nearly ₹3.6 lakh crore each year, about 11 per cent of the total Union Budget. As a line-item, this would be larger than the country’s Defence budget and rank as the #1 government expenditure for eternity. Why eternity? Because once an entitlement is offered — that too, one from which the poorest 20 per cent of the nation benefit — it is almost impossible politically to withdraw it in the future. India is already facing a budget deficit of 3.4 per cent of GDP. The new programme would inflate this to 5.2 per cent of GDP, a whopping 52 per cent increase.

It is also not clear if Rahul’s programme offers a brand new tranche of benefits, in which case its massive size makes it unaffordable, or is intended to replace existing cash-transfer anti-poverty programmes, such as Fair Priced Shops and subsidies on cooking gas, kerosene, and fertilisers. If the latter, it may become more affordable but politically unpalatable. People want more of something new, not less of what they already have.

As an election year ploy, NYAY could win the Congress Party crucial votes in impoverished regions, sufficient even to turn the election. But the scheme is not intellectually serious and deserves little consideration beyond idle conversation over a cup of tea.