Rahul Gandhi's electoral promise and the curse of handout politics

Just as in Feb 2006, when the Congress inaugurated the politics of entitlement with NREGS, it has now given a big push to the politics of handouts, even if that constrains the state's fiscal capacity

Whatever may be its impact on the forthcoming general elections, Congress President Rahul Gandhi’s poll promise on Monday to offer up to Rs 72,000 of annual income support to almost 50 million poor families is an inflexion point for India’s electoral politics. Make no mistake about it. Just as in February 2006, when the Congress had inaugurated the politics of entitlement with its national rural employment guarantee programme, it has now given a big push to the politics of handouts, triggering a possible chain reaction from other political parties and seriously constraining the state’s fiscal capacity.
 
There is of course a big difference between 2006 and now. Then, the Congress was in power at the Centre while launching the job guarantee scheme (Mahatma Gandhi National Rural Employment Guarantee Act). And now its promise of financial handouts to the poor has come as an instrument for wooing voters in the run-up to the general elections.

 
The job guarantee scheme was followed up with a couple of more such entitlement schemes, namely the right to food and the right to education, although their real impact — financial or otherwise — was not very significant. And now there is the promise of a cash handout to the bottom 20 per cent households, which could result in as heavy an annual financial burden on the central exchequer as Rs 3.6 trillion or about 1.9 per cent of India’s gross domestic product or GDP.
 

But just as the BJP government formed in 2014 saw no merit in rolling back those entitlement schemes and instead endorsed them with increased financial outlays, there is every likelihood that Mr Gandhi’s income support scheme, if ever implemented in any form or by anyone else, would get a thumbs up from other political parties, whether in power or not. Such is the charm and power of handout politics.

 
To be fair, the race for handout politics was started by the Bharatiya Janata Party-led government of Narendra Modi. In its Budget this year, the Modi government announced that farmers with less than two hectares of cultivable land would be entitled to an annual income support of Rs 6,000. This meant an annual financial burden of Rs 75,000 crore on the central exchequer. That promise too was to secure votes in the forthcoming elections. What the Congress has promised now is to widen the scope of such an income support scheme.

Why is this bad news for the Indian economy? You might argue that meeting the income needs of the poorest 20 per cent of the population should help address concerns over growing income inequalities. After all, the state must do something to ameliorate the problem of chronic poverty afflicting its people even after 70 years of the country gaining freedom. The simple answer to that is the problem of poverty or income inequality cannot be tackled by just handing out the dole, but by creating necessary state capacity to provide facilities in the areas of health, hygiene, education, water, housing and food.

 
That the Indian governments in the past seven decades failed to create these facilities for all is a shame. But that shame cannot be overcome by providing an income support scheme at this stage of India’s economic development for two specific reasons. One, this would constrain the state’s capacity to provide basic social welfare facilities to people. Two, it might lull the state into wrongly believing that its responsibilities would be over if it were to provide that dole.
 
Income support schemes are all right, but having them before creating the basic infrastructure facilities in the country would result in a sequencing flaw. As it happened in many developed countries, the basic ingredients of social and economic infrastructure in India too should be created before the income support schemes are introduced to address concerns of the relatively weaker sections of society.

 
There are two other adverse outcomes if the politics of handouts gains ascendancy at this stage of India’s economic development. It is a no-brainer that the pre-election promise of an income support scheme like the one announced by the Congress will improve the electoral prospects of the party. This might encourage other political parties, and indeed even the ruling BJP, to come up with something similar, but more attractive, which again will imply a bigger drain on the exchequer’s resources. If this race begins, as it well might, then India’s developmental goals would be seriously compromised, widening the government’s resources gap.

 
A bigger problem would be the state’s tendency to meet the consequent resources gap through steps that might mean a new direction to India’s taxation policy. An additional annual burden of Rs 3.6 trillion can be met only partially by paring down other subsidies that the government doles out, admittedly through schemes that are largely porous and often poorly targeted. The government’s total bill on account of explicit subsidies is about Rs 3 trillion or 1.6 per cent of GDP. Most governments in the past have been either reluctant or slow in phasing out subsidies. Even the BJP government rolled out its marginal farmers’ income support scheme without even touching any part of the fertiliser subsidy that goes out in the name of farmers. There is virtually no hope that the governments of the future would roll out the income support scheme for the poor and would phase out the existing subsidies in lieu.

 
So, where will the resources come from? Although improving tax collections through greater compliance and expanded coverage is a desirable goal, governments under pressure to meet the huge financial burden of an income support scheme could be tempted to raise tax rates in the hope of garnering more resources. The real danger here is that governments might settle for this option which is likely to be counterproductive.
 
That could be a dangerous path. If the country is pushed towards such a path, the blame for that should be shared by both the BJP and the Congress. Income support schemes need a more mature polity and a stage of economic development where the basic needs of social and economic infrastructure have already been met. India is as yet far from meeting those two conditions.