The questionable rationale for govt schemes

The Government of India (GoI) runs a very large number of schemes. Consider some examples: Sahaj Bijli Har Ghar Yojana, PM Fasal Bima Yojana, Emergency Credit-linked Guarantee Scheme, PM Garib Kalyan Rozgar Yojana, Sovereign Gold Bond Scheme, PM Street Vendor’s AtmaNirbhar Nidhi, Kisan Credit Cards, PM Matsya Sampada Yojana, and Deen Dayal Upadhyaya Grameen Kaushalya Yojana. This is only a subset from a very long list of schemes. 

Broadly speaking, the various schemes listed above are ways to intervene in the markets. But the economic rationale is not always clear. Let us examine the whole issue more closely. 

Market mechanism is a powerful and a wonderful mechanism for allocation of resources. However, it does not work in a vacuum; it operates within a legal, regulatory and institutional framework. In case, this framework is not appropriate, then markets can malfunction. So, there is a need to do something. However, there is a need for a change at the level of the legal, institutional and regulatory framework. There is, except in some extraordinary circumstances and for short periods, hardly any need for the so-called special schemes. 

Consider an example. If home prices are high and not affordable by many people despite the slowdown in the real estate sector in the last seven-eight years, the government can run a scheme like the Pradhan Mantri Awas Yojana (PMAY), which is what the GoI actually does. Alternatively, the government can introspect and reconsider the policy framework within which the housing market functions. Now there are, broadly speaking, two basic reasons why home prices are high in India. First, we still have variants of the licence-permit-quota raj in the real estate sector (this kind of a raj was abolished in 1991 in a few sectors only). Second, we have had some variant of what is now familiar as the Land Acquisition Act, 2013. It is at these two levels that we need a basic change. PMAY will not carry us far, even if we leave aside the issue of the opportunity cost of the subsidy in one form or another under the scheme. 

It is true that even with an appropriate legal, regulatory and institutional framework, there can be a market failure. There can be mis-pricing and misallocation of resources. There can be now a case for government intervention. However, often a rule-based tax-subsidy policy is a good way of intervention. Sometimes an awareness campaign can be used so that people are nudged towards making the right choices. So, again it is not clear if we need government schemes of the kind listed above.

It is true that we do have different tax-subsidy rates for different goods and services. However, such rates in India are decided primarily on the basis of whether a good or service is a necessity or a luxury or something in between. The rates are often not determined on the basis of where we have a possible market failure in ensuring correct pricing. We need a basic change here. 

The issue is, of course, not just about efficient allocation of resources but also one of poverty and economic inequality. However, we do not need special schemes like low charges for an essential commodity like water, or even a separate scheme like the Jal Jeevan Mission. Instead, we need to raise the tax-GDP ratio. Then, the government can provide more income support, and it can also spend more on infrastructure, which includes things like adequate supply of (clean and running) water.

 At present, the tax-GDP ratio is quite low and this is not entirely due to the under-development of the Indian economy. It is low also because the GoI does not spend enough money and effort on raising the tax-GDP ratio. On the one hand, some tax laws are still unreasonable and, on the other hand, we have too many tax exemptions and some taxes are not imposed at all!

In all fairness, it should be mentioned that it is not the case that government schemes are omnipresent in all economic spheres. In dealing with macroeconomic and financial instability, we have institutions like the Reserve Bank of India and policies like the Keynesian fiscal policy. The policy and institutional framework is by and large general; the public authorities in India do not routinely run “special” government schemes for maintaining macroeconomic and financial stability. However, when we come to areas outside of macroeconomics, conditions are, as we have seen, very different in India.

It is important to shift, in a phased manner, to a good and general policy framework from a situation of a plethora of schemes. This shift will help in achieving a high long-term rate of growth of GDP.

The writer is visiting faculty, Indian Statistical Institute, Delhi Centre