Unaffordable welfarism

Congress' NYAY can be a fiscal killer

Congress President Rahul Gandhi has come up with the latest instalment of welfarism with the promise of depositing Rs 6,000 per month in the accounts of 20 per cent of the poorest households in the country. The targeted beneficiaries of the proposed Nyuntam Aay Yojana (NYAY) will be 250 million individuals, or roughly 50 million families. The proposed scheme is significantly different from the party’s earlier plan of topping up the gap between a poor household’s income to bring it to Rs 12,000. Instead of a top-up plan, the fresh proposal is a flat allowance of Rs 72,000 a year if a family’s income is below Rs 12,000. The broad assumption is that even the poorest families earn roughly Rs 6,000 per month; so by providing another Rs 6,000 in the form of government support, such families will be brought up to an income level that alleviates poverty. It is hardly surprising that the Congress’s chief political opponent — the ruling Bharatiya Janata Party (BJP) — has sought to rubbish the NYAY scheme. Regardless of the political arguments, the fact is that the NYAY is a very poor policy prescription. 

To begin with, the logic of choosing 20 per cent of the poorest families may be faulty since it is clearly not based on the national poverty line. India’s own poverty level was 21.9 per cent of the population in 2011, which means it should be under 15 per cent today. The cut-off is way too high and there will be much more than 20 per cent of families below that line, creating selection problems. Second, it has been hinted that this payout will be in substitution for some existing schemes, but this is a non-starter, as it will create a lot of dissonance and protest because the beneficiaries will not completely overlap for different schemes, and there will be losers. This will be true of the scheme per se. An artificial cut-off is problematic, given that very little separates those under it and those unfortunate enough to fall just above that. For instance, someone who earns Rs 11,000 will get Rs 6,000 but someone who earns Rs 12,000 will get nothing. This leaves immense scope for social strife among those who lose out. Another headache will be the identification of the beneficiaries because there is no foolproof method. 

Moreover, there is no differentiation for variations in family size, and between urban and rural households even though the cost of living is very different. Lastly, there is the question of fiscal affordability. The Congress claims that the NYAY will cost 1.2 per cent of gross domestic product (GDP). But this calculation seems over-optimistic. On current GDP, the bill will be close to 2 per cent of GDP. Three years down the line, with economic growth, it will be 1.5 per cent of expanded GDP. But even at 1.2 per cent of additional spending, the NYAY will be a fiscal killer. 

All such proposals flow from the basic notion of a uniform basic income (UBI), which has simplicity as an advantage but is essentially unaffordable because — no matter what armchair economists may say — in the real world no government can withdraw existing benefits. To keep the costs down, the simple UBI gets distorted with selection criteria, but these, in turn, create identification problems that have no easy solutions and, therefore, lead to messy execution.