The Minimum Income Scheme in Congress Manifesto - Critical Analysis - Seeker's Thoughts

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Friday, 5 April 2019

The Minimum Income Scheme in Congress Manifesto - Critical Analysis

On March 25, 2019 The Indian National Congress announced the Nyuntam Aay Yojana or NYAY a minimum income scheme in its election manifesto for the Lok Sabha Elections 2019.

Who will be benefitted with Minimum Income Scheme?

The Nyay scheme is targeted towards 5 crore families who are the poorest 20% in India. Nyay scheme guarantees each family's cash transfer of Rs 72,000 a year and as far as possible the money will be transferred to a bank account of a woman in the family. There will be a design phase of 3 months, followed by pilot and testing phases 6-9 months before the rollout of the plan.


How will the Minimum Income Scheme (NYAY) be implemented?


The scheme will be implemented in phase and the estimated cost will be less than 1% of the GDP in the first year, and less 2% of the GDP in the second year and thereafter.



As the nominal GDP grows and the families move out of poverty, the cost will decline as a proportion of the GDP.


If brought to power, congress announced the appointment of an independent panel of economists, social scientists and statisticians to oversee the design, testing, rollout and implementation of the programme. The programme will move from one stage to the other only after a go-ahead from the panel. The Nyay scheme would be a joint scheme of the central and state governments.


And the scheme will be funded through new revenue and rationalisation of expenditure current merit subsidy schemes that are intended to achieve specific objective will be continued.


Concerns about the NYAY scheme 


If the scheme would launch, NYAY will be by far the biggest basic income scheme applied anywhere in the world. However there are valid concerns on the viability of the scheme and the impact it is likely to have on the India economy.


Does free money make people lazy?


The concern comes from the fact that the government will be distributing free money under the NYAY scheme with no conditions attached. If one looks at the PM- KISAN Samman Nidhi Scheme, it is already doing the same though to family which own agriculture land of less than two hectares. 
Of course the amount in case of PM-KISAN is much lower at RS, 2,000 per quarter against the RS- 6,000 per month promised under NYAY.
But ultimately free money is free money, irrespective of whether it is being given by the current government or proposed by an opposition party.

Also, anyone who looks at basic income as something for nothing should have issue with other forms of the same phenomenon.


Guy standing, an economist at the school of the oriental and African studies, university of London, writes about this in basic income: and how we can make it happen.
Anyone opposing basic income on this ground (free money) should also oppose all wealth inheritance and all other forms of income that are not derived from productive activity. 

They should oppose all the selective tax breaks which mostly benefit the affluent who have done nothing to ‘earn’ them.




It will increase more inflation

 As if the incomes of a large section of population will go up suddenly. The higher income will chase the same set of goods and services available in the market and will ultimately lead to higher prices, in theory, this makes immense sense. 

When people suggest that basic income schemes will lead to inflation, they tend to believe that the supply of goods and services will continue to remain the same, despite an increase in income.

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For instance – the basic income pilot study carried out in Madhya Pradesh between the years of 2009-13. As standing report points out: villagers increased purchasing power led to local farmers to plant more rice and wheat, use more fertilizer and cultivate more of their land.
 Their earning went up, while the unit price of food went down. Infact, a similar thing happened with clothes. As people earned more, the demand for better clothes went up.

Women in the village saw this as an entrepreneurial opportunity. They brought sewing machines and material to sew new clothes. A new market was created where none existed.  


Evidence from many such studies carried out in Africa seems to suggest the same. As a UNICEF document titled from Evidence to Action: the story of cash transfers and impact evaluation in sub-Saharan Africa points out : with the exception of temporary price increase occurring during payment periods, there is no evidence that the cash transfers have led to inflation.
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Demonetisation destroyed a large part of the informal economy in India


There are a couple of other things need to be stated. Due to demonetisation large part of the informal economy has been destroyed in India, rendering many Indian jobless. Of course, there is also case of India’s demographic dividend or the fact 10-12 million Indian youth are entering the workforce every year and for whom enough jobs are not being created.


There is also needs to take into account the fact that NYAY, if ever implemented, will be the largest basic income scheme in the world. Hence, it will be important to implement it gradually across the length and breadth of India, to rein in any danger if inflation.


While NYAY is not universal basic income in the strictest sense of the term, the Economic Survey 2016-17 essentially states that guiding principle for universal basic income is gradualism. The congress has talked about phased implementation.


Would people stop working?


The logic here is that free money from the government will make people lazy and third will lead to them dropping out of the labour force. Let’s look at this in the context of NYAY- an amount of 6,000 rupees per month per household has been promised.


And average Indian household has five individual, so this works out t0 1,200 per month per individual, on an average. People who feel that individual will opt out of the workforce because the unit members are earning 1,200 rupees per month extra; have a very low opinion of the ambitions of Indians.


 Also, if they stop working, their situation may continue to be the same as it was earlier, and the entire benefit of the extra money will be nullified. This concern largely comes from the wrong belief of the rich and the middle class that the poor are poor because they are lazy.

In the Indian case, this concern comes from a patriarchal view of the society. Arvind Subramanian writes in of counsel: The challenges of the modi-jaitley economy, “if men control the wallet, as they often do, cash transfers would be imprudently use – and used more in line with the preferences of adult males than the real needs of the family- which would make women and children worse off.


As the Economic Survey 2016-17 points out: one can define consumption on alcohol, tobacco and paan as consumption on temptation goods. 
The main finding is that these goods from smaller share of over budget/consumption as overall consumption rise.
 This is an indication that an increase in income from Universal Basic Income alone will not necessarily lead to an increase in temptation goods consumption.
In fact, the survey more specially points out: in fact first place, there has been no statistical evidence of any increase in economic “bads” such as consumption of alcohol and tobacco.



 On the contrary, in Bhil tribal village, there was actually a drop in consumption of alcohol since that is where people had liquidity to sue for agriculture inputs and therefore one saw an increase in agricultural productivity and own cultivation effect.


Does it will lead to higher taxes?
In Fact, this is the most genuine concern. NYAY is expected to cost 3.6 rupees trillion or around 1.7 of the forecasted gross domestic product (GDP) for 2019-20. Calculation shows that it will not cross 2% of the GDP; it will be 1.8% of the GDP at any given point of time.



This is a lot of money, something which can easily derail the scheme as well as government finances. In economics, there is no free lunch; hence, the question is where this money is going to come from.


The congress has hinted at doing away with some subsidies, sharing the cost with the state governments and raising new taxes. The total food, fertilizer and oil subsidies in 2019-20 are expected to be at 2, 97 rupees trillion, or 1, 41% of the GDP.
The point is that if the government is carrying out an income transfer to citizens, are the subsidies and many other government programmes really required?


Evidence from different parts of the world which doesn’t suggest anything like this

As an August 2018 research paper titled Universal Basic Income: An Effective Policy for Poverty Reduction? Published by the centre for social justice, point out: the extent to which UBI disincentives work is dependent on its generosity. 

The Alaska permanent Fund pays out 2,000 dollars annually, and analysis has shown that it has little to no effect on the supply of labour. By that logic 1,200 rupees individual per month is not high at all.


In fact, the Canadian Mincome experiment carried out in the 1970s, had some very interesting evidence to offer on this front. As standing points out: “in the Canadian mincome experiment, ‘mothers with newborn stopped working because they wanted to stay at home longer with their babies, and teenagers worked less because they weren’t under much pressure to support their families, which resulted in more teenagers graduating. 
This is the kind of withdrawal from the labour force, which is good in the long term



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