Rahul Gandhi’s Minimum Income Scheme For Poor Doesn’t Have The Math Rigour To Make It Real

There is little doubt that Rahul Gandhi’s promise yesterday (28 January) to give the poor a minimum basic income if his party comes to power has been prompted by the possibility that the National Democratic Alliance (NDA) government, in its last budget to be presented on 1 February, may announce some such scheme. The announcement is intended to be pre-emptive strike.

You can also read this article in Hindi- राहुल गांधी की न्यूनतम आय योजना का साथ नहीं दे सकेगा वित्तीय गणित

Rahul is quoted as saying: “The Congress has decided to take a historic decision... to give a minimum income guarantee. This means, each poor person in India will have minimum income. This means there will be no hungry, poor people in India.”

This promise, made at a rally in Madhya Pradesh, is precisely the kind of empty rhetoric politicians love to indulge in before any election. No details are needed. The details have been promised in a manifesto to be unveiled later, when no one may notice what it says about how this largesse will be funded.

Former finance minister P Chidambaram, who ought to know his financial onions, having fudged budgets for long, had little to add by way of clarity, except to say that this guaranteed income will be targeted. It is not for everyone. The Congress scheme is thus well short of a universal basic income that former chief economic advisor Arvind Subramanian talked about in the 2017 Economic Survey.

In an interview to CNBC TV-18, Chidambaram was vague on the details and dealt with only hypothetical numbers. “Let’s assume that 20 per cent of India is very poor, and we must find the way in which (these) 20 per cent families are assured an annual income at a minimum level…where they will have enough food, clothes, roof over their head, (and) can send their children to school and access healthcare…that’s the absolute minimum in a civilised society.”

The math can work out if the government is willing to tweak its other subsidy schemes, and tweak the Mahatma Gandhi National Rural Employment Guarantee Act MGNREGA) to fund minimum incomes for the poor.

There are questions that need answering before we can be certain that the income scheme will be well funded.

First, who is eligible? We first need to find a way to target the poor. Those with BPL (below poverty line) cards would be obvious targets, and their numbers exceeded 276 million in 2011, according to the World Bank. In a revised methodology, this number came down to 172 million in 2015.

If Chidambaram believes that 20 per cent of India is poor, it means around five crore households – approximately 25 crore individuals in all. The Suresh Tendulkar poverty line estimated that that to step out of poverty and sustain a reasonable life, the minimum needed was Rs 7,620 per person per annum. Since this level was decided many years ago, let’s take that as Rs 10,000 per head per annum. For 25 crore people (five crore households), the total cost of the scheme will be Rs 2.5 lakh crore annually. At 2018-19’s estimated gross domestic product (GDP) figure (at current prices) of Rs 188 lakh crore, the money would amount to just over 1.3 per cent of GDP. It’s not doable without busting the fisc, which Chidambaram has promised to honour.

Second, the timeframe. The figure of Rs 2.5 lakh crore is not doable in year one, but if one extends the scheme in stages over five years – with one crore households targeted each year – the GDP would be sufficiently large to pay for all five crore households by 2024. At 10 per cent nominal growth annually, India’s GDP would be around Rs 300 lakh crore in 2024. It can handle a dole of Rs 2.5 lakh crore by then – assuming the minimum amount to be paid does not change too much in money terms. In other words, you can pay people less in real terms, and manage to dole out the minimum income, but effectively you are not giving what was promised. With inflation adjustment, the minimum income needed may rise in the proportion as nominal GDP. So, again, it would be tough to finance.

Third, will other subsidy bills be pared? The current food and fertiliser subsidy bills add up to over Rs 2.4 lakh crore. Adding interest rate subventions for agriculture (but excluding petro-product subsidies), the bill exceeds Rs 2.5 lakh crore, which is fairly close to what is required for financing the income guarantee scheme.

However, if this money is used to pay incomes to the poor instead of subsiding food and fertiliser prices, it would mean dismantling the very same things that were touted as big achievements of the previous United Progressive Alliance (UPA) government – the Right to Food Act, higher minimum support prices and cheaper farm inputs. These subsidies may not be easy to dismantle, since the targeted beneficiaries are different. While food price subsidies benefit the urban poor, the income guarantees will mostly be targeted at the rural poor. The urban middle classes won’t benefit from the income scheme while the resultant rise in food prices will burn a hole in their pockets. Let us be clear: there will be huge resistance to withdrawing these subsidies in urban areas, unless they too get the benefits of income guarantees.

One source of additional resources could be the abandonment of MGNREGA in favour of income guarantees. Rs 50,000 crore could come from the resultant saving. But this means dismantling yet another achievement of the UPA regime, and an admission of partial defeat. A UPA-3 cannot claim that food security and MGNREGA were the prime achievements of its previous government if it dismantles them in 2019.

The real problem with the Rahul Gandhi proposal is not that income guarantees will ultimately be unaffordable, but that it cannot be financed if some of his other promises are also kept.

For example, Rahul Gandhi has been demanding a central farm loan waiver scheme, promising sleepless nights to Narendra Modi if he doesn’t announce one. Adjusting for the inflation since 2008, when the last central loan waiver of Rs 60,000 crore plus was announced, a waiver of the same magnitude would easily cost Rs 1.5 lakh crore. This will wipe out any possibility of launching an income guarantee scheme for the poor.

Then there are unrealistic political promises to be kept. For example, Chidambaram claimed some time ago, when oil was on the boil, that petrol prices can be cut by Rs 25 a litre. The exchequer loses Rs 13,000 crore for every Re 1 cut in taxes, and if prices have to be cut by Rs 25 a litre, the cost to the exchequer (including the costs to be absorbed by the oil companies) would be over Rs 3 lakh crore. Enough to wipe out any possibility of launching any scheme to distribute incomes to the poor. Even if the price cut is kept restricted to petrol, and the cut on diesel is relatively small, the exchequer will take a hit of at least Rs 1.5 lakh crore. Again, fiscally irresponsible.

Narendra Modi has been accused of making promises that he could not easily keep. The malaise is even more true of the Congress, it seems, in a desperate bid to regain power at the Centre.