By Paying You ₹635 Per Month, Is The Govt. Robbing You Off Your Facilities?

Posted by Monish Borah in Business and Economy, Staff Picks
February 13, 2017

The Economic Survey 2016-17, released by the Union Finance Ministry of India has proposed a Universal Basic Income (UBI) for 75% of India’s population. This income will amount to ₹7620 per year, or ₹635 per month, which the government will deposit into people’s bank accounts directly. This plan will require the government to spend something around 4.9% of India’s Gross Domestic Product (GDP) – and this money, according to the Economic Survey, will come from abolishing all the welfare schemes and subsidies that we Indians currently get from our government, which amounts to 5.2% of the GDP.

Yes, you heard me right! The government wants to give you ₹635 per month, and in exchange, they will abolish everything including NREGA, Pradhan Mantri Gram Sadak Yojana, Pradhan Mantri Awas Yojana, National Health Mission, Swachh Bharat Abhiyan, Sarwa Siksha Abhiyan, Mid-Day Meal Scheme, LPG Subsidy, Food Subsidy, Fertilizer Subsidy and every other centrally- sponsored-scheme and sub-scheme.

Unbelievable? You better believe it!

But how could they have arrived at such a measly amount? Well, what they did is – they took the consumption level of an average person living in poverty in 2011 (according to now-defunct Tendulkar Committee Report), and then calculated the amount needed to be added so that that person crosses the poverty line threshold – then they adjusted the numbers to accommodate the inflation, in 2016-17.

There are so many problems here that I do not know where to begin.

It is very strange that when discussions on Universal Basic Income took place in the rest of the world, people called it too ‘socialistic’ a measure – but in India we have a situation where the Finance Ministry has ‘perverted’ UBI to demolish whatever elements of socialism and social welfare have remained in India.

I will be going off-topic if I start to discuss the merits of poverty lines here, but I think it should be mentioned that when the last report on poverty line was released by the Rangarajan Committee, it was criticised for keeping the poverty line very low. The Tendulkar Committee Report which came before that kept the threshold at a level even lower than the Rangarajan Committee. According to the Tendulkar Committee Report, anyone with income of more than ₹1000 per month in urban areas, or ₹816 per month in rural areas, was not poor.

Now, do the framers of the economic survey really believe that the welfare programs which they plan to abolish, will have no impact on income levels of the poor? Programs like NREGA and Pradhan Mantri Gram Sadak Yojana employ lakhs from the unorganised labour sector, for whom income from these programs is very important to make ends meet. But the impact on consumption of even basic things, like food and fuel for cooking, will be much worse. I will discuss this in detail under a different context.

The ‘Evil’ Middle Class

In the chapter on UBI, there is a lot of implied and direct ranting and raving against the middle class of India, which is apparently misappropriating a large amount of subsidies for their own benefit. This, in turn, has been cited as one of the reasons why subsidies and welfare schemes should be done away with, in favour of a Universal Basic Income.

But how much of the subsidies is the middle class appropriating for itself? According to its own admission, the Economic Survey says it amounts to only 1.05% of India’s GDP. On the other hand, the total value of all subsidies and centrally-sponsored welfare schemes is 5.2% of the GDP.

It is important to note that the subsidies valued at 1.05% of the GDP, which, according to the Economic Survey, is going to the undeserving people of the middle class, also includes favourable interest rates for farmers, long distance non-AC travelling by trains, fertilisers and LPG subsidies. I am not at all convinced that it is only the rich or the middle class which takes advantage of these subsidies. What do you say?

What Is The Middle Class?

The Economic Survey of 2016-17 does not quantify or define the ‘middle class’. However, if the above-mentioned subsidies and the 75% to whom the government wants to give the UBI to, are the indicators – then the number of people in the middle class in India, according to Finance Ministry’s estimate, should be something close to 20% of our population or over 260 million people.

But how did they come up with this number, and is it relevant to the present times?

The World Bank came up with this number by considering anyone whose income is equivalent to $2-$13 per day as middle class.

But, I will like to draw your attention to another study done by Credit Suisse in 2015 where the size of the Indian middle class comes up to only 24 million. They arrived at this figure by considering wealth instead of income.

What Is The Difference Between Income And Wealth?

Income primarily refers only to the salary or wages that a person earns from doing his job. On the other hand, wealth or net worth refers to the financial assets of a person, like the amount of money in the bank, insurance policy returns, non-financial assets like immovable assets. People’s debts, however, are subtracted from this calculation.

So, even though a person’s income might categorise him as being middle class, one will lose that class-status if he/she becomes jobless. However, a person categorised as middle class based on his or her wealth will not lose that status immediately, even if they lost their job, because they have a protective net worth preventing them from falling into poverty.

So, Is Income Assessment Or Wealth Assessment More Applicable To India?

According to the International Labour Organisation (ILO), only 15.4% of Indian workers get regular salaries, and over 80% people work in the unorganised or informal sector.

Furthermore, over 60% of India’s GDP comes from the services sector. The services sector does not only include the IT sector, but also tourism, shipping and port services, and media and entertainment services.  These sectors are extremely vulnerable to external shocks, and it seems that the world economy is facing one shock after the other. Two of the biggest shocks that it is currently facing are the increased speed at which China is selling its US debt – and the US dollar becoming extremely strong, thanks to Trump’s policies.

In the current situation, where only 1 out of 10 Indian workers get a regular salary or wage – a number which threatens to plummet even lower owing to the present volatile international situation – income should, in no way, be the basis for defining the middle class. Instead, a person’s net worth or wealth should be used for quantifying it. It also means that the Economic Survey’s assumption that around 20% of India’s population belongs to the middle class is not applicable. If we consider the wealth of Indians, it is only around 2%.

Transaction Costs

I am a student of economic history, but I have always been on the fence when deciding the role that economic history can play in policy making. But the chapter on Universal Basic Income has convinced me that economic history is very important for policy formation – or else, neo-classical economists, like those involved in creating this Economic Survey, will let some obvious things slip from their minds.

The proposal for the UBI falls under the New Institutional Economics (NIE) school of thought. This is fast becoming the most important school of thought in the world of economics. But some neo-classical economists are trying to ‘pervert’ it for their own needs, which currently mean only one thing- reduction of government spending and austerity, which, according to them, will free the markets for the private sector. But the NIE school of thought not only talks about abstract economic notions that most people find difficult to comprehend, but also deals with implementation issues – with their primary aim being to reduce transaction costs.

Let me give you a brief explanation of transaction costs. According to the New Institutional Economics, when people interact with one another economically, not only do they exchange goods, they also exchange the rights to those goods. For example, when you buy a cucumber from the market, you buy the right to eat it, and not the right to hit someone over the head with it. In order to ensure that these rights are preserved, three main costs are incurred- negotiation costs, information costs and enforcement costs. All these comprise the transaction costs – and lesser the transaction cost, the better it is for the economy. This principle is not only applicable to economics, but can also be applied to many other things, like the functioning of the government or the distribution of subsidies. What you see in the economic survey is unfortunately a shortcut by which the authors are trying to reduce transaction costs, by directly reducing the expenditure of the government – but this is really very short-sighted.

Let us consider some probable consequences on transaction costs if the UBI plan as mentioned in the Economic Survey of 2016-17 is implemented.

It seemed really bizarre to me that this chapter, which talks a lot about the negative psychological impact that poverty has on people (they basically lifted this from a study done by the World Bank in 2015), seemed to be so clueless regarding how people deal with their surroundings, everyday, when they live in poverty. Living in poverty is a form of violence in itself, which makes people behave in radical, and often, unlawful ways.

For example, the current NDA government says that they have been able to provide LPG connections to lakhs of poor households. If the LPG subsidy and the kerosene subsidy are discontinued, what will these people do? Obviously they will start cutting down trees for cooking fuel.

Also, millions of people all over India are employed for a season (100 days) under the NREGA scheme. If this support is removed, not only will many people lose their income and remain unemployed for almost a third of the year, rates of theft and robbery will also increase.

As we have seen, eliminating just these subsidies or welfare schemes will result in a massive increase in the enforcement costs for the government – be it to enforce the forest protection laws or to reduce petty crimes. But these are obvious things – how could the economists writing the economic survey miss them? The answer might lie in the fact that the survey was conceived without properly analysing all the probable effects of its implication, and without conferring whether the measures would be good or bad for the economy.

It is no secret that the neo-classical economists see themselves as scientists who work in a field that can be mathematically precise. This has been their undoing in recent years. This is why I am proposing that economic historians, who deal with social issues, to a large extent, should be given more say, or at least, be heard, when shaping economic policies.

The Basic Problem With This Document

I think that the basic problem with the chapter on UBI in the Economic Survey, is its clear intention to cheat Indian people. To an extent, they have succeeded. They have garnered the support and congratulations for the Economic Survey, from some staunch critics of the NDA government like Yogendra Yadav.

The primary means of this cheating has been the structure of this chapter. They begin and end this 41-page document with several out-of-context quotes from Mahatma Gandhi talking about social justice, responsibility and frugality – so that no one can question their good intentions. Then, they proceed to tell you how much the Central Government is spending on all its welfare schemes and subsidies (5.2% of the GDP). Then, they inform you that this does not reach the deserving recipients, by showing the percentage of poor people across all of India’s districts. In the next map, they show you in how many districts there are shortfalls in welfare schemes/subsidy allocations. Their implication is that the undeserving has gobbled up all the subsidies. But do they consider that the government might itself be under-investing in those schemes? No.

Instead they go on a full rant against the ‘evil’ middle class, based on their assumption that it constitutes nearly 20% of India’s population – all the while telling you the advantages of targeting the welfare schemes and subsidies. In the mean time, they also mention that to implement the Universal Basic Income, the government will need to spend 4.9% of India’s GDP. They freely sacrifice the subsidies, which they think goes to the middle class alone, for this purpose. As for the rest of the subsidies, they issue a warning that dissolving them might destabilise the country – but this is just to confuse the people who might condemn it.

But no one is getting confused. Other newspapers also interpreted this measure in a way similar to mine – but they were happy with it, while I am disturbed by it. Moreover, Arvind Subrahmaniam (the person who wrote the Economic Survey), in his interview to The Hindu, makes it clear that he is completely in favour of removing the entire gamut of subsidies and welfare schemes, in order to launch a Universal Basic Income.

This document can also be accused of lying through omission, especially with regards to two issues. Firstly, there is no discussion on how the government finds money to grant subsidies and tax- cuts to the corporates, while it cannot do the same for the poor. This is an issue that is repeatedly highlighted by people like Jean Dreze and Amartya Sen. Secondly, there is no explanation as to why they considered the old and much criticised Tendulkar Committee Report for deciding the poverty line, instead of using the newer and somewhat better (although in no way perfect) Rangarajan Committee Report.

What also saddens and worries me is the fact that the team which prepared this economic survey includes young and brilliant graduates from some of the best universities in the world, like Harvard and Oxford. Do they think it is a great achievement on their part to cheat people into giving up all their rights to subsidies and claims to social welfare, for a measly ₹635 per month?

The media and the civil society of India must ask the government to disown the concept of Universal Basic Income, as proposed by the Economic Survey of 2016-17 – or else, shrewd economists will manage to convince sufficient number of politicians to approve this proposal.

After all, we have to keep in mind what John Maynard Keynes said- “The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.

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Image Source : Reuters/Anindito Mukherjee

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