An Analogy Of Logical Unsoundness
The Mahabharata is a tale of several powerful warriors, but the most powerful of them was a certain Barbarik (son of Ghatotkacha, who himself was the son of Bhima and his demon wife Hidimba). Before the beginning of the final war, Krishna asked each warrior how many days it will take each of them individually to finish the war. While different warriors gave different estimates in terms of days, Barbarik replied that he could finish the war within moments because of a set of three special arrows that he possessed. Next, when he was asked which side between Pandavas and Kauravas he would choose to fight for, he said that he had promised to his mother that he would fight on the side which was relatively weaker. Now herein lied the problem. Whichever side Barbarik would choose, would automatically grow stronger because of him being on their side, and thus, he would have to move to the other side. Now the other side will become stronger and hence he would have to switch back to the previous side.
The Congress promise of NYAY, wherein it is promised that around five crores of the poorest households would get Rs. 72,000 per year (Rs. 6000 per month), bears quite a bit of resemblance to the Barbarik issue. For example, let’s assume that the criteria would cover all households with income less than Rs. 5000 per month. Now say we have a family (say BPL-F) earning Rs. 4000 per month, and another family (say APL-F) earning Rs. 8000 per month. Now as per the Congress scheme, BPL-F is to be assisted with a monthly grant of Rs. 6000, so now BPL-F monthly income becomes Rs. 10000 per month, which is greater than that of APL-F.
Now since all poorest families earn Rs. 6000 more due to the NYAY scheme, there is a need to classify these families. In the process, some families who were initially covered under NYAY might lose their coverage and might fall back to the category of being the poorest, making them eligible for Rs. 6000 again next month. Basically, a large number of households will on a purely technical basis keep moving in and out of the NYAY coverage.
How Much Will NYAY Cost?
While how much NYAY will cost to implement has been mentioned by multiple sources, but just a recap of the basic math is as follows. Rs. 72000 per year for 5 crore households = 72000*5,00,00,000 = Rs. 36,00,00,00,00,000 i.e Rs. 3.6 lakh crore.
Where Does The Government Earn Income From?
Next comes the part about where the money will come from. Typically, the government derives its income from the various taxes (direct and indirect) and duties it levies on individuals and firms, and the dividends on shares of the RBI and PSU companies the government has a stake in. Apart from this, if the government wishes to have a higher level of expenditure, it borrows from different foreign banks, IMF, etc. Now let us assess the impact of NYAY on various metrics. From here on, I would use the word ‘government’ to mean ‘Congress-led central government, should it come to power in 2019’.
If NYAY Is To Be Funded Through Direct Taxes
In FY 2018-19, direct taxes formed a total of Rs. 6.75 lakh crore. According to Sam Pitroda, Chairman of Indian Overseas Congress, the NYAY scheme will be funded through direct taxes, and he has appealed to the Indian taxpayers to be ready to part with some income to fund the scheme. Now for NYAY to be funded through direct taxes means the government will need to raise (3.6 lakh crore * 100 / 6.75 lakh crore) = 53.3% more tax (assume 50% for ease of calculations. Assuming current tax slabs, if the additional tax burden is to be evenly distributed among all taxpayers, the revised tax slabs will read as follows:
For individuals:
- Rs. 0-5 lakhs (taxed at 0% if income is below Rs. 5 lakhs)
- Rs. 0-5 lakhs (taxed at 7.5% if income is above Rs. 5 lakhs)
- Rs. 5-10 lakhs (taxed at 30%)Income above
- Rs. 10 lakhs (taxed at 45% with 3% surcharge for income above Rs. 1 crore)
For corporates: 37.5% income tax, with 12% surcharge if PBIT is above Rs. 1 crore.
That’s right, the income tax that the higher income salaried professionals will have to bear will kill any financial aspiration. In general, a higher direct tax regime suggests that an economy has unsound fundamentals. However, economic soundness has never been the forte of Congress.
Back in 1970, Indira Gandhi introduced the most socialist phase of the Indian economy, when for the highest tax slab above Rs. 2 lakh, she introduced a tax rate of 93.5% which combined with a 15% surcharge, would wipe out almost 98% of a person’s income, should he make the grave mistake of meriting an income above Rs. 2 lakh. It isn’t without reason that the GDP growth rate for the 8-year period from 1970-77 was the lowest in the history of independent India.
If NYAY Is To Be Funded Through Fiscal Deficit
Assuming that the government does not want to raise the direct tax burden, but decides to fund NYAY through the fiscal deficit route in the hope that in the long run, the returns would pay off. India’s fiscal deficit in 2018 at 3.42% of GDP was equivalent to Rs. 6.32 lakh crore. If we add Rs. 3.6 lakh crore to the fiscal deficit, we would end up shooting the fiscal deficit up to 5.36% in one year, thus offsetting all the achievements in terms of reducing the fiscal deficit in the past five years. What is worse, the amount Rs. 3.6 lakh crore deficit would keep adding every year, and should the government run its 5-year course, we would be staring at a double-digit percentage fiscal deficit figure.
What Will Happen To The Inflation
If you make everyone equally rich, you end up making everyone equally poor. How this works is as follows. Suppose there’s a vegetable seller in a place where the average household income is Rs. 4000 per month. Next, he realizes that due to NYAY, the average household income has suddenly risen to Rs. 10000 per month. Now the vegetable seller knows that his customers have some more money in their hands (overnight they have become richer by an average of 150%). So why not sell his vegetables at a higher rate? So then, he begins to slowly jack up his prices, and to prevent the inflation from feeling like a shock, will do so gradually.
Soon, the customers will begin to realize that even with their additional income, they are not exactly feeling as rich as they should be. However, they have grown used to the Rs. 6000 per month getting deposited in their bank accounts. As we have seen above, the NYAY scheme will spell disaster for economic fundamentals.
However, no party can in a democracy campaign for putting an end to such a scheme and expect to win the election. If they have to win the election, or if the incumbent government wishes to retain power, they will either want to distribute NYAY over a wider percentage of households or raise the monthly grant, or both. Such a move will be fiscally irresponsible, but will definitely rake in the votes once people are accustomed to receiving such grants. What this will end up doing is raising the inflation, while slowing down the economy (because higher corporate taxes will lower the investment levels). Also, since it is the salaried taxpayers who will have to bear the brunt of the NYAY, they will end up relatively impoverishing themselves while running against rising inflation.
NYAY essentially works like a minimum income guarantee scheme, and an example of what it can do can be found in Venezuela, where the inflation rate hit 80,000% in 2018 and is around 1.6 million % in 2019. Essentially, if something cost 1 bolivar in 2017 in Venezuela, it would cost 800 bolivars in 2018 and 12.8 million bolivars in 2019, thus resulting in almost a 90% poverty rate, despite Venezuela being an oil-rich country which was one of the richest nations in the continent of South America.
Capping The Total Subsidy Bill At Rs. 3.6 Lakh Crore
Another rumor that was doing the round was that instead of increasing the total subsidy bill by Rs. 3.6 lakh crore, which is the necessary amount needed to fund the NYAY, the total amount of subsidies that will be disbursed would be Rs. 3.6 lakh crore. In essence, this would only mean raising the subsidy bill from its current amount of Rs. 2.64 lakh crore by around 36%, and letting dis-continuing all other existing subsidies.
What Happened To Barbarik Eventually?
Since we began the article with an analogy, let’s end it with the same one. Since Barbarik the most powerful warrior of Mahabharata had made a logically unsound promise as we saw above, Krishna suggested to him a different route out. He said that before the beginning of the great war, there needs to be a sacrifice of the head of the bravest Kshatriya and that he considered Barbarik to be the bravest of Kshatriyas.
Barbarik, out of deference to Krishna, voluntarily decapacitated himself with one wish that he be allowed to witness the battle. Krishna, as agreed upon before, placed his decapacitated head on the top of a mountain overlooking the battlefield. Should India commit the grave mistake of voting into power, the party which promises the NYAY, Barbarik’s severed head overlooking the bloody chaos on the battlefield would be how India’s fate would seem figuratively- that of a potentially mighty economy, poised to break into the top 3 economies in the coming decades, ending up in self-destruction by committing to a nonsensical promise.