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Last Updated : Mar 26, 2019 12:47 PM IST

Comment | Why minimum income will lead to maximum trouble for the economy

What the Indian economy needs at this stage is vastly different from what is being proposed

Rajesh Kumar

Rajesh Kumar

Congress president Rahul Gandhi on Monday made possibly the most expensive poll promise ever. If voted to power, the Congress party will implement a minimum income guarantee scheme which will provide Rs 72,000 per year to the poorest 20 percent of families. According to the party’s calculation, all households in the country will then be earning a minimum income of Rs 12,000 per month.

If the Bharatiya Janata Party-led government can give Rs 6,000 per year to small and marginal farmers, a Congress government will give Rs 6,000 per month to the poorest families. Who says the Congress party is not in the reckoning in this election? If this doesn’t help win, what will?

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However, if the current government’s decision to give Rs 6,000 per year to a section of farmers was fiscally imprudent, the idea proposed by Congress would be a disaster. This is not to suggest that farmers and the poor don’t need support, but reckless spending will not solve the problem. A rough calculation suggests that the minimum income scheme will cost about Rs 3.6 lakh crore per year or about 2 percent of the gross domestic product. To put this into perspective, the expenditure will be more than the total spending on centrally sponsored schemes or the total subsidy budget of the Centre for the next financial year.

Interestingly, Gandhi was also quick to state that the fiscal implications of the scheme have been studied. Thanks to economists and economics commentators, fiscal prudence remains relevant, at least theoretically, even in the election season. However, neither Gandhi himself nor the other talking heads of the party, were forthcoming about details of how the scheme will be financed—though the Congress claims to be working on this for months.

Nonetheless, it is hard to imagine how India can afford this kind of scheme. Adhering to fiscal targets is a constant struggle for the government. Therefore, it will require roughly the same amount of expenditure compression in other areas. Since a large part of the expenditure, such as on defence, interest payment, or other operating expense of the government cannot be touched, it would require cutting subsidies or capital expenditure. As noted above, even the total expenditure on subsidies will not be sufficient to finance the scheme.

Moreover, experience shows that cutting subsidies is not easy. Also, politically, it could backfire if voters see existing benefits being substituted with income transfer. Even on the revenue side, it will not be easy to raise taxes. Therefore, it is likely that the scheme would end up increasing the fiscal deficit significantly. It will push up the borrowing cost and, over time, the government will be forced to compress capital expenditure to contain the deficit—a double whammy for economic growth. Needless to add, it will also be inflationary.

What India needs at this stage of development is vastly different from what is being proposed. The Indian economy is slowing and the global economic environment is becoming increasingly challenging. What India needs is fiscal prudence and structural reforms that will enable investment and growth.

Indian experience shows higher growth has the potential to lift people out of poverty more rapidly. It is understandable that discussing policies that can help lift growth may not be an attractive poll proposition, but political parties should avoid making promises that will hurt the economy and voters in the long term. In the present context, the Congress party knows more than anyone else that it is difficult to contain the fiscal genie, once it is out of the bottle.
First Published on Mar 26, 2019 12:23 pm
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