India Can’t Afford to Guarantee Income

(Bloomberg Opinion) -- During election season, which we’re entering in India, everyone likes the idea of giving voters more money. Congress Party President Rahul Gandhi, the de facto opposition leader, says his party will guarantee a minimum income for the country’s poor if victorious. Reports suggest that Prime Minister Narendra Modi’s government may compete by announcing some form of direct transfer of cash to farmers in the interim budget to be revealed on Friday, which could cost the exchequer nearly $10 billion annually.

While governments everywhere should take care of their most vulnerable citizens, the idea of guaranteeing a basic income is wrong for India right now. Fundamentally, it would only work if two conditions were met. First, large sections of the population would have to be mired in absolute poverty. And second, all other subsidies and welfare programs for them would have to be abolished in order to free up the necessary funds without completely blowing open India’s fiscal deficit, which is already strained.

Neither condition prevails in India. While there’s no recent government estimate of the number of people living below the poverty line, credible research by the Brookings Institution suggests that extreme poverty in India, defined as those living on less than $2 a day, now afflicts only five percent of the population. Granted, that’s still more than 70 million people. But, for the vast majority of Indians, the challenge is no longer subsistence, it’s aspiration. No basic income guarantee will be able to address rising aspirations unless it’s a very large sum of money. At India’s level of national income, providing anything more than a subsistence income would simply be unaffordable.

Press reports say the government’s idea would be to replace existing subsidy programs with a direct cash transfer. But, realistically, the chances of any Indian government, no matter how committed to fiscal rectitude, cutting down India’s gigantic maze of welfare programs is negligible, probably zero. In fact, it’s hard to name any government welfare scheme that has ever been abolished in India. Many have been renamed, tweaked, often expanded, but never eliminated altogether. Given the reality of an extremely competitive polity, no politician will risk being labeled anti-poor by abolishing even one, let alone the entire gamut, of welfare schemes. Any cash-transfer scheme will thus likely be a top-up over everything else.

Perhaps the biggest problem with such ideas taking center stage in India’s political economy right now is that it distracts attention from the more pressing task at hand — creating high-quality jobs. Whoever wins the next election, whether Gandhi’s Congress or Modi’s Bharatiya Janata Party or a third alternative, may end up implementing some version of an income guarantee. That would probably yield a short-term political dividend. Ultimately, however, any new government will be judged by whether or not it can create jobs. Welfare can never be a substitute for productive employment.

For politicians who have shied away from job-creating but politically difficult economic reforms — in banking, as well as land and labor laws — a well-delivered welfare scheme may buy time. It would be so much better for India, though, if the case for reform was argued with the same intensity and implemented with equal alacrity. India might, after all, be able to afford one more welfare measure if it were accompanied simultaneously by big-bang market reforms.

To contact the editor responsible for this story: Nisid Hajari at nhajari@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Dhiraj Nayyar is chief economist at Vedanta Ltd. and the author of “Modi and Markets: Arguments for Transformation.”

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