National political parties are giving up on the endeavour to have a development state in favour of a compensatory state
We have to see a shift towards producing things that all Indians consume, and not just the top 100 mn, for inclusive growth
NEW DELHI :
After Congress president Rahul Gandhi proposed the quasi-universal basic income scheme, Nyuntam Aay Yojana, or NYAY, debate has intensified about the feasibility of the proposal in the Indian context. In an interview, Rathin Roy, director at the National Institute of Public Finance and Policy, said the exchequer is unlikely to absorb the shock from such a scheme. Edited excerpts:
You recently said in your column published in Business Standard that the Indian state is transitioning from a development state to a compensatory state. What exactly do you mean?
A development state is one which is focused on using public spending to make the lives of people better by ensuring stable and high growth, by ensuring that benefits of that growth through participation in the growth process are available to the maximum number of people, and by ensuring that public goods, which improve the lives and capabilities of the entire population, are available at affordable prices. These public goods, such as health, education, sanitation and nutrition, should not necessarily be produced by the public sector, but provided for those who cannot afford it through tax payers’ money.
When a state fails to provide these goods, then it has two choices. It can try harder to provide these things, or it can give up and say, since we are unable to provide inclusive growth, good health, good education, we are now compensating for that failure by giving you money. That can take the form of an income transfer. But, such income transfers are essentially compensations. For an economy like India, which is growing nominally at 11-12%, if income of every citizen grew by 11-12%, why would you need an income transfer? You would have eliminated poverty in five years because everyone’s income will double by participating in growth. It is because they are not able to participate in the growth process that their incomes are not growing and, therefore, income of someone else is growing at a much higher rate. If you are looking at recent initiatives from both the national political parties, I see a tendency to give up on the endeavour to have a development state and to transition to a compensatory state.
But why are so many people not able to participate in the growth process? Where did things go wrong?
It is not a matter so much of where things went wrong. It is more a matter of understanding that since the 1991 liberalization, the engine of growth has been things that a majority of people of India cannot consume at affordable prices. That’s not a bad thing in the initial phase of growth. If you look at the leading indicators of the Indian economy as viewed from Bombay, these are four-wheelers, fast-moving consumer goods and white goods like air conditioners. When sales of these items go up, then Bombay is happy and they say the economy is doing well. But items that all Indians consume, or want to consume, at affordable prices are: A nutritious meal; decent clothing; one decent home in their lifetime; basic, affordable and quality healthcare, and quality education. Only the top 100 million can afford these things.
This has not happened by chance. Things that were not affordable for the top 100 million have become affordable over time, and growth has been propelled by the demand of the 100 million. This growth is not inclusive. So, we have to see a shift in the composition of growth towards producing things that all Indians consume, then your employment problem will be solved, your demand problem will be solved and your inclusivity problem will be solved.
But is the problem producing these items at an affordable price, or raising the purchasing power of a majority of Indians by providing them better jobs?
No. I think the problem, first and foremost, is producing these goods at affordable prices. It can’t be the case that everything that Indians demand can’t be produced at a reasonable profit and at affordable prices; and, therefore, either must not be provided at all or must be imported. Today, the economic structure is geared towards producing jobs for some Indians. So, by definition, that limits the market and it also makes it capital-intensive. All the things that are fast-moving indicators in the Sensex are capital-intensive, but a nutritious meal is not capital-intensive. Producing textiles for the masses, housing, healthcare and education are hugely labour-intensive. I am an orthodox economist and I don’t believe you can create jobs. Jobs come from activities. The question I am asking is, what are these activities that are delivering 11-12% growth? If you have differentiated activities delivering same sort of nominal growth, you will get jobs, you will get demand and growth will be sustainable and more equitable.
What is the real problem with Rahul Gandhi’s proposal of a quasi-UBI, NYAY? Is it the fiscal cost or its workability?
I don’t know how this is proposed to be implemented, but I do know some common sense fiscal facts. If you are going to implement this, you can do it only in three ways. First, you can raise taxes and use the incremental taxes to finance such a programme. That is pure Robinhood distribution. In our country, the tax-GDP ratio is stagnating spectacularly. I would be very interested to know what the incremental tax proposals are. The second way you can do it is by borrowing and I would not recommend that. Third, if you can’t tax more and can’t borrow more, you can spend less on something to spend more on this. I would like to know what that less spending would be on.
I really find it difficult to understand why a doubling of income every five or six years should require UBI except if it is an interim measure. But, I have not heard anyone say that India will need a diminishing UBI, diminishing by certain defined percentage of amount over the next 10 years. That’s a real hard economic proposition. I have not seen it and, therefore, I must conclude by default that the intention is an UBI in perpetuity and I have a quarrel with that because I find that profoundly not only unjust, but an admission that injustice will continue in the foreseeable future in the form of undesirable inequality.
But has not the fisc been able to absorb shocks like Right To Food Act and Pay Commission-based salary hikes in the past?
It will, but there is a problem. With the Right to Food Act, the incremental expenditure on food was not very high, because food is otherwise subsidized in a number of other ways. So, the very subsidies and measures that are keeping food prices down, to an extent, took the bite off the fisc. The Pay Commission hike is interesting. The government plays a small trick with government employees. I know this because I have been a member of the Pay Commission. The allowances that government employees get—about 30% of their salaries—are not inflation-adjusted. So, all that happens in Pay Commissions every 10 years frankly, is that the allowances are adjusted for inflation, and as nominal GDP grows, the inflation adjustment is absorbed. The trouble with income schemes is that unless you are saying that you are deliberately going to make the real value of this ₹6,000 per month erode over time, you will have to keep adjusting that with inflation. So, the bill will go up and, therefore, its percentage value of GDP will remain constant. So, you will always have to find either more taxes or borrow more or cut spending. So, the option of letting inflation take care of the shock, such as it does in the case of Pay Commission hikes, is not available.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!