Photo: Mint
Photo: Mint

Opinion | An income support plan for the poor to tide over testing times

India should spend 3 trillion on emergency financial support for 300 million workers in the country’s informal sector

Millions of informal sector workers now face the prospect of economic devastation as a result of the shutdowns across the country. They neither have stable wage contracts nor access to a social security system. There is an urgent need to give them a safety net. Some states, such as Kerala and Uttar Pradesh, have made a beginning, but something needs to be done at a national scale.

The latest data from the Periodic Labour Force Survey tells us that India has 418 million workers. Around 303 million of them are in the informal sector. Informality varies across states, depending on their level of economic development. States such as Delhi and Goa have a relatively modest 38% of their workforce in the informal sector. However, even a state such as Maharashtra has 71% of its workforce informally employed. Uttar Pradesh and Bihar have 85% and 86% respectively.

Here is a proposal. The International Labour Organization estimates that the average informal worker in India earns 150 a day. The Indian State should thus make an unconditional cash transfer of 10,000 to each informal sector worker. A thumb rule used here is that the average poor family has 1.5 informal workers. That should provide an initial buffer to see them through two or three months at a very basic standard of living. Such an unconditional transfer to around 300 million citizens would cost 3 trillion, or around 1.5% of the estimated nominal gross domestic product (GDP) for the fiscal year 2019-20.

Not all the money will involve new spending. Governments at different levels can front-load some of their social security payments, such as the Pradhan Mantri Kisan Samman Nidhi (PM Kisan) scheme that provides income support to farmers. States can take some of the cost onto their own books.

However, building an emergency social safety net cannot be left to the states alone. This is because the poorest states have the highest proportion of informal workers to support—and often the weakest fiscal systems. Our calculations show that the estimated cost of giving 10,000 per informal worker will soak up 16% of West Bengal’s annual revenue budget and 14% of Uttar Pradesh’s. Even Tamil Nadu will need to set aside a tenth of its revenue budget if it had to bear the entire cost of social support.

There is one big advantage that the Union government has over states. It can fund its extra fiscal deficit by monetizing it. States do not have that option. The Reserve Bank of India will thus have to step into the act as well. It should print new money to ease the burden of borrowing from an overstretched bond market. Monetization of the fiscal deficit will entail risks, including future inflation as well as exchange rate instability. The Indian central bank will have to fight these battles ahead.

The big challenge in such an income support plan will be targeting it well. India has thankfully built its digital infrastructure to send money directly to beneficiaries through the Jan Dhan-Aadhar-Mobile (JAM) triad. It is not perfect but definitely better than where we were five years ago. However, given the need to move fast, there is a high likelihood of both exclusion as well as inclusion errors. This is where the third tier of government will have to play a role. India also has resilient social networks that will hopefully play a positive role, as they did during the demonetization shock.

The impact of income support through cash transfers to bank accounts may get whittled away if inflation eats into the value of money incomes. That is not inconceivable. There could be buying panics as shutdowns stretch out in time, so the government needs a plan to provide food directly to the poor. India’s Public Distribution System (PDS) and Integrated Child Development Services (ICDS) will be integral to such an initiative.

The country has ample food stocks right now. The winter crop will also be in soon. However, it is important that food moves seamlessly across state borders. The cooperative nature of Indian federalism will be on test.

The Indian government is going to be fiscally overstretched in the coming months. It had very little fiscal firepower left even before the world got hit with the Covid-19 shock. Its tax collections will surely decline. It will have to spend, by our estimates, 1.5% of GDP in emergency income support to the poor. And it will need to keep financial resources ready to kick-start aggregate demand once the pandemic storm blows over. The response will thus have to be a coordinated one—across the federal system, between fiscal and monetary authorities, and with other national governments.

The global response to the pandemic has been to privilege lives over production—and rightly so. Protecting human beings is the most important public policy concern right now. Income support to the most needy for the next few months should be part of the national strategy.

Sharmadha Srinivasan of IDFC Institute also contributed to this article

Niranjan Rajadhyaksha & Prakhar Misra are, respectively, a member of the academic board of the Meghnad Desai Academy of Economics and a senior associate at IDFC Institute

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