Indian welfare: Beneficiaries and benefactors must overlap more

Making fertilizer pricing market-oriented and transfering direct cash to poor farmers will incentivize producers and bring more investment into a sector that still sees massive imports.
Making fertilizer pricing market-oriented and transfering direct cash to poor farmers will incentivize producers and bring more investment into a sector that still sees massive imports.

Summary

  • We can afford a large welfare system and even a universal basic income, but the tax burden must be shared much wider. Our direct tax collections need to increase.

In the award-winning movie Oppenheimer, the director of the atomic bomb project is repeatedly questioned about his communist sympathies and loyalty to his country. In one telling line, he says, “I am a New Deal supporter, not a communist." He was referring to the massive welfare expansion and public-works projects undertaken by then president Franklin D. Roosevelt’s government that eventually made it possible for America to come out of the Great Depression. Apart from massive support for industrial recovery, it launched the social security system to provide protection for the unemployed, youth, farmers and the elderly. This was a radical shift for an otherwise conservative America. The affluent scientist J. Robert Oppenheimer has no qualms supporting such welfare spending. The New Deal had support from all strata of American society, who did not see it as robbing Peter to pay Paul. It was the richer, tax-paying class that not only supported welfare spending, but also saw themselves as indirect beneficiaries. What is the overlap between welfare beneficiaries and those who fund programmes in India? Let us examine.

India’s economic trajectory over the past 10 years has been distinctly welfarist. The idea of a universal basic income (UBI) became big news as it was prominently discussed in a chapter of the Economic Survey of 2016-17. The then chief economic advisor, Arvind Subramanian, wrote: “[UBI] is a radical and compelling paradigm shift in thinking about both social justice and a productive economy. It could be to the twenty-first century what civil and political rights were to the twentieth." The proposed scheme had three major themes: universality, unconditionality and agency. Having agency meant that there was no constraint on how the income was to be spent by the recipient. This is in contrast to voucher-based approaches, where recipients are supposed to use welfare vouchers only on designated goods and services. UBI has not yet been rolled out formally, but might happen soon. Pilot projects were tried in 2011-12 with some success. At present, we see welfare spending by way of free foodgrains for 800million-plus people, and other nearly 450 direct benefit programmes that reach an estimated 900 million, of which PM-Kisan, meant for farmers, alone covers 100 million people. These are direct cash transfers and mostly unconditional. The total of all such welfare spending could be in excess of 5% of GDP. It is possible that there may be duplication or redundancy in some schemes, or more efficiency can be attained with the same budget. Improvements could be made by reorienting other subsidy schemes. For instance, why not make fertilizer pricing market-oriented (currently it sells at a steep 75% discount to the cost) and transfer direct cash to poor farmers, who are the intended beneficiaries? This will incentivize producers and bring more investment into a sector that still sees massive imports. However, shifting to direct benefit transfers (DBTs) for fertilizer is easier said than done, since the land tiller is not the same as the land owner. And how to distinguish between rich and small farmers? The PM-Kisan scheme makes no such distinction. And conditionality in any case goes against the spirit of a UBI.

This column is neither about the efficacy of welfare spending nor what we can afford fiscally. Both are valid issues and can be examined separately. Here, we look at an aspect that was also highlighted in the Economic Survey of 2016-17. It pointed out that India has only 7 taxpayers for every 100 voters, and that ranks us No. 13 out of 18 of our democratic G20 peers. In a remarkable chart shown of taxpayers versus voters, India ranks 45 out of 51 countries. Countries like Norway, Sweden and Canada have nearly 100 taxpayers for every 100 voters. The Netherlands and Australia have close to 80. The US, Oppenheimer’s country, has 60. But India is an outlier. Of course, this refers to income-tax payers. And it is common knowledge that consumption tax in the form of goods and services tax is paid by almost everybody. The GST, being an indirect tax, is regressive and also too high. Not surprisingly, there is hardly any talk of reforming income tax this election season. Direct taxpayers constitute a tiny minority and are electorally irrelevant. Are they proud and supportive of India’s welfarism the same way as Oppenheimer? We don’t know. For most voters, party manifestos promise more welfare (if not more freebies). There is no use pointing out the increase in tax filers every year. Since the exemption threshold is so high, a person pays more than zero income-tax only after earning more than 7 lakh, which is nearly 4 times India’s per capita income. On this metric too, India is an outlier—it provides too high an exemption threshold. The flip side of this is that the effective tax rate goes from zero to the maximum incremental rate of above 42% very rapidly. The graded tax slabs of 10%, 20% and 30% should be spread over taxable income from say 5 lakh to 50 lakh. But that is not the case, and the government stands to lose big if it raises the threshold for the high marginal tax rate of 30% plus surcharge.

The original sin was making income up to 7 lakh tax free, which it is politically impossible to turn back. We can afford welfarism and even UBI, but not on the back of regressive and distorting indirect taxes and non-shareable cesses. It should be based on direct taxes. And there should be a greater overlap between beneficiaries and benefactors. Only then we can merge political democracy with fiscal democracy.

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