Can we afford NYAY, and is it practical?

The Congress party announced that if elected to form the next government, it would implement a Nyuntam Aay Yojana (NYAY), which will transfer Rs 72,000 as cash income annually to the bottom fifth of the poorest families. The acronym NYAY means justice. The implication is that this “injustice” called acute poverty will be tackled, possibly for the first time by promising a direct transfer of cash. It is true that direct benefit transfer (DBT) has been implemented for more than two dozen schemes in the past five years. This includes subsidy payment for cooking gas, pensions, scholarships and soon for fertilisers too.  The idea of giving direct cash to the poor was mooted by the Chief Economic Advisor Arvind Subramanian in 2017, and indeed a full chapter was devoted to Universal Basic Income (UBI) that was included in the Economic Survey.

The philosophical foundation of UBI is the same as NYAY, and is also the same as that propounded by John Rawls in his classic treatise “Theory of Justice”. By a strange coincidence Rawls’ modern classic, was published in 1971, the same year that Indira Gandhi launched “Garibi Hatao” as her election campaign.

Of all the criticism against NYAY there are only two which are legitimate: (a) is it affordable? i.e. will it not unleash a large fiscal deficit, raise interest rates and inflation and endanger India’s sovereign rating, and spook away foreign investors? Will it not crowd out private investment? and (b) is it implementable? how do we identify and authenticate the beneficiaries? is it not a moving target? will it not lead to massive corruption, as people scramble for income certificates (much like the scramble for caste certificates).

The Rawlsian theory of justice has two principles. The first principle states that each person must have equal right to the most extensive liberties compatible with a similar system of liberty for all. Thus, so long as my liberty does not infringe on yours, I should have unconditional maximum liberty. The second principle states that if we are to have inequalities, they must be such that they do not make the least well off person worse off.  In other words, if we are to move away from equality, we must make sure that the poor do not become poorer.

John Rawls was a professor of Philosophy, and perhaps too abstract to understand. An easier way to understand his principles, was the way Mahatma.Gandhi articulated it fifty years prior to Rawls. Gandhi’s line appears in many government documents, political speeches and indeed in the Economic Survey. Gandhi’s quote is a call for action to all future policy makers. He said: “I will give you a talisman. Whenever you are in doubt, or when the self becomes too much with you, apply the following test. Recall the face of the poorest and the weakest man whom you may have seen, and ask yourself, if the step you contemplate is going to be of any use to him”. In other words, focus on the making the worst off person better off. Focus on the last in the line.

How is social wellbeing to be evaluated? We have two choices. Either we look at average wellbeing (income, health, longevity) or we focus on the lowest, the “last person”. The latter is the Rawlsian idea. Of course. the two measures are not independent or unconnected. The chances are, that in an economy where average incomes are rising, even the poorest of the poor do benefit. But a scheme like NYAY makes us focus directly on the least well off in society.

As the third largest economy (in PPP terms), we can afford to spend 2 percent of GDP on direct transfers, albeit after expenditure and revenue rationalisations. We must also not forget that the most rapid and significant fall in poverty rates happened during the high growth phase. So, growth and job creation are the surest way to reduce poverty quickly.

There is much debate and discussion about NYAY.  Two years ago the Prime Minister announced that his government was committed to doubling farmers’ income in the coming five years. Perhaps as part of that strategy the PM KISAN scheme was announced in this year’s Union Budget. The scheme envisions a direct cash transfer of Rs 6000 per year to 120 million poor farmers. NYAY takes this much further.

Of all the criticism against NYAY there are only two which are legitimate: (a) is it affordable? i.e. will it not unleash a large fiscal deficit, raise interest rates and inflation and endanger India’s sovereign rating, and spook away foreign investors? Will it not crowd out private investment? and (b) is it implementable? how do we identify and authenticate the beneficiaries? is it not a moving target? will it not lead to massive corruption, as people scramble for income certificates (much like the scramble for caste certificates). Both these are legitimate concerns and should be discussed.

To the first objection of affordability, it is true that India’s combined fiscal deficit is very large. The debt to GDP ratio should be falling but is not. If you count the borrowing requirement of public sector, and add off balance sheet obligations the number looks formidable. So, some expenditure pruning is essential. Firstly, there are many redundant, or overlapping and duplicate schemes which can be rationalised. Secondly, the efficacy of current spending can surely be improved. Thirdly, we have to remember that the fiscal deficit has two dimensions: expenditure and revenue. Are we doing enough on the latter?

India’s direct tax to GDP ratio is among the lowest in the world. We can widen the tax net without increasing rates. We can eliminate wasteful exemptions. We can lower the GST rate, and include the excluded sectors like petro products, electricity and real estate. Simplifying and rationalising the tax system can make revenues buoyant. The other point is to acknowledge that the “giveaways” to the corporate sector, or what are called “tax expenditures” i.e. revenue foregone is more than 6 lakh crores. Surely some pruning is possible?

A better way for implementing NYAY would be to test out the idea in pilot projects and gradually phase it out across the country, with the assistance of local and State governments. Whatever the debate on NYAY, the idea of direct cash transfer as an attack on poverty, has entered the national discourse.

As the third largest economy (in PPP terms), we can afford to spend 2 percent of GDP on direct transfers, albeit after expenditure and revenue rationalisations. We must also not forget that the most rapid and significant fall in poverty rates happened during the high growth phase. So, growth and job creation are the surest way to reduce poverty quickly. But NYAY is also about reducing inequality, and the Rawlsian principle.

The second objection about implementability is also serious. In a country where 90 percent of the workforce is in the informal sector, we don’t have accurate and authentic data on people’s income. Also, people move in and out of poverty. Hence an untargeted, universal scheme makes sense, but may be more expensive. It is also true, that unlike earlier failed attempts of poverty alleviation, we are now in the age of big data and data mining.

Political parties are using micro targeted strategies based on data culled from social media, and other digital trails. We may thus have more tools at our disposal to substantially reduce the problems of leakage to the non-poor. A better way for implementing NYAY would be to test out the idea in pilot projects and gradually phase it out across the country, with the assistance of local and State governments. Whatever the debate on NYAY, the idea of direct cash transfer as an attack on poverty, has entered the national discourse. It is about time.

(The writer is an economist and Senior Fellow, Takshashila Institution)