Minimum Income Guarantee: A ‘new deal’ for the poor

In September of 2017, as India was overtaking France to become the sixth largest economy in the word,11-year-old Santoshi died of starvation. Congress president Rahul Gandhi’s Minimum Income Guarantee plan would not only banish chronic hunger from India, it could raise family incomes by as much as Rs 30,000 a year at the bottom of the pyramid.

The Congress led UPA had made history after bringing in MGNREGA, which was called the “largest and most ambitious social security and public works programme in the world” and a “stellar example of rural development” by the World Bank in its World Development Report 2014. Rahul Gandhi’s Minimum Income Guarantee plan could well be the world’s largest income support programme.

As we wait for the Congress to put out the numbers and the contours of the plan in its manifesto, the Minimum Income Guarantee plan effectively reverses Prime Minister Narendra Modi’s trickle-down economics and replaces it with bottom-up growth.

While implementing the scheme would conceivably create short-term problems, it could fundamentally alter India’s growth trajectory, much like Franklin D Roosevelt’s New Deal in the 1930s, which not only allowed the United States to recover from the Great Depression but also laid the foundations of strong economic growth in the years that followed.

Rahul Gandhi’s plan Minimum Income Guarantee has put the ruling BJP off-balance, but the impact of the scheme would go way beyond politics, it would transform the fundamentals of the economy.

While the Congress will reveal the specifics of the plan over the next few months, as the campaign for the 2019 Lok Sabha election gathers momentum, data from the 2016-17 Economic Survey indicate what the pay-out could be like, the plan’s likely impact and more importantly, how the plan could be funded.

First, it is important to understand that the plan is morally justified. Pandit Nehru, in his famous ‘Midnight Hour’ speech, talked about wiping every tear of every eye as the driving force behind the Indian state as he said: “so long as there are tears and suffering, so long our work will not be over.”

We are now a 2.6 trillion-dollar economy and if we could have implemented MGNRGA when we were a trillion-dollar economy, it is perhaps time to launch our final assault on poverty.

We need to now look at what the plan could mean for the poorest Indians. The Economic Survey 201617 carried out an extensive analysis of the Universal Basic Income issue and states that incomes needed to be raised by Rs 893 at 2011-12 prices to ensure every Indian gets above the Tendulkar Committee poverty line, which came to Rs 5,400 per year, per person.

Factoring for inflation, the number was raised to Rs 7,620 per person per annum in 2016-17 and would be close to Rs 8,000 per annum, per person at present levels.

Considering that the average size of an Indian family is around 4.8 persons, we could see household incomes rise by around Rs 38,400 per family, bringing fundamental change in a country in which about 27.5 per cent of the population lived in multi-dimensional’ poverty and 8.6 per cent lived in extreme poverty, according to 2016 data.

Data from 2015 indicates that about 22% of the population had a monthly income of less than Rs 5,000, or less than 60,000 per annum. The Minimum Income Guarantee plan could see family incomes of this segment rise by a massive 50%.

If a cap is kept at Rs 10,000 per month or Rs 1,20,000 per family per year, we could see about 2/3rd of the population covered. Since these are trends from 2015, an income cap of Rs 1,50,000 per annum could ensure that the poorest Indians could benefit from the scheme.

First, it is important to understand that the plan is morally justified. Pandit Nehru, in his famous ‘Midnight Hour’ speech, talked about wiping every tear of every eye as the driving force behind the Indian state as he said: “so long as there are tears and suffering, so long our work will not be over.”

We are now a 2.6 trillion-dollar economy and if we could have implemented MGNRGA when we were a trillion-dollar economy, it is perhaps time to launch our final assault on poverty.

We need to now look at what the plan could mean for the poorest Indians. The Economic Survey 201617 carried out an extensive analysis of the Universal Basic Income issue and states that incomes needed to be raised by Rs 893 at 2011-12 prices to ensure every Indian gets above the Tendulkar Committee poverty line, which came to Rs 5,400 per year, per person.

Factoring for inflation, the number was raised to Rs 7,620 per person per annum in 2016-17 and would be close to Rs 8,000 per annum, per person at present levels.

Considering that the average size of an Indian family is around 4.8 persons, we could see household incomes rise by around Rs 38,400 per family, bringing fundamental change in a country in which about 27.5 per cent of the population lived in multi-dimensional’ poverty and 8.6 per cent lived in extreme poverty, according to 2016 data.

Data from 2015 indicates that about 22% of the population had a monthly income of less than Rs 5,000, or less than 60,000 per annum. The Minimum Income Guarantee plan could see family incomes of this segment rise by a massive 50%.

If a cap is kept at Rs 10,000 per month or Rs 1,20,000 per family per year, we could see about 2/3rd of the population covered. Since these are trends from 2015, an income cap of Rs 1,50,000 per annum could ensure that the poorest Indians could benefit from the scheme.

This will not only ensure food security for the entire population, it would also boost consumption at the grassroots, which would lead to a massive spurt in demand, kickstarting a new growth cycle.

This was the kind of growth spurt that was seen in the first five years of the UPA government when the economy recorded a growth rate of 9 per cent plus in three of the five years. During this period, the size of the economy went up from around $ 720 billion to about $1.36 trillion, the sharpest increase in Indian history.

The most important question, however, is how the scheme would be funded. The Congress president promised a Minimum Income Guarantee plan, which would be different from the concept of Universal Basic Income where the assumption was that 75% of the population would be covered. The estimated cost of implementing the UPI in India would be around 4.9 per cent of the GDP but the actual numbers would be much lower, through more effective targeting. Estimates by experts such as NC Saxena suggest that this could be in the range of Rs 80,000 crore.

The union government’s budget for MGNREGA was Rs 55,000 crore for 2018-19 and considering this, the Minimum Income Guarantee would be 1.45 times higher than the allocations for MGNREGA. The Congress would not subsume MGNREGA into the Minimum Income Guarantee and would also not want to make significant cuts in existing subsidies and ongoing welfare programmes.

In the long term, the plan would pay for itself as financial assistance directly to the grassroots would lead to increase in consumption and increased consumption would lead to increase in revenue inflow. This will also kick-start the job creation process and open up new avenues of growth.

The problem is getting the scheme off-ground, which would be difficult considering the fiscal mess the BJP government is going to leave behind.

While few will argue about the merits of the plan and the effect it would have on reducing poverty and boosting consumption, the challenge is going to be on how the scheme is going to be funded, more so when the union government’s finances are in dire straits as it crossed the fiscal deficit targets for the fiscal year by November 2018 and some of the Modi Government’s liabilities would be carried forward into the future.

The government is expected to overshoot its fertiliser subsidy estimates by Rs 30,000 crore this fiscal and this is going to hurt the Congress, when the new government takes office.

Since the Congress has already stated that it stands committed to the FRBM targets as this was clear in former Finance Minister P Chidambaram’s tweet when he said: “The poor of India have the first charge on the resources of the country. Congress will find the resources to implement the promise of Rahul Gandhi.” So, the scheme could be focused on the bottom quarter of the Indian population and make an intervention where it is most needed.

The Congress government should start small with an initial budgetary allocation of around Rs 20-30,000 crore and ensure that the benefits reach the target beneficiaries. This money could be raised by increasing tax rates for the super-rich and cutting down wasteful expenditure, like the Rs 6,590 crore that Prime Minister Modi spent on advertisements and foreign trips. The roadmap for Minimum Income Guarantee plan could well be like MGNREGA which started in select districts but was later expanded to the entire country.

The Congress president promised loan waivers in Punjab, Karnataka, Madhya Pradesh, Rajasthan and Chhattisgarh and the party delivered on his promises within days, if not hours, of taking office.

He has now promised to lift every Indian living in extreme poverty to a better life. His track records indicates he delivers on his promise. A rising tide will lift all boats and Rahul Gandhi’s Minimum Income Guarantee plan is surely going to do that