From the perspective of welfare policy, finance minister Nirmala Sitharaman faces real dilemmas as she presents this government’s first budget on Friday.
In the short term, India’s economic slowdown and persistent agrarian crisis together make a strong case for increased welfare spending to revive rural demand.
With the launch of PM-KISAN in the interim budget in February 2019, the government has laid the groundwork for increased spending. And one of the first policy decisions taken by the new government on its return to power was to expand PM-KISAN to all farmers. This is a clear indication that spending will increase, significantly.
Add to this, as M.K. Venu has argued here, Modi’s politics is about expansive welfare. Or more specifically, I would argue, expansive welfare infrastructure and handouts. From ‘Nal se Jal’ to ‘Ayushman Bharat’, current political commitments made by the government will require increased welfare spending for the next five years. But confronted with a sluggish economy, the government has relatively little fiscal wiggle room to meet these commitments.
Sitharaman has a careful balancing act ahead of her this budget. On the one hand, she has to find money to finance welfare expansion. On the other, she needs to addresses concerns of extensive fiscal slippage, which, if not handled with care, could cause long-term harm to the economy.
But first budgets are also grand opportunities. Given the resounding mandate this government received, it has a unique opportunity to undertake critical reforms in India’s welfare financing architecture that could generate some fiscal space for welfare spending, at least in the short term.
Rationalising scheme expenditure
The commitment to expand PM-KISAN is a clear indication that income support is going to be a key instrument for welfare under Modi 2.0. However, thus far, income support is being implemented alongside existing schemes and subsidy regimes. Current fiscal realities make this a financially unsustainable proposition. If expanded income support is here to stay, the question that the government must confront is this – which existent subsidies and schemes will be rationalised and where are the complementarities and overlaps with the existing financing regime that need strengthening?
There are two important issues that the budget will need to address.
First, the relationship between income support and existing subsidies. As I argue in a recent CPR policy paper with Partha Mukhopadhyay, there is a strong case for financing PM-KISAN by transforming existing, regressive fertiliser and electricity subsidies into a size-independent cash transfer. Not only will this create a much-needed fiscal wiggle room, but it will also open up the possibility of reforming India’s subsidy regime to make it more progressive and accountable. The political risks of doing this are well known. But with its current mandate, this government has a rare opportunity to undertake this bold reform in its first budget.
Second, the relationship between income support and the existing basket of welfare schemes. With every successive political transition and nearly every budget, the temptation that all governments, regardless of political colour, have succumbed to is the launch of “new” schemes. The result is a financial architecture made up of more than 400 ad hoc, overlapping and even redundant schemes run by the Central government. In this ad hoc financial regime, budgetary allocations are determined on the basis of political priorities of the moment rather than a coherent strategy.
An important consequence of this ad-hocism is that it fails to accommodate the wide variety of needs across India’s states.
Consider this: estimates by the World Bank highlight that poverty rates in six of India’s poorest states are twice that of the rest of the country. Nearly 62% of India’s poor live in seven of India’s poorest states – Bihar, Chhattisgarh, Madhya Pradesh, Jharkhand, Odisha, Rajasthan and Uttar Pradesh.
Poor states have considerably different developmental needs and governance capacities to those that are relatively better off. Yet, most of these 400 schemes are designed and implemented uniformly across the country. The result is an extremely inefficient financing system. Several recent studies point out that poorer states are unable to spend on central schemes, even as their financial needs are more acute.
While richer states and districts who are bigger spenders (analysing six key Central government schemes, the 2016 economic survey highlighted that India’s poorest districts received barely 40% of the total funds allocated to a state) of Central government schemes are often implementing programmes that don’t quite meet their specific development needs. The PM-KISAN, in its current form, is yet another ad hoc contribution to this cacophony of schemes.
The challenge of financing PM-KISAN can be a much-needed opportunity to tackle this ad-hocism. As many advocates of income support programmes have argued, a key source of financing is through repurposing and rationalising central schemes. But sensible rationalisation requires a coherent strategic framework; one that aligns schemes with welfare goals and specific developmental needs of states. Absent such a framework rationalisation risks throwing the baby out of the bathwater.
Consider the relationship between PM-KISAN and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). At first glance, the overlaps between the two schemes (both are designed as targeted anti-poverty programmes) would suggest that PM-KISAN makes MGNREGS redundant.
But a careful assessment of the two schemes points to deep complementarities. MGNREGS as Mukhopadhyay and I argue, plays an important role in enhancing farm productivity because it encourages employment through asset creation on farmlands belonging to small and marginalised farmers. This can significantly enhance farm productivity. These farmers are also PM-KISAN beneficiaries – a programme aimed at enhancing their ability to purchase agricultural inputs. MGNREGS and PM-KISAN together can thus both improve farm productivity and raise demand for local labour. By enhancing farm productivity, if implemented well, MGNREGS can, in fact, strengthen PM-KISAN’s welfare goal of alleviating farmer distress.
A coherent national strategic framework could also provide the basis for offering much-needed flexibility for states to align schemes with their specific needs. This is an important recommendation made by the World Bank in its recent analysis of India’s welfare approach. The World Bank calls for developing a national social protection strategy with a core basket of welfare schemes that states can adapt to their needs.
Greater flexibility was also a key recommendation by the NITI Aayog’s chief minister’s subcommittee report on Centrally Sponsored Schemes in 2016. The annual budget is not the space to unveil a new welfare strategy. However, by avoiding the temptation to announce new schemes and instead, expressing a clear commitment to implementing the NITI Aayog chief minister’s report, this budget could pave the way for much-needed reforms in welfare policy financing that could make welfare expenditure more efficient and aligned with needs and priorities.
Entitlement vs empowerment
Early in its first term, the Modi government was careful to distinguish its own welfare agenda from its predecessor, the UPA, by characterising its welfare approach as “empowerment” in contrast with the UPAs “entitlement” (or one that privileged handouts) approach. Yet, the government went to the polls largely on the back of what can only be characterised as an entitlement-focused welfare agenda.
Government financed housing, toilets, gas cylinders, income transfers – were the schemes that dominated welfare in Modi 1.0. The two pillars of “empowerment”: health and education were largely missing from the welfare agenda. Ayushman Bharat was a late entrant and its ability to provide quality healthcare to India’s poor remains an open question.
From the perspective of this government’s long-term welfare agenda, Friday’s budget is an opportunity to chart the policy course for the next five years.
Will welfare under Modi 2.0 continue to be about expanded safety nets and handouts, as in the first term? Or will the focus now shift to building basic human capabilities through greater investments in health and education? In other words, will welfare policy under Modi 2.0 be about entitlements or empowerment? And will it use its historic mandate to pave the way for bold welfare reform? Friday’s budget should provide some answers to these crucial questions.
Yamini Aiyar is the president and CEO of the Centre for Policy Research.