The approach of the next general election has reminded political leaders of the existence of the poor in India. This has set off a rash of competing promises to the electorate.
On January 28, three days before the budget, Congress president Rahul Gandhi announced that his party would guarantee a minimum income to every poor family in the country.
As of now neither Rahul, nor anyone else in Congress, has clarified precisely who will benefit from this scheme, but the cost will be prohibitive: At the prevailing minimum wage of Rs 321 a day (Rs 9,630 a month), covering 25% of the families of the country will cost the exchequer a whopping Rs 700,000 crore a year.
How the beneficiaries will be chosen is still unclear. The actual number could be much smaller – perhaps no more than 18% – if we count only those whom the National Sample Survey has placed in its residual category of ‘casual’ workers. But even casual workers make up 18% of the work force. So guaranteeing at least a minimum income will add Rs 500,000 crore to the central government’s expenditures.
Not to be outdone, three days later, Piyush Goel – Prime Minister Narendra Modi’s acting finance minister – announced in his budget speech that the BJP-led government would introduce an immediate income subsidy of Rs 6,000 a year to all farm families with less than two hectares of land. The government has estimated that 12 crore farmers operate on less than two hectares of land. This will therefore add Rs 72,000 crore to the Centre’s annual expenditure.
Goyal also unveiled an insurance scheme for unorganised workers in which the government will match the contributions of Rs 55 to Rs 100 a month of contributors starting from the age of 18, and guarantee them a pension of Rs 3,000 a month after they reach the age of superannuation. On the surface, this looks like a ‘pay as you go’ insurance scheme of the kind that continental European countries have adopted (but the UK and India have not). But it too bears the marks of haste and lack of study.
In ‘pay as you go’ schemes, the annual payout by the insurance company is met by the interest earned on accumulated pension contributions, supplemented by current premium inflows.
If such a scheme is open to anyone who is prepared to pay the required premium, a lock-in period of five to six years before contributors become eligible for its benefits is usually sufficient to make it solvent, without the need for any annual subvention from the exchequer.
But the imposition of a Rs 15,000 ceiling on eligibility for benefits will almost certainly pervert its purpose. For it will provide the employers with a big stick with which to dissuade workers who want a pay hike beyond Rs 15,000: “Stay below it or face the loss of half your pension when you retire”.
Unwittingly, therefore, Goyal has made a similar mistake to what the Speenhamland Act made in England in 1795, when it promised to supplement private wages with a ‘filler’ to raise workers’ living standards to the minimum acceptable level. All that the Act succeeded in doing was to allow employers to lower their wage rates as far as the Speenhamland commissioners would tolerate .
The ‘Speenhamland Effect’ will also ensure that the total number of beneficiaries will far exceed the 10 crore that to the Modi government expects. There are more than 36 crore non-agricultural employees in the unorganised sector. Is there any good reason not to expect 30 crore among them to take out old age pension policies?
If, or rather when, that happens, the government’s outgo on the scheme will rise to Rs 36,000 crore. If one adds to these two schemes the tax, and interest rebates that the interim finance minister has promised, this budget will increase budget spending by Rs 100-125,000 crore in a full year.
A broke government
Where will this money come from? Neither the Congress nor the BJP has said a word about how it will raise it, so one must conclude that they expect the annual increase in the government’s tax and non-tax revenues to cover the extra spending.
But even a cursory look at the government’s finances will show that while this can happen when the economy is growing at 8-10% a year and industry at 9-12%, as it did between 2003 and 2011, it cannot when industrial growth is stuck at 3-4% a year.
The harsh truth is that the government is broke. To balance its budget in 2017-18, it had to borrow money to meet close to 29% of its expenditure by borrowing money from the public through the sale of bonds by the Reserve Bank of India. The preliminary estimate for 2018-19 is only marginally lower.
Had the borrowed money been going into the creation of infrastructure, as it did in from the ’50s to the ‘70s, it would have given no cause for concern because the additional assets it created would have generated more money and more jobs.
But in 2017-18, very little of the borrowing is being done for investment. Of Rs 5,91,000 crore in 2017-18, Rs 529,000 crore was used to pay the interest on past loans. This is thus a self-contained circle that comes into being in which fresh debt is incurred to meet the cost of servicing past debt.
In short, the government is running the largest Ponzi scheme of all time.
The budget does contain a small allocation Rs 263,000 crore for its capital account. But this money does not create new fixed assets. Most of it goes into the maintenance of the fixed assets – roads, bridges, power stations and the like that were built in the past.
In sum, very little of the money that the government now raises from taxpayers is intended to safeguard the future of the country by creating more and better infrastructure. Nearly all of it is being spent upon salaries and pensions of a bloated bureaucracy whose income is adjusted every five years for inflation, come rain or shine.
What little remains is being spent on an ever-expanding web of social welfare programmes that create immediate relief and garner votes in the next election, but do nothing that will enable the poor to stand on their own feet.
That security comes only with the acquisition of stable, permanent jobs. Neither Rahul Gandhi’s minimum income programme, nor Mr Modi’s Rs 6,000 a year to the superannuated farmer will assure his or her son, daughter or grandchildren a job. To revert to economists’ jargon, every rupee that the government spends on boosting consumption instead of investment, denies someone a job on some date in the not too distant future.
Prem Shankar Jha is a Delhi-based journalist and writer.