Rahul Gandhi’s income plan falls short
That the Congress is promising paltry cash transfers instead of promising radical improvements in what are structural challenges shows that it is continuing with the long-established short-termism in Indian politicsUpdated: Jan 30, 2019 09:09 IST
The Congress has promised a minimum income guarantee (MIG) – direct cash transfers to the poor – if it comes to power after the 2019 elections. The political benefits from such an announcement will only be known after the results. However, one can say that the economics behind this a warped version of Keynesianism. Here are three reasons why this is so.
Deterioration of terms of trade for agriculture, liquidity shock due to demonetisation and squeeze on the informal sector after the implementation of Goods and Services Tax have all contributed to squeeze on the incomes of India’s poorest people. All this justifies some sort of stimulus. But such policies should have an in-built mechanism to give them a counter-cyclical nature. The MGNREGS has it. When poor workers in villages have remunerative work elsewhere they won’t demand work under the MGNREGS. Hypothetically, this allows for a future reduction in the fiscal burden. MIG payouts won’t change with a slump or boom in the labour market at least in the medium term. MGNREGS, if implemented scientifically, has the potential to augment asset creation in India’s villages. This compensates for the scheme’s inflationary impact on wages. An MIG will increase the reservation wage for unskilled labour without any such positive externality. Poor workers after all will get some money whether or not they work. In an age where automation is already threatening the growth of labour intensive industries, this could actually go against the long-term income share of workers in the economy. Any credible MIG plan will have a significant fiscal cost. This is bound to put pressure on other expenditure heads. The United Progressive Alliance government did well in providing some relief to the poorest sections of the population. It also reaped political benefits from these policies. But the party ended once global financial crisis created strong headwinds for economic growth, and hence, revenue generation.
India’s key challenge in fighting poverty is to ensure sustained income growth for majority of its workforce. This will require a significant hike in education and health expenditure along with a drastic improvement in delivery. This requires prolonged effort and resources without a promise of political benefits in the short-term. That the Congress is promising paltry cash transfers instead of promising radical improvements in what are structural challenges shows that it is continuing with the long-established short-termism in Indian politics.
First Published: Jan 30, 2019 09:09 IST