Economic Survey – Monish Borah

The Economic Survey 2016-17, released by the Union Finance Ministry of India has proposed a Universal Basic Income or UBI for 75% of India’s population. This income will amount to 7620 Rupees per year or INR 635 per month which the government will deposit into people’s bank accounts directly. This plan will require the government to spend something around 4.9% of India’s GDP and this money according to the Economic Survey will come from abolishing all the welfare schemes and subsidies that we Indians currently get from our government which amounts to 5.2% of the GDP.[i]

Yes, you heard me right. The government wants to give you Rupees 635 per month and in exchange they will abolish everything including MNREGA, Pradhan Mantri Gram Sadak Yojana, Pradhan Mantri Awas Yojana, National Health Mission, Swachh Bharat Abhiyan, Sarwa Siksha Abhiyan, Mid-Day Meal Scheme, LPG Subsidy, Food Subsidy, Fertilizer Subsidy and every other Centrally sponsored scheme and sub schemes.

Unbelievable? Believe It![ii]

But how can they have arrived at such a measly amount? Well, what they did is that they took the consumption level of an average person living in poverty in 2011 (According to now defunct Tendulkar Committee Report) and then calculated the amount needed to be added so that that person crosses the poverty line threshold, then they inflation adjusted the numbers to 2016-17.

There are so many problems here that I do not know where to start my analysis from.

It is very strange that when the discussions on Universal Basic Income took place in the rest of the world people called it too socialistic a measure, but in India we have a situation where the Finance Ministry has perverted UBI to demolish whatever elements of socialism and social welfare remained in India.

I will be going off topic if I start to discuss the merits of poverty lines here but I think it should be mentioned that when the last report on poverty line was released by the Rangarajan Committee it was criticised for keeping the poverty line very low. The Tendulkar Committee Report which came before that kept the threshold at a level even lower than the Rangarajan Committee. According to the Tendulkar Committee Report, anyone with income of more than Rupees 1000 per month in urban areas or INR 816 per month in rural areas was not poor.

Now, do the authors of the economic survey really believe that the welfare programs that they plan to abolish will have no impact on income levels of the poor? Programs like MNREGA and Pradhan Mantri Gram Sadak Yojana employ lakhs of unorganised labour for whom income from these programs are very important for making their ends meet. But the impact on consumption of even basic things like food and fuel for cooking will be much worse which I will discuss in details below under a different context.

The “Evil” Middle Class

There is in the chapter on UBI a lot of implied and direct ranting and raving against the middle class of India which is apparently misappropriating a large amount of subsidy for their own benefit which in turn has been sighted as one of the reasons why subsidies and welfare schemes should be done away with in favour of a Universal Basic Income. But how much of the subsidies is the middle class appropriating for itself- according to its own admission the Economic Survey says it amounts to only 1.05% of India’s GDP (the total value of all subsidies and centrally sponsored welfare schemes is 5.2% of the GDP)

It is important to note that the subsidies valued at 1.05% of the GDP which according to the Economic Survey is going to the undeserving people of the middle class also includes favourable interest rates for farmers, long distance non-AC train travel, fertilizer and LPG subsidies. I am not convinced that it is only the rich or the middle class which takes advantage of these subsidies, are you?

What is the Middle Class?

The Economic Survey of 2016-17 does not quantify or define the middle class but if the above mentioned subsidies that it wants to curtail, the massive focus in the chapter about the undeserving appropriating subsidies and “75%” to whom it wants to give the UBI to are any indication then the number of people in the middle class in India according to Finance Ministry’s estimate should be something close to the World Bank’s estimate i.e. around 20% of our population or over 260 million people. [iii]

But how did they come up with this number and is it relevant to the present times?

The World Bank came up with this number by considering everyone whose income is equivalent to 2-13 US Dollars per day as middle class.

But, I will like to draw your attention to another study done by Credit Suisse in 2015 where the size of the Indian middle class comes up to only 24 million. They arrived at this by considering wealth instead of income[iv].

What is the difference between income and wealth?

Income primarily refers to only the salary or wages that a person earns from doing his job. On the other hand wealth or net worth refers to the financial assets of a person like the amount of money in the bank and insurance policy returns and non-financial assets like immovable assets and people’s debts are subtracted from this calculation[v].

So, even though a person’s income might categorize him as being middle class, he/she will lose that stature if they lost their job. But a person categorized as middle class based on his or her wealth will not lose that status immediately, even if they lost their job because they have a protective net preventing them from falling into poverty.

So, is Income or Wealth Assessments more applicable to India?

According to the International Labour Organisation (ILO) only 15.4% of Indian workers get regular salaries and over 80% people work in unorganised or informal sector[vi].

Furthermore, over 60% of India’s GDP comes from the service sector[vii]. The service sector does not only include the IT sector but also tourism, shipping and port services and media and entertainment services[viii]. These sectors are extremely vulnerable to external shocks and it seems the world economy is facing one shock after another. Two of the biggest shocks that it is currently facing are the increased speed at which China is selling US debt and the US dollar becoming extremely strong thanks to Trump’s policies[ix].

So, in the current situation where only 1 out of 10 Indian workers get a regular salary or wage, a number which threatens to plummet even lower owing to the present volatile international situation, income should in no way be the basis for defining the middle class, Instead a person’s net worth or wealth should be used for quantifying it. It also means that the Economic Survey’s assumption that around 20% of India’s population belongs to the middle class is not applicable since if we consider the wealth or net worth of Indians it is only around 2%.

Transaction Costs

I am a student of Economic History, but I have always been on the fence when deciding the role that economic history can play in policy making. But this chapter on Universal Basic Income released by the Finance Ministry has convinced me that economic history is very important for policy formation or else neo-classical economists like those involved in creating this Economic Survey will let some obvious things slip from their minds.

The proposal for the UBI falls under the New Institutional Economics or NIE school of thought. This is fast becoming the most important school of thought in economics. But some neo-classical economists are trying to pervert it to their own needs which currently mean only one thing- reduction of government spending and austerity which according to them will free the market for the private sector. But NIE school of thought not only talks about the often abstract economic notions that most people find difficult to comprehend, but also deals with implementation issues with their primary aim being to decrease transaction costs.

Let me give you a brief explanation about the transaction costs. According to the New Institutional Economics when people interact with one another economically they not only exchange goods but also rights to those goods. For example when you buy a cucumber from the market you buy the right to eat it not the right to hit someone over the head with it. In order to ensure that these rights are preserved three main costs are incurred- negotiation costs, information cost and enforcement costs. All these comprise to form the transaction costs and lesser the transaction cost the better it is for the economy. This principle is not only applicable to economics but can be applied to many other things like functioning of the government or distribution of subsidies. What you see in the economic survey is unfortunately a shortcut by which the authors are trying to reduce transaction costs by directly reducing the expenditure of the government, but this is really very short sighted.

Let us consider some possible consequences on transaction cost if the UBI plan as mentioned in the Economic Survey of 2016-17 is implemented.

It seemed really bizarre to me that this chapter which talks a lot about the negative psychological impact that poverty has on people, which they basically lifted from a study done by the World Bank in 2015[x], seem to be so clueless regarding how people deal with their surrounding everyday of their lives when they live in poverty. Living in poverty is a form of violence in itself which makes people behave in radical and often “unlawful” ways.

For example, the current NDA 2 government says that they have been able to provide LPG connections to lakhs of poor household[xi]. Now, if the LPG subsidy along with the kerosene subsidy is discontinued then what will these people do? Obviously they will start cutting down trees for cooking fuel.

Also, millions of people all over India are employed for a season (100 days) under the MNREGA scheme. If this support is removed then not only will many people lose their income and remain unemployed for almost 1/3^rd of the year but rates of theft and robbery would increase.

As we have seen, elimination of just these two subsidies or welfare scheme will result in massive increase in the enforcement costs for the government be it to enforce the forest protection laws or to reduce petty crimes. But these are obvious things, how could the economists writing the economic survey miss it? The answer might be in the following meme

It is no secret that the neo-classical economists see themselves as scientists who work in a field that can be mathematically precise. This has been their undoing in the recent years. This is why I am proposing that economic historians who deal with more social issues should be given more say or at least should be heard when shaping economic policies.

The Basic Problem with this Document

The basic problem I think with this UBI chapter in the Economic Survey is its clear intention to cheat the Indian people. To an extent they have succeeded because they have garnered support and congratulations for the Economic Survey from some staunch critics of the NDA government like from Yogendra Yadav[xii].

The primary instrument for this cheating has been the structure of this chapter. They begin and end this 41 page document with several out of context quotes from Mahatma Gandhi talking about social justice, responsibility and frugality, so that no one can question their good intentions. Then they proceed to tell you how much the Central Government is spending on all its welfare schemes and subsidies (5.2% of the GDP). Then they tell you that this does not reach the deserving by showing the percentage of poor people across all of India’s districts. In the next map they show you in how many districts there are shortfalls in welfare schemes/subsidy allocations. Their implication is that the undeserving has gobbled up those subsidies. But do they consider that the government might itself be under-investing in those schemes, no.

Instead they go on a full rant against the “evil” middle class based on their assumption that it comprises of nearly 20% of India’s population, all the while telling you the advantages of better targeting the welfare schemes and subsidies. In the mean time they also tell you that to implement the Universal Basic Income the government will need to spend 4.9% of India’s GDP. They freely sacrifice the subsidies they think goes to the middle class alone for this purpose but it comes up to only 1.05%. As for the rest of the subsidies they give a warning that dissolving them might destabilise the country, but this is to just confuse the people who might condemn it. But no one is getting confused, even The Economist read it the same way I did, but they were happy with it while I am disturbed by it[xiii]. Even Arvind Subrahmaniam (person in charge of writing the Economic Survey) in his interview to The Hindu makes it clear that he is all for of removing the entire gamut of subsidies and welfare schemes in favour of a Universal Basic Income.[xiv]

This document can also be accused of lying by omission especially with regards to two issues. Firstly, there is no discussion about how the government finds money to give subsidies and tax cuts to corporates while it cannot find the same for the poor, something that is repeatedly highlighted by people like Jean Dreze and Amartya Sen. Secondly, there is no explanation as to why they considered the old and much criticised Tendulkar Committee Report for deciding the poverty line instead of using the newer and somewhat better (although in no way perfect) Rangarajan Committee Report.

What saddens and worries me also is that the team which prepared this economic survey includes young and brilliant graduates from some of the best universities in the world like Harvard and Oxford. Do, they think that they can pass even an under-graduate exam in those universities if they produced such a mess of a paper? Do they think it is a great achievement on their part to cheat people into giving up all their subsidies and claims to social welfare for a measly 635 rupees per month?

The media and the civil society of India must ask the government to disown the concept of Universal Basic Income as proposed by the Economic Survey of 2016-17 or else shrewd economists will manage to convince sufficient number of politicians to approve this proposal. After all we have to keep in mind what John Maynard Keynes said-

“The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”

[i] http://finmin.nic.in/indiabudget2017-2018/es2016-17/echap09.pdf

[ii] Catchphrase from http://www.imdb.com/title/tt0218787/

[iii] http://www.business-standard.com/article/current-affairs/indian-middle-class-is-24-million-not-264-million-credit-suisse-115102900181_1.html

[iv] https://www.credit-suisse.com/us/en/about-us/research/research-institute/news-and-videos/articles/news-and-expertise/2015/10/en/global-wealth-in-2015-underlying-trends-remain-positive.html

[v] http://publications.credit-suisse.com/tasks/render/file/index.cfm?fileid=AD783798-ED07-E8C2-4405996B5B02A32E

[vi] http://www.ilo.org/wcmsp5/groups/public/—asia/—ro-bangkok/—sro-new_delhi/documents/publication/wcms_496510.pdf

[vii] http://www.business-standard.com/article/economy-policy/india-s-services-sector-grew-10-a-year-in-2015-16-cii-report-116042001082_1.html

[viii] http://pib.nic.in/newsite/PrintRelease.aspx?relid=136868

[ix] https://www.ft.com/content/2a01d6c2-de6f-11e6-86ac-f253db7791c6?myftTopics=TnN0ZWluX09OX0FGVE1fT05fMTIxNjIw-T04%3D and https://twitter.com/adam_tooze/status/826029868009787392

[x] http://www.worldbank.org/en/publication/wdr2015

[xi] http://pib.nic.in/newsite/PrintRelease.aspx?relid=155686

[xii] https://twitter.com/_YogendraYadav/status/826435386914136064