Paying for Rahul's Nyay: Slashing subsidies may be a hard sell

Income transfer are the rage now. The latest initiative has come from Rahul Gandhi who announced on March 25 that 20% families in the ‘poorest of the poor’ category will be given ₹72,000 each annually as a minimum income. Will cash transfers prove to be more efficient in delivering benefits to the poor as compared to giving grains? How will this be funded? Can existing subsidies be replaced to find funds? These are the questions that needs to be answered.

The spadework for transfers not in kind, but in cash, like minimum income guarantee to the very poor, was done during the second term of the Manmohan Singh government. Though Singh thought markets could work for the poor, the National Advisory Committee (NAC), headed by then Congress President Sonia Gandhi, being Leftist in orientation, believed the state should guarantee certain rights: to primary schooling, food, forest land for tribals, and wages for at least 100 days a year in rural areas.

Under the National Food Security Mission (NFSM), subsidised grain was to be given to 66 per cent of the population. Economists Jean Dreze and Ritika Khera were in favour of giving grain. But the then Chairman of CACP, the commission that fixes minimum support prices for crops, was in favour of replacing grain transfers ─ because of the huge cost, inefficiency, corruption and wastage ─ with cash.

Delhi’s Chief Minister Sheila Dikshit started a pilot project in 2009 in Raghubir Nagar with the help of SEWA or the Self-Employed Women’s Association. About 100 families opted for cash and 150 families for grain rations. Surprisingly, those who got cash said they were better off.  They bargained for better prices at wholesale mandis and better food (like meat, occasionally).

In 2018, Telangana Chief Minister K Chandrasekhar Rao announced the Rythu Bandhu Scheme (RBS), where every farmer would get ₹4,000 per acre per season (₹8,000 a year). This covers 5.2 million landowners regardless of size of holdings, identified on the basis of cleaned-up and updated land records.  The cost is ₹12,000 cr a year.  An audit found that 38 per cent of the payouts were to farmers with more than two hectares of land.

Template from state

RBS became the template for Prime Minister Narendra Modi’s 2019 scheme of depositing Rs 6,000 a year in three equal instalments in the bank accounts of those owning up to 2 hectares of farm land. The cost is estimated at ₹72,000 cr a year. The scheme covers 81 per cent of India’s agricultural households. But it excludes agricultural workers ─ 144 million according to the 2011 census ─ who are more numerous than cultivators.

Odisha’s KALIA scheme remedies the inadequacies of the above two schemes. It pays ₹5,000 twice a year to the state’s 3.02 million farmers with up to five acres of land, ₹10,000 a year to half a million agricultural households and ₹12,500 a year to one million landless families. The annual tab is ₹3,400 cr a year.

Direct income support would presume withdrawal of subsidies in kind. But all the beneficiaries identified above continue to be entitled to subsidized grain, cooking gas and fertiliser. Before the assembly elections last year, Rao offered to waive off farm loans and give power free to farmers.

Such input subsidies are wasteful. Free power and assured procurement of rice (for whose cultivation is it not suited) has depleted Punjab’s groundwater reserves.

A top-up scheme

Gandhi said his Nyunatam Aay Yojana (NYAY) is a top-up scheme; the bottom 20 per cent of households – each with an average of 4.8 persons, according to the 2011 census ─ would get cash supplements to assure a monthly income of ₹12,000.  It’s assumed that an average of ₹6,000 per household would need to be paid to about 50 million households who were below the poverty line in 2010-11. That is ₹3.6 lakh cr a year or 1.7 per cent of this year’s projected GDP.

The central government’s budgeted subsidies on food, fertiliser and petroleum for the coming year are ₹2.96 lakh cr. The outlay for the rural employment scheme is ₹60,000 cr. Can the government replace these with NYAY without inviting a backlash? Not all the beneficiaries of existing subsidies are the poorest, though there may be some overlap.

The Aadhar infrastructure, the proliferation of smart phones and the spread of Internet banking will allow income transfers to bank accounts of the poorest households. But identifying them will be a fraught exercise. There will be errors of inclusion and exclusion, that is, some of those who should not get the guarantee will be included and some of those who should will not be.

The Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA) is supposed to be self-selecting, because only those really in need of work will opt for hard manual jobs. But there is widespread corruption.

Village sarpanches make false jobs cards in the name of favoured constituents. No work is done but wages are paid and split in connivance with the beneficiaries. In 2015, when an elderly and well-off farmer of Mathura asked this correspondent to check his bank passbook for crop insurance premium deduction, he saw entries for regular monthly MNREGA payments. Earlier this month, village folk in MP’s Sehore district told him about sarpanches falsifying MNEGA work. NYAY is unlikely to escape corruption.

Madhya Pradesh Bhavantar Bhugyan Yojana or price deficiency top-up scheme is similar to NYAY. The previous government of Shivraj Singh Chouhan offered to pay farmers the difference between minimum support prices and the price they actually got at the mandis for soybean, moong, urad, tur, maize, til and groundnut. Traders cartelised and depressed the prices so they could buy cheaper, knowing the government would compensate the farmers.

NYAY might have similar unintended consequences. It might affect work culture and encourage freeloading. If minimum income is guaranteed why should anyone work? It will divert money from investment in infrastructure like roads and irrigation that create durable job opportunities.

The recent spate of schemes seems to be favouring direct cash transfers and with passage of time the schemes are improving based on past experiences. But the funding remains a big question. Experience shows it may not be easy to replace subsidies with a new scheme.