MIT's Professor of Economics Abhijit Banerjee was in New Delhi to launch his new book 'What the Economy Needs Now' which is being co-authored with 13 economists, including Raghuram Rajan and Gita Gopinath, Pranjul Bhandari, Sajjid Chenoy, among others. In an exclusive interview to BusinessToday.In's Rajeev Dubey, Banerjee explains how the Congress Party is considering implementing the NYAY scheme on the ground, what will be its implications on the fiscal and on the tax payers. Excerpts:
Congress consulted you on its economic agenda. What was your involvement with the minimum income guarantee scheme?
At a broad level we were really sympathetic to the idea that India as a new middle income country should do something for its desperately poor. That it's not okay to have people who are really on the border of starvation or at very low levels of living in a country that should be able to afford it.
Beyond that, the details of the scheme, my view was that they should have gone slower. That it would have been easier to create the fiscal space if they went slower. I see the compulsion of going faster which is that you want to make a mark. An election is coming up. I think long term they are thinking election in some number of days. So, it's a very different perspective and I can see that having news to deliver is important. I'm not totally surprised that they went in this direction but it would have been easier to implement if it was planned to be a more gradual rollout.
By slower you mean by the tenure or the amount of money being doled out?
The amount of money. Going with Rs 2,500 or Rs 3,000 (per month) would have been a good start. I was a bit more conscious of the fiscal constraints in saying that. I do think that either way we have a fiscal challenge. Even if we didn't do this scheme our interest rates have been telling a consistent story, something we emphasised in the book - that the interest rates are unsustainably high and that reflects on whatever magic we do with our budget numbers. A high level of deficit at the state and federal level plus hidden or off-budget borrowings of all kinds of government organizations are unsustainable whether or not this scheme was proposed.
Was this your joint recommendation with Dr Raghuram Rajan?
With Raghu what we said was not so specific about the numbers. There was more about what the objectives and style of the projections should be.
So there is some kind of bravado involved in this that if BJP can give you Rs 6,000 in a year, Congress can give you Rs 6,000 every month. Economics we'll figure out later.
There's bravado. I do think that at some point we'll have to bite the bullet. We're a lower middle income country now, the kind of country where the desperate poverty that we have seems unacceptable. I work on the very poor and I have seen this first hand. People live in conditions which should not be acceptable to any of us.
What else did the Congress want to know from you?
Just what's the income distribution, where is the cut-off, where should we set the poverty line, how many people are below a certain level. Those kinds of numbers. That's the place where we mostly contributed by just trying to provide numbers where there aren't any very good numbers. Thanks to our very broken data collection apparatus.
How did you reckon this will be implemented?
There will be a couple of steps. One is based on the SECC 2011. They are going to define a set of exclusion criteria. If you have a car, you're not eligible; if you have a pucca house in a city or a large village, you're not eligible, etc. From this they're going to try to see how many people they're going to exclude by that.
The first year they're only aiming for the poorest of the poor who're actually relatively easy to target. The easiest people to target are the people who are at the very bottom because they live outside villages. They often live in specific hamlets for the Jatavs or some discriminated communities. So it's relatively easy to identify. The SECC will give them a reasonably good guess, as well. It won't be perfect but the one thing I've been recommending over and over is that you can't be dogmatic about it. You have to allow a scope for the community when a community comes back and says X is somebody who really needs to be included. You have to include X. You can't say our numbers says he's just above the line. You have to have the attitude that if you aim for 10 per cent, you're going to get 12 per cent. But that's okay. That is the right way to do. So the lowest 10 per cent is not that hard.
The next step will be harder. For that, probably they'll need to update the SECC 2011 which is 8 or 9 years old. So the second tranche-the 10-20 per cent-gets harder because they are a little less distinguishable from the rest.
The most difficult may also be those below the Rs 12,000 per month threshold. How can that be worked out?
The way it's going to be done is through some predictive model that if you have this, this and this, you're above the level. You're going to have some exclusion criteria and then you're going to impose some rule which says that anybody who doesn't have any of these things starts by being eligible and then we might do a check on them, for instance a government job. They'll evolve a set of criteria but in the beginning there's going to be a lot of problems just like with everything else in India. I'm not that worried about it. With political will, and I think there will be political will. This is the kind of promise that you can't make and not deliver. One good thing about an ambitious claim is that you can't make it and not deliver. You don't deliver, you are dead. So I think they will deliver. They will figure it out. I'm not too worried about it.
Do you get a sense that Congress has announced it and now they will figure out the fiscal space?
Even without this, we're in a fiscally unsustainable state. Some major tax reform has to happen. Whichever government wins, they'll have to do. There's no fiscal space for this.
You're saying this can only happen when there is tax buoyancy or you create tax buoyancy?
You have to create tax buoyancy.
So we have to plan for higher taxes or new taxes. What would those be?
There's short run and the long run. In the long run, we've missed every bus that arrived. Every year, we basically raised the tax limit. China and we were exactly at the same spot 20-something years ago with the same fraction of income taxes in the GDP. China has increased by 2.5 times. We haven't. The reason we haven't done it is that China held their standard. As we get middle income, we have to say that the middle classes have to be able to pay something. I don't see this as having anything to do with this scheme. There's this idea that the middle class wants something without paying for it. We want to be a great nation but it is okay if people are starving. We want to be a great nation but we don't have enough to pay for upgrading the army. We want to have a space programme but we don't have money for it. This is a litany that we keep hearing. If we want to be a great nation, we need to foot the bill.
You are saying we made a great mistake by lowering tax rates in growth years when we should have kept them like China?
Absolutely. If we held it that exact amount would have paid for this programme more or less, just incidentally.
That's a political hot potato but where do you see the new taxes coming from? If you were to recommend, what taxes should increase and what are the new taxes that can be imposed?
Income taxes. In principle, there's scope for wealth taxation and in some sense there's scope for increasing GST. All of those have to be a fair game. We have to bail out our banking system by recapitalising them. It's going to cost a lot of money. We'll have to create a special fund from somewhere and fund it. One can get obsessed that this scheme is going to cost money but in fact we've done lots of things that cost money. We've spend Rs 50,000 crore for Air India. That's not a tiny amount of money. It's a complete waste.
Let's look at the good side of NYAY. If the subsidy to the poor who largely stay in rural areas will more than double, it should transform lives, it should boom the rural economy, the agri economy. What kind of positive side of NYAY are we looking at?
A lot of people who are relatively not in the bottom 10-20 per cent will also benefit. All the evidence we have is that we are a bit demand constrained in the rural economy, even in the urban economy. Essentially, the informal sector is demand constrained and when there is some injection of demand, it creates a multiplier. That looks very much like what the evidence from NREGA. When you expand NREGA, you see a general boom. There is very nice work in Andhra Pradesh which is showing that. You do see evidence that there is demand constraint and injection of some more purchasing power into the economy does have positive consequences.
So you do see impact of this on the expansion of the economy?
We'll have to deal with short run pressures which are going to be substantial and there is a worry of crowding out of investment. I don't want to minimise that. All the evidence looks like that when you expand the schemes that target the poorest. You see a demand effect. My reading of the evidence is very consistently that there is a strong demand effect.
One of the questions that arise is that if our subsidy burden of the nation is already going to be Rs 7 lakh crore next fiscal. And there is hidden subsidy as well from off-budget subsidies, where is this going to stop? What is the evidence from the world economy of the kind of subsidy India can handle?
I can't quote you a number. There are countries which seem to have gone much further than others. There are European countries where the government budget is close to 50 per cent of GDP. We're a long way. There's still scope. You're raising a perfectly reasonably point. I don't disagree with the point that these economies have increased the efficiency of their taxation system. Their databases of tracking people are enormously better than ours. Will we get there immediately? No.
One way to think about what efficient cash delivery would do is that in the medium run it would create a structure by which you can then say that we're credible. If we say we'll give you Rs 6,000, we'll give you Rs 6,000. Now, we're going to try to replace a lot of the distorting subsidies by non-distorting subsidy. That's the first step.
That requires a lot of political capital which India hasn't had so far...our subsidy burden is 5 times of what it was 10 years ago. With NYAY, it will be 10 times.
I agree. Once you implement this, the credibility of implementing a very large scheme to a very large population is the first step in withdrawing some subsidies. The reason we can't withdraw is because nobody believes us. You say that we will give you cash but why would I believe you? What have you done efficiently? It will be very important for whoever comes to power. And this is equally true for the BJP's Rs 6,000 as well. If they actually manage to do that efficiently and is credible, the next step in reducing water, electricity and fertiliser subsidies might be feasible. Then you can start to replace those and the efficiency gains there are large. That's where there is real waste going on.
Is NYAY the baby step towards Universal Basic Income?
This is related to what I am saying-the replacement of all other subsidies. So those subsidies don't necessarily go to the poorest. It will start to include a lot more people. In that case, it's a little bit UBI, yes, because it gets this idea that we want to have a unified payment rather than 15 different schemes. If there's one clean scheme then we avoid the distortions that are there.