With the Congress promising through the Nyuntam Aay Yojana (NYAY) scheme ₹6,000 every month to the poorest 20% of households if voted to power, Mahendra Dev and Pronab Sen talk of the importance and problems of direct cash transfers. Providing social protection is important even as governments try to create conditions for income-generating activities, they say in a discussion moderated by Sharad Raghavan . Excerpts:
Professor Dev, in the light of unemployment being such a big issue now, should the government that comes to power next double down on employment creation or opt for direct transfers to the people who need it?
Mahendra Dev: Let me start on the employment question. Productive employment is the best way to remove poverty. But the organised sector constitutes only about 10% of the population; unorganised sector employees constitute almost 90%. In that context, unless you create jobs for everybody in the organised sector, the working poor will have problems. People are working, but at low wages. About 50% are self-employed. Unless you create productive jobs, you need to have social protection measures because the poor face many risks — health risks, labour market risks, financial risks.
But whether it is a minimum income guarantee or the Pradhan Mantri Kisan Samman Nidhi Yojna (PM-Kisan), are these the best ways to reach them, or some other programmes like old-age pensions and maternity entitlements? That’s the debate. But the need for social protection for the poor is important in the context of risks. And now there is also rural distress. The best way is to create jobs, but for job creation at the higher level, we need to increase more labour-intensive manufacturing, which may take time. So, in that context, giving cash transfers may be right, but how to get resources for the scheme and implement it is another issue.
Dr. Sen, is the way forward to try to increase the number of productive jobs, increase skilling and train people better, or provide them with economic assistance?
Pronab Sen: I think what Mahendra Dev is saying is that the two are not mutually exclusive. We keep talking about governments creating jobs, but the fact is that governments don’t of themselves create jobs. The best a government can do is to create conditions whereby private enterprises create jobs. That has to be done, and people must have the expectations of being able to access the jobs. In the interim, when you have people who cannot get employment, like the old, you do need social protection for them.
And then comes the problem of the working poor, which is the largest chunk of the Indian economy. Do you need to do a top-up is the question. Now, the thing is, the two are related. So long as productivity and the income accruing from jobs don’t reach a particular level, a certain amount of help is necessary.
The problem with entitlement sort of programmes, which is what both PM-Kisan and NYAY are, is that they don’t create that link. When we think about jobs, we should be very careful in our choice of words. Jobs are when someone else is employing you. What we are really talking about is income-generating activities. That could be a job, it could be self-employment, there is a variety of things that people do.
We have simply gone away from the discussion on how to increase income-creating opportunities for the people at large. Our focus is too much on the formal sector, which, as Mahendra Dev rightly says, employs just 10%. Even if it grows at a very rapid rate, it is not going to make a dent for a while. But we are really not discussing the steps, the measures, the macroeconomic conditions that are necessary to create non-formal jobs which have been the mainstay of income for the bulk of the Indian working class.
Professor Dev, keeping that in mind, would increasing allocations to, say, MGNREGA, which is giving people work and also income, be one way instead of directly giving money to those who can work?
MD: I am an advocate of MGNREGA. Of course, that is for unskilled workers mostly, although some skilled component is there. It is a self-targeted programme also. In the minimum income guarantee scheme, the problem of targeting errors is there. There will be exclusion and inclusion errors in identifying the poor. In MGNREGA, it is mostly self-targeted. The rich may not participate unless they do some corruption with the muster rolls. Otherwise MGNREGA is a good one. But that itself may not be enough because we have the self-employed poor and the old. That is one of the social protection things...
But also remember that the amount allocated for this minimum income guarantee, ₹3 lakh crore, comes with opportunity costs. Human development people say, why can’t this be spent on health and education instead of on minimum income guarantee? There are opportunity costs to any expenditure, unless the government expands the tax base much more. Otherwise, there is always a trade-off.
Dr. Sen, how does one pay for something like the minimum income guarantee scheme?
PS: Let’s be very clear. The scheme is a pure transfer, which is perfectly legitimate in any society that is caring. You take from the rich and you support the poor. There is nothing inherently wrong with that, but the implication is that you are going to have to tax the rich. And if you really look at the discourse we have been having in India over the last 25 years, it has mainly been focused on how to increase profitability of Indian enterprises and persuade them to invest and create jobs. Now that part of the narrative continues to be valid if you’re talking about creating jobs. But in a context where you need to tax the rich and get much more out of them, some of this narrative is going to have to change. For instance, we have sequentially been lowering the corporate tax rate. This government has already announced that it wishes to bring the corporate tax rate to 24%. It’s been done for one category of companies but has not been fully extended yet. All of those are actually leading to reduction in the amount you are taxing the rich, which becomes a problem for you to fund this sort of a programme.
The other way you can do it is to remove a whole bunch of government activities. But anybody who has taken a long, hard look at the government’s budgets knows that there are very few items of expenditure which you can legitimately question as being unnecessary. So, there is a problem, and the problem now is that if the discourse now says, we are going to do this, we are going to tax the rich, what effect it has on the larger macroeconomic picture then becomes an issue that we need to debate.
Professor Dev, the thing with directly giving people money is that you are in essence just increasing their consumption expenditure, but the revenue earned by the government from them is more or less the same. Yes, there is some increase in indirect tax collections, but direct tax collections remain the same, whereas the consumption expenditure goes up. Is that a sustainable way? How do you mitigate that?
MD: As Pronab said, we are not against the concept of minimum income guarantee. But how we do that is important. If the consumption expenditure increases, the demand for industrial goods, many durable or non-durable goods will increase. So that may have some taxes for the government. But how do you raise ₹3 lakh crore is an important issue. There are implications, as Pronab mentioned, like taxing the corporate sector. So, one has to see how to raise the resources. Can you reduce the so-called non-merit subsidies or concessions to the corporate sector in the Budget? These are issues one has to see, apart from how to identify the poor and implement the scheme.
Dr. Sen, if the government does manage to raise this quantum of resources, would direct transfers be the best way for it to utilise this extra resource?
PS: I think this is where Mahendra Dev and I completely agree. The problem with the direct transfer mechanism is that there is an inherent assumption which has not been discussed, that is, the poor always remain poor. This is not necessarily the case. We are in a fairly dynamic economy and a person or household that was poor three years ago or five years ago may no longer be poor because their children have started working, they are earning better. The direct income transfer that is being talked about now is inherently non-dynamic. It’s very difficult to drop people who have been receiving these funds.
On the other hand, MGNREGA is dynamic. That is, as people move into poverty, they will access MGNREGA because, as Mahendra Dev rightly said, it is self-targeting. People who are moving out of poverty will stop going to MGNREGA work sites. So, the ideal combination would be to have MGNREGA as a safety net and to have direct transfers to those who, for whatever reason — physical, age, gender — are unable to access the work market. It’s a combination of social protection and a social safety net.
Professor Dev, Dr. Sen had mentioned that the corporate tax rate has been lowered and it could possibly be increased. Do you feel this is the case for personal income tax as well? There was a calculation that increasing the tax rate for people earning more than ₹2.5 crore a year by 2 percentage points would pay for this scheme. Is something like that feasible?
MD: I don’t know the implications for the economy of increasing the tax rate for the ultra-rich. Economist Thomas Piketty talks of a wealth tax. One has to see the implications and how much you get and those kinds of things. One has to think much more about resource mobilisation and how to mobilise this ₹3 lakh crore and also continuously map the dynamic poor. For example, the Socio-Economic and Caste Census (SECC) is of 2011. From that data, one can identify the poor, but what we had in 2011 could be quite different in 2019.
Dr. Sen, how then do we increase targeting? Do we need to increase the frequency of surveys such as the SECC or is there some other form of targeting we can use?
PS: There are other forms of targeting. It could be on the basis of readily verifiable parameters such as age, physical disability, being an orphan. There are ways of targeting without going into the issue of poverty itself. So that what you are targeting is the inability to work and you focus on the growth process and for social safety nets like MGNREGA to take care of those who are able to work.
