Ad hoc approach to raising income of the poor needs to be replaced with well thought-out bouquet of measures that would spread its net wider to be effective in reviving and sustaining growth. The single most import task for the next government would be to kick-start the economy which has gone into a downward spiral - real GDP growth has fallen from 8.2% in 2016-17 to 7% in 2018-19.
- Prasanna Mohanty
- New Delhi
- May 31, 2019
- UPDATED: June 5, 2019 17:36 IST
The Finance Ministry's explanation for this is: "The proximate factors responsible for this slowdown include declining growth of private consumption, tepid increase in fixed investment, and muted exports. On the supply side, the challenge is to reverse the slowdown in growth of agriculture sector and sustain the growth in industry..."
While the entire economy seems out of gear, private consumption is of greater significance here since this has been the main driver of growth for long. It constituted about 60 per cent of GDP (at current price) during 2017-18 and 2018-19. A decline in consumption indicates that demand has dried up and need to be revived immediately.
It is in this context that raising the income of the bottom pile of population assumes significance. This could be achieved through direct income transfers and a host of other income support mechanism that needs to be worked out through wider deliberations and consultations.
This article is the second in a series that looks at the agenda for the Narendra Modi government's second term. Read the first part on creating jobs here.
Why raising income of poor is the key to growth
The word 'poverty' is no longer fashionable. Instead, global attention has been focussed on widening income inequality in recent years, both in developed and emerging or developing economies, more so after the financial crisis of 2008-9.
The International Monetary Fund (IMF) - the very proponent of the neo-liberal economic policy - has taken a lead in this and rightly so because its neo-liberal policies are to be blamed, even though in a limited context for spreading income inequality. Its 2016 study Neo-liberalism: Oversold? found that two of the neo-liberal policies under scanner - removing restrictions on the flow of capital across a country's border and fiscal austerity - increased inequality and hurt the level and sustainability of growth, instead of delivering growth.
In the Indian context, French economists Thomas Piketty and Lucas Chancel pointed out that the country turned even more unequal since mid-1980s "when pro-business, market deregulation policies were implemented".
Thus, a neo-liberal economic regime and rise in inequality share more than just a coincidental relationship.
Another IMF report found a link between the rise in the income of rich and poor with that of the GDP growth. It concluded that while a rise in the income of the rich led to a decline in GDP growth that of the poor did the reverse - led to a higher GDPO growth. It said: "...if the income share of the top 20 per cent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 per cent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels".
It went on to add that income inequality could lead to a suboptimal use of human resources, cause investment-reducing political and economic instability and raise crisis risk.
These IMF reports are of interest to India also because they support the idea of redistributive mechanisms to raise income of the poor and suggest a more nuanced approach to fiscal discipline (or austerity) - reducing fiscal deficit and debt level. One of the reports says there is no one-size-fits-all when it comes to fiscal discipline and warns against turning it into a fiscal noose or contraction of economy.
Making India’s approach broad-based
In recent times it was the Economic Survey of 2016-17 which talked of a redistributive mechanism to raise the income of the poor by suggesting a Universal Basic Income (UBI) programme the basic premise of which was: "A just society needs to guarantee to each individual a minimum income which they can count on, and which provides the necessary material foundation for a life with access to basic goods and a life of dignity".
This envisaged an income transfer of Rs 7,620 a year to 75 per cent of the population (excluding the top 25 per cent in income). But the subject remained forgotten until the Congress, during the run-up to the general elections, promised Nyuntam Aay Yojana (NYAY) - an income transfer of Rs 72,000 a year to the poorest 20 per cent families - to eliminate poverty, ensure a life of dignity and also increase consumption to provide growth impetus.
On its part, the BJP-led NDA government announced the Pradhan Mantri KIsan SAmman Nidhi (PM-KISAN) programme in the interim budget for 2019-20, under which farmers having land up to two hectare (or five acre) were to receive Rs 6,000 a year in three equal instalments. By the time the polling ended on May 19, millions of farmers had already received their second instalments.
In the meanwhile, the BJP had promised in its manifesto to extend the programme to all farmers (big ones), indicating that it was aimed more at a segment of voters, rather than providing a vision to revive the economy. More glaringly, it left out the poorest of the poor - farm labourers. The farm labourers constitute a larger chunk of the total agriculture workforce - 144.3 million of them (or 54.9% of the total agriculture workforce) against 118.8 million of cultivators (45.1%).
Nevertheless, these moves are not insignificant, especially when India needs to revive demand and boost growth. But there is a need to craft a comprehensive policy response to widen the net of income support measures as well as the beneficiaries to be effective in reviving demand and sustain long-term growth.
These could include a range of income support systems such as social security for the old and other vulnerable segments, strengthening of public health, education and other services and infrastructure in rural and urban areas, better price realisation of agriculture produces and handicraft items, streamlining of financial and other incentives for self-employment etc.
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