IS NYAY ANYAY?

We, as a nation, have come a long way but need to move further. From excesses of socialism since Independence to the relative prudence of today in public finances, we have substantially changed the economic and investment climate in the country. Starting with reforms under PM. P. V. Narasimha Rao , FM Manmohan Singh and Make In India under PM Modi, we have swung into becoming known world over for our services & manufacturing . Over the years, fiscal governance improved with accountability and transparency getting better.

The citizenry has also evolved, and they are asking for ROI, if they need to contribute to revenues by way of taxes. Thus, over the years, The Fiscal Responsibility and Budget Management (FRBM) Act came into being which pushed the GOI and State Governments to keep borrowings within well-defined limits.The governments also thought it fit to reduce taxes as economy improved and tax compliance became better.

The summary table below depicts the data on GDP growth and fiscal deficit growth super imposed on direct tax rates. The data proves that moderate tax contributes to government revenue and also expansion of tax net.

Let us take a 10 year view from FY 2009 to FY 2019.

Summary:

  • GDP expansion 1.62X
  • Tax revenue expansion 2.65 X
  • Direct Tax as % to GDP of 0.84% growth at 5.98%
  • Direct Tax growth rate 6.20% to 18.03% almost 3X
  • Cost of Tax collection improving from 0.67% of tax revenues to 0.61% of tax revenues improving by 8.95%
  • Number of filers improving from 52.79 million to 74.13 million filers an increase of 40% over the period
  • Over the years, the corporate headline tax rates for SME’s have come down from 33.34% to 25% and with increased tax compliance, may come down in future too. The same applies to individuals where decrease in tax rebate slabs, have spurred compliance and consumption.

Governments are well within their right to offer sops,doles and subsidies targeted at the population that needs them the most. However sharp, directed direct benefit transfers have achieved a near 100% efficiency. Thus, an appropriate, value added, moderated tax, efficient tax system empowers the government to help the needy.

The time has also come, as it was done in the IT act to club and collapse all exemption under single heads and do the same for subsidies.

It is under this scenario that we examine the Nyuntam Aay Yojana (NYAY) scheme now being proposed. Let me also state at the outset that no one doubts or is oblivious to the fact that the poor of the country needed to be helped and this includes the urban and rural poor. The scheme targets a dole of a maximum of Rs. 72,000 for 5 crore individuals triggering an expenditure of Rs. 3,60,000 crores every year. The scheme also envisages a kind of gap income support between actual earnings and dole.Some wise men believe that the actual amount could be lesser than the Rs. 3,60,000 crores computed on the basis of each beneficiary drawing out the full value. Also the fact that, administering this scheme could be far more complex than imagined. It is puzzling that the 5 crore citizens identified for this dole, have grown over the years, in spite of numerous poverty alleviation schemes of the past. Clearly this is no solution, is it? Further justifying this scheme to bank loan write off does not make sense, because loans are liabilities fully recoverable in the current context of Insolvency & Bankruptcy Code, where recoveries are more than Rs.85,000 crores. Income support and industrial credit are not comparable.

It appears that NYAY is possibly ANYAY on those who comply with the tax regime and laws of the country. Those who govern will do well to keep the following major reasons why:

  • Unlike MNREGA, it does not add to GDP nor does it create social assets
  • Identification of the beneficiaries in the absence of proper income surveys and current data is going to be a challenge
  • It does not address the core issue of either rural poor or urban poor. For e.g. in rural India, a lot can be achieved by creation of adequate cold storage facilities for agricultural produce and elimination of the middle man who eats away the earnings of the farmer. By handing out a dole to the farmer, none of his issues or his dependence on the local unorganized money lending system is going to end. Same is the case with the urban poor who are largely migrants and move from place to place, very often without the relevant national identity papers. Both sectors may well be unbanked/ difficult to reach out to. As the operationalization cost of NYAY will also need to be considered.
  • Unlike Ujwal Yojana, UDAAN, PMKY, Ayushman Bharat or other schemes, it does not result in relieving a pain; in fact it puts money that is most likely never going to be used in the household
    • or the dole itself may be deployed into instant consumption goods without benefiting the family
  • It may create a set of people who may prefer to live off the dole. We have enough examples even from developed countries.
  • It acts as a disincentive to those who work hard, comply and borrow to repay
  • NYAY cannot be funded through existing revenue receipts as pointed out by economists. Adequate thought needs to be given to the funding of such an ambitious scheme. The Government simply cannot risk cutting back on infrastructure, health and education spend. The only solution then is to increase the tax rates which may lead to less compliance. Further, there are global factors at play. We cannot be an economy which goes back to the high tax regime and make India an unviable destination for manufacturing or services. We actually need to bring our corporate and personal income tax rates down to match other countries
  • Huge spend of this kind may well trigger an inflationary spiral which in turn will reduce the real value of the dole in the hands of the recipient.
  • It is estimated that NYAY will certainly lead to increase in budgetary deficits at least by 0.5 % to 1%; we have with great difficulty managed to bring them down. Inflation which has been around 3.5% yearly will jump substantially by around 2% based on previous experience.
  • Unlike food based subsidies, it does not add to food security and cannot be compared with income based support for farmers
  • How may of us really believe that this dole value is fixed? In all probability, it will come up for review time and again and create a perpetual drain on the country’s resources leading to further cutback in infrastructure spend or increased taxes
  • Lastly this scheme is perennial; it covers a larger population and borrows money from future revenue and growth as admitted by former FM himself and therefore is potentially toxic. It is hard to unwind as well.

In conclusion, governments are well advised to educate citizens on how to fish rather than hand them out a fish. The answer is collapse of subsidies into targeted sectors with sunsets; improve skill sets, education and opportunities. Help people to Achieve rather than Appease. As of now, the government has introduced a skill development program led apprentice scheme called “Shreyas”. This program upskills and pays a stipend of Rs.72,000 per annum for apprentices. This hopefully adds value.

ANYAY is two-fold. One for the person who will pay the cost of NYAY and for the recipient himself – who is shamed into living a life on dole without realizing the intrinsic potential that each one is capable of.