VOTE: How will Rahul Gandhi’s 500 rupee/day scheme impact India?

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Rahul Gandhi has caused a flutter in political circles by announcing today that his government will offer Rs 12,000 per month, or about Rs 500 per working day, to any family that does not earn any income from any other source.

UPDATE: The Congress Party has clarified that the guarantee of Rs 12,000 per household is applicable only to those who do not fall into the category of the poorest of the poor. For those who fall into the category of the bottom 20% of Indians by income, the Congress Government will pay Rs 6,000 per month, irrespective of how much they’re earning. For such households, the 12,000-rupee guarantee will not apply.

The move is pitched as a masterstroke as it could attract many people who cannot or don’t want to work for a living to vote for the party.

Rahul Gandhi said his team has been working on the scheme for the last four months, and that it is a ‘fiscally prudent scheme’, and is completely practical.

“It will be implemented in phases. First there will be a pilot, and then the scheme,” he said.

The scheme is not novel in terms of its conception, but will be, in terms of its scale of implementation.

Many countries, such as the US, and most nations in Europe, offer a minimum income to those without any other source of income.

CHALLENGES

The challenges of implementing the scheme will be two-fold — preventing people from abandoning their current work, and ensuring that people who are earning a lot of money don’t apply and get this subsidy.

The first challenge, also called a moral hazard, is around the question of how people will be incentivized to work — especially in low-income states like Bihar and Orissa — if they can get Rs 500 per day without doing any work.

In states like Bihar and Orissa, a laborer can earn less than Rs 500 per day by going to work.

Imagine, for example, a laborer who earns about Rs 400 per day, or about Rs 10,000 per month at present.

Under Rahul Gandhi’s scheme, the laborer can get Rs 2,000 per month from the government if he continues to go to work, and Rs 12,000 per month, if he stops going to work.

In such a situation, most laborers and shop-floor staff will not go to work.

In fact, even if a person earns Rs 600 per day, or Rs 15,000 per month, it will make more sense for that person to stop working and collect the Rs 12,000 per month from the government, because going to work requires extra expenditure such as travelling costs etc, while not going to work requires no extra expenditure.

It should be noted that outside Kerala, Goa, Punjab and the metro cities of India, laborers get paid less than Rs 600 per day.

If Rahul Gandhi’s scheme is implemented, people will have to pay around Rs 1,000 per day to attract workers.

The other challenge is to generate the money required to fund the scheme.

Assuming that 10 cr people apply for Rs 12,000 per month under the scheme, the government will have to shell out Rs 7.2 lakh cr per year.

This is about ten times the amount that the government spends on the MG NREGA rural employment guarantee scheme. In fact, the total income tax collection of the central government is only about Rs 10 lakh cr.

To fund the scheme via direct taxes, it will have to increase income tax collection to at least Rs 15 lakh cr, which means that people who pay Rs 100 as income tax today will have to pay Rs 150 as income tax to support the scheme.

It remains to be seen how many ordinary, middle class and salaried people will be willing to pay 50% more tax to support such a scheme.

The second negative impact will be on shops and industries.

Any shop or industry that pays Rs 15,000 or less to its employees will suddenly find it difficult to get employees.

Such establishments will have to pay at least Rs 1000 per day, or about Rs 24,000 per month, to attract employees.

This is easier said than done.

For example, how will a Xerox shop that generates only Rs 500 per day and currently pays its staff only Rs 300, be able to afford an employee that costs Rs 1,000 per day?

How will a garments shop, that currently pays only Rs 15,000 per month to 10 employees, be able to pay Rs 25,000 per month from the next month? How will a restaurant or a barber shop pay Rs 1,000 per day instead of the current Rs 500 per day?

That said, to remain in business, these establishments will have no other option but to pay the higher wages.

This money too will have to be recovered from the customers.

As a result, the cost of most items will rise across the board, with the highest increase being felt in labor-intensive sectors like agriculture, hotels and restaurants, retail establishments and so on.

In other words, ordinary people could end up paying for Rahul Gandhi’s ‘free income scheme’ for those who cannot, or don’t want to, work.

Another issue would be that states with low salary levels and high population levels, such as Bihar and West Bengal, would draw most of the funds under such Rahul Gandhi’s proposed scheme, while states such as Kerala, Goa and Punjab, where salary levels and living expenses are higher, could end up as ‘contributor states’.

HOW TO DO IT BETTER

There is, however, a better way to roll out a universal income scheme. That is by offering a small amount — say Rs 75 per person per day — to everyone in the country.

Such a scheme also usually means that all current freebies — such as fuel subsidies and ration subsidies — will be completely stopped.

The advantage of such a scheme is that people will continue to do whatever work they are currently doing.

If someone is earning Rs 10,000 per month at present, he or she will now earn Rs 12,250 per month. If someone is earning Rs 5,000 per month, he or she will earn Rs 7,250 and so on.

Similarly, if a family of two adults and two children have an income of Rs 20,000 per month, it will have an income of Rs 29,000 per month after such a scheme is implemented.

The other advantage of such a scheme is that there can be virtually zero corruption in its implementation, as everyone with an aadhaar number can be given the amount, without checking his or her income level.

In contrast, Rahul Gandhi’s scheme requires the ‘poor’ person to go to a government official and get a certificate that he does not have any income.

Such a move will inevitably lead to corruption and the inclusion of non-deserving candidates and beneficiaries, and the exclusion of genuine beneficiaries who refuse to pay bribes to officials.

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