Why NYAY will be pared down and Zombified

Rahul Gandhi's NYAY scheme- which would give about 90 dollars per month (which in purchasing power would be equivalent to perhaps 500 dollars) to the poorest fifth of households- has received the endorsement of celebrity economists like Piketty & Rajan. If Modi wins, no doubt the BJP will steal this item of its clothing next election season. But what will be the eventual outcome?

As a proportion of Tax Revenue, the total commitment is likely to peak over the next decade at around 12 percent assuming current growth trends continue. However, there is scope for eliminating other subsidies so the impact may be smaller longer term. Ultimately, it would cease to be a problem if it is rolled into a Universal National Insurance Scheme with a contributions based element. Ultimately, it could be self-funding and thus independent of Fiscal policy- i.e. it would have no inflationary or crowding out effect. Rather it would reduce uncertainty, increase mobility and improve allocative and dynamic efficiency.

Three questions arise

1) Does the State have adequate administrative capacity to roll out this measure?

Rahul has said there would be pilot projects. Clearly, some States or Territories already have this capacity and so the answer is yes. Laggard States have an incentive to adopt best practice from the more developed areas. There are clear economies of scale and scope which would tend to diminish the operational costs more particularly if Information Technology is properly applied.

2) Will its intended recipients fall into a poverty trap?

We don't know the details but, presumably, this is the sort of thing the pilot projects will give us information about. There is no reason disincentives should necessarily be created.

3) Is it sustainable?

My gut-instinct is that the 20 per cent figure will be pared down. This is because this particular demographic can grow twice or thrice as fast as the rest. You can't create a sense of hereditary entitlement which will cover 40 per cent within a couple of decades, more particularly because people will use political connections to get themselves enrolled in this group.

At the same time, while net contributors may want targeted benefits for victims of illness, redundancy, death of bread-winner etc, they don't want what is in effect a 'basic income' scheme from which they are cut off. Subsidies on food, electricity, etc, potentially benefit everyone. Clearly, there could be a Caste or Communal angle to this. The 80 percent may feel themselves to be different from the 20 percent, though they recognize that misfortune may reduce their economic status. However, Social insurance would give them higher benefits than the basic dole because it would take note of the specificity of the misfortune suffered.

There is also a Regional aspect to this. More developed states which have completed demographic transition aren't going to want to subsidize population growth in less developed States. On the other hand, they may want to see a National Insurance Scheme linked to Health and Educational Services on an all India basis because this improves their own geographical mobility. What matters is that there is a link between contributions and targeted benefits which are linked to adverse contingencies.

I believe that this scheme, if implemented, will soon be pared down and assume a Zombie like form. Why? Regions have discovered a way to stop being net contributors to the Exchequer. True they pay their taxes but they also run up debts to Nationalized banks. There is net inflow, not outflow which is counterbalanced by redistributional schemes like this. Poorer Regions will have criminalized Leadership which will use a Zombified version of the scheme to tactically reward specific votebanks- but the benefits will be rationed by their own goons. The thing will exist but only 'naam ke vaaste'- for name's sake alone.

It is no accident that this scheme is being publicized as elections approach. This suggests that the political class in India already knows that its future will be as I have described.