Macro Economy

As India’s Economic Slowdown Deepens, Is It Time to Reconsider Cash Transfers to the Poor?

Praveen Chakravarty
January 22, 2020

Experts, finance ministers and Nobel laureates agree that to remedy the economy, demand needs to be stimulated.

As India’s Economic Slowdown Deepens, Is It Time to Reconsider Cash Transfers to the Poor?

Representative image. People queue up outside a bank. Photo: REUTERS/Amit Dave

India’s precarious economic situation has everyone worried and rightly so. Two weeks ago, we got news that India’s nominal GDP growth is at its lowest in 45 years. Even that is perhaps a rosier picture than the ground reality according to the former chief economic advisor of the Narendra Modi government who has cast doubts over GDP measurement and said that the measured GDP is overstated. There is simply no dispute that India’s economic growth has collapsed, regardless of how and who measures it. So, what is the way out of this mess?

Several economic commentators, finance ministers and Nobel laureates are now in consensus about the remedy: stimulating demand in the economy. Nobel laureate Esther Duflo recently called for a ‘TUP’ policy – targeting the ultra-poor by giving them cash which they will spend immediately. Bengal’s finance minister Amit Mitra in a recent interview specifically called for a direct cash transfer to the poorest sections of society to stimulate consumption.

Another Nobel laureate Abhijit Banerjee said that the situation is so egregious that fiscal deficit concerns should not be a hurdle to boosting demand through a stimulus package. Nearly every major newspaper has carried an editorial calling for a demand stimulus. Never before has there been such an overwhelming consensus in an economic policy prescription for the country across all hues of commentators.

Not too long ago, there was precisely such an idea proposed for the Indian economy. An idea to target 20% of the poorest households in every district in the country and give them a direct cash transfer of Rs 6,000 a month which would then stimulate demand and revive private investment, which in turn would lead to more jobs and a healthier economy. The idea was called NYAY, which was part of the manifesto of the Congress party for the 2019 parliament elections.

The Congress party diagnosed the rapidly deteriorating state of the economy, assembled a group of experts, and presented a solution to pull the nation out of the impending economic crisis. In fact, the party believed in it so strongly that NYAY became the centrepiece of the campaign, contrary to some recent fallacious narratives that the economy was not the focus of the Congress party’s campaign.

Of course, the party could not convince voters, either because the NYAY message did not reach enough people or voters did not believe the message. Regardless, just nine months later, the same idea to revive a sagging economy by stimulating demand through cash transfers to the poor is now a consensus prescription.

Photo: Mahtab Alam

The Modi government should not be churlish to dismiss this consensus solution of experts to pull our economy out of distress, only because the Congress party originated the idea. Economics and governance should transcend politics. The ‘Sarva Shiksha Abhiyan’ was pioneered by the Vajpayee government and carried forward by all successive governments, the Aadhaar programme was mooted by the Congress party and continued by the Modi government amid many such examples of policy ideas adopted across governments and political parties. NYAY, in perhaps a different shape and form, remains the most relevant solution to our current economic crisis and the Modi government should embrace it.

The Modi government has been whimsical and knee-jerk in their prescriptions for the economic crisis, like a deer caught in headlights. Out of the blue, one day in September, just before the prime minister embarked on his visit to the US, the finance minister announced a steep reduction in corporate tax rates and claimed that it would cost the exchequer nearly Rs 1.5 lakh crore and help revive the economy. Even a cursory analysis would have revealed that a corporate tax cut at this juncture would only be used by corporates to reduce their loan liabilities and not to invest more in capacity building since consumer demand is very weak.

If using the same amount, had five crore poorest households been given say Rs 5,000 a month for six months, the poor would have spent it immediately, fueling demand and reviving private investment. Of course, such a move would not have elicited the blaring headlines in the media the next day that the corporate tax cut announcement did. Four months later, it is now acknowledged that the corporate tax cuts were mere hogwash.

Why can’t states such as Rajasthan, Madhya Pradesh, Punjab or Chhattisgarh – governed by the Congress party – implement NYAY is the other common refrain one hears. NYAY was conceived as a scheme that will be implemented by both the Centre and states, which would give it the required fiscal capacity. Post-GST, state governments have lost all powers of generating their own tax revenues for state-specific programmes. So, even if say, the Rajasthan government wants to raise taxes on other goods to generate funds for cash transfer to the poor, it cannot do so.

In fact, a democratically elected chief minister of a state in today’s India has almost no powers to raise revenues for her state since both direct and indirect taxes are controlled by the Centre or the GST Council. Hence, a scheme like NYAY cannot be implemented at the state level any longer, which is a travesty of federalism.

The keys to the solution to India’s current economic catastrophe is only with the Union government in Delhi. The solution is to revive demand by putting money in the hands of the poor.

Our analysis for NYAY showed that it is both possible to target the poorest households as well as pay for the scheme through a combination of expenditure rationalisation and a modest fiscal expansion. The PM needs to act boldly and decisively. Now is not the time to indulge in petty quibbles over ownership of ideas. Let us all agree that good policy ideas belong to the people of the nation.

Praveen Chakravarty is a political economist and a senior office bearer of the Congress party.

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