‘NYAY or not, we are not taxing the economy enough,’ says economist Abhijit Banerjee

In late March, Congress party president Rahul Gandhi announced it would roll out an ambitious minimum income guarantee programme, the Nyuntam Aay Yojana or NYAY, if voted to power. “We will wipe out poverty from the country,” he said, adding that the scheme would target the poorest 20% in India.

The scheme promises to provide Rs 72,000 annually or “a flat, uniform amount of Rs 6,000 a month to the poorest 50 million Indian families”, and “entails a peak cost of Rs 3.6 lakh crore-1.8% of India’s gross domestic product (GDP) today”, wrote Praveen Chakravarty, chairperson of the Congress party’s data analytics department, in The Economic Times.

Abhijit Banerjee, Ford Foundation International Professor of Economics at the Massachusetts Institute of Technology, was one of the economists consulted for formulating NYAY.

“Financial viability is an issue,” he told IndiaSpend in an interview, and suggested that many current schemes would have to be reviewed and shut down.

Banerjee, 58, co-founded the Abdul Latif Jameel Poverty Action Lab or J-PAL, a research organisation, and is one of its directors. He has been a fellow of the American Academy of Arts and Sciences and the Econometric Society, and has been a Guggenheim Fellow and an Alfred P Sloan Fellow. He received the 2009 Infosys Prize for social sciences and economics, and was named one of Foreign Policy magazine’s top 100 global thinkers in 2011. He co-authored Poor Economics with Esther Duflo, which won the Goldman Sachs Business Book of the Year award in 2011. He served on the UN Secretary-General’s high-level panel of eminent persons on the Post-2015 Development Agenda.

In an interview with IndiaSpend, Banerjee spoke about the the financial viability of NYAY, the need for India to formulate a wealth tax, and the quality of government data and interference in its estimation.

In January 2019, GDP for 2016-’17, the year that saw demonetisation (in November 2016), was revised upwards to 8.2%. What is your assessment of the economy under the present government, and how does it compare to the previous one?
These numbers have lost so much credibility. I have no way of checking them and am not going to get into a debate about reading the tea leaves. This is the tragedy of constantly revising data.

There are changes in definition and revisions, but it somehow always seems that the growth in a particular year went up. This process needs to stop. No number is perfect, but constantly tweaking the process where there is a potential for political interference does damage. It creates suspicion about the quality of data.

You were one of the 108 signatories to a letter that red-flagged data suppression and interference in data estimation by the current government. Have you witnessed government interference of this nature before, and what must be done to resolve the matter?
There must be a committee of experts that has credibility to propose a stable methodology that can then be back-cast, say for a decade, to reconstruct consistent GDP [gross domestic product] series for those years.

Even in China there are are similar claims about data manipulation, especially at the provincial level, and there are many people there who are suspicious of the data. I believe that some Chinese government officials have even suggested that they look at non-government numbers. They seem be more open to this than we are.

In India, there have long been discussions on why the GDP data is collected in a particular way or why the government does not invest more in the National Sample Survey. It may be more true now that people are questioning political motives than before, but the idea that the data collection agencies have failed is not new. Earlier, the release of [revised] data was not so frequent and if there was clear opposition to the government’s numbers, the government had a set of experts who were established as being objective. So, it was a bit more process-driven.

Currently, the NITI Aayog comes up with one number after the other whenever it wants. When I speak to people in the financial world, they say that they don’t pay any attention to government data anymore. We must invest money and effort to bring in experts from India and abroad and establish a process which is without interference and stick to it without any fiddling for, say, the next decade.

Recently, with reference to unemployment, you wrote “something will need to be done, and it will probably eventually take the shape of a minimum income guarantee”. The Congress has proposed NYAY and the Bharatiya Janata Party government has started implementing PM-KISAN (announced in Budget 2019) to offer income support to small and marginal farmers. There have been questions about the financial viability of both, particularly NYAY. Your comments?
Financial viability is an issue. There is a long-term problem we face. I think we are not taxing the economy enough. If NYAY is implemented it will add urgency, but even without it we need a series of fiscal intervention. I have been saying this long before NYAY was discussed. I think we are under-taxed.

We need to bring down our interest rates and give some semblance of balance to our budgets. This will involve figuring out the subsidies that need to be cut and taxes to be increased, or risk going back to high inflation. We cannot afford the interest rates we have, our share of government debt in GDP has been going up since 2014, and creditworthiness will eventually be hurt. We do not want to get into such problems. So whether or not we have NYAY we will have to solve the problem [of not imposing enough tax].

Praveen Chakravarty, chairperson of the Congress party’s data analytics department, mentioned in an interview that around 939 schemes excluding 11 core schemes will have to be reviewed for financial rationalisation if NYAY were implemented. Manmohan Singh, former prime minister and economist, said that no new taxes on the middle class would be required to fund NYAY, and that 1.2% to 1.5% of gross domestic product, at the scheme’s peak, would be needed. Do you agree?
I do not think there is going to be enough money from just cutting the minor schemes. But I do agree that schemes should be reviewed and many should be shut down. There is money there which can be utilised. Both taxes and expenditure rationalisation are important. I am all for more taxes on the rich, maybe we can look at some version of a wealth tax. There needs to be some thought on how much the wealthy population can be taxed.

Have you made an assessment of the schemes that can be shut down to facilitate NYAY?
The right way to think about NYAY is that it is the opening step in creating an infrastructure for making money transfers possible rather than an entitlement for a particular good. It is better to give people cash than a fertiliser subsidy or free power.

However the first step has to be to convince people that the subsidy delivery mechanism works. This is what NYAY can do. So the major subsidy schemes cannot be removed before NYAY is well established and in the short-run, there will definitely be some fiscal pressure.

You were consulted by the Congress for NYAY. What sort of inputs did you provide? How will a government go about targeting the poorest given that poverty data has not been collected since 2011-’12?
I think the hardest group to target would be those who are a bit further up beyond the bottom 20%. The poorest 20% are relatively easy to identify and if they [the government] are willing to be inclusive, even if it includes up to 22%-25%, the targeting should be not too bad.

In our research, we find that there is relative agreement on who the poorest are even within villages. So it should be possible to combine an updated version of the socio-economic and caste census and some local community review mechanisms to come up with a targeting procedure. It may not be perfect, but the scheme has to be run in a way to ensure that the associated infrastructure works and people do not get excluded for random reasons.

I was consulted on matters relating to estimating beneficiaries for the scheme considering that exact numbers or data are not available.

Economic inequality is high in India. The nine richest Indians now own wealth equivalent to the bottom 50%. Nearly 50% of the population is dependent on agriculture that contributes 14% of the GDP. Rural distress is a major issue. What are the solutions? Is moving people out of agriculture the only viable alternative?
We do not have the urban infrastructure to move everybody out of agriculture. It may be true that around 50% are dependent on agriculture, but the share of their incomes from agriculture is actually less than 50%. Many people in agriculture have other jobs to supplement their incomes, which often involve temporary migration to cities.

One of the things governments can do is to create low-cost spaces for migrants to live in so that it is more viable to work in urban areas. But this is unlikely to be a very big part of the story in the short run. My prediction is that we will move towards cash transfer as many of these lives are only marginally viable, especially among the younger, more educated generation that does not want to do the same jobs or have the same lifestyles as their parents did. We have this political problem that needs to be solved.

In a March 2019 paper, you (along with Thomas Piketty and Amory Gethin) noted that “voters seem to be less driven by straightforward economic interests than by sectarian interests and cultural priorities”. Worldwide, we have seen a rise in populist leaders. Is this trend a major worry for India given that the rise of religious divisions and the persistence of strong caste-based cleavages is “determining voters’ choices” while “education, income and occupation play little role (controlling for caste)”?
There should be more politics based on economic interests because those are aspects that we can deliver on without creating social divisions. If voters come to believe that the State cannot offer anything useful in terms of economic benefits, then they will be responsive to sectarian claims. If people start caring about only sectarian issues, then parties have an incentive to promote it and then we will end up in a totally fractured polity.

The advantage of economic interests is that they can often be addressed, whereas sectarian interests cannot be addressed other than saying that we will hurt those others, which is frightening.

The criteria for 10% reservation for economically weaker sections announced by the BJP government allows a majority of households to qualify. How do you assess this reservation policy and what are the political and economic implications that you foresee?
This policy won’t do anything. People from upper castes with an annual income less than Rs 8 lakh are a huge part of the population and they are already getting more than 10% of the jobs. Other than as a political gesture, it will have no consequences.

Almost four-fifth (Rs 5.5 lakh crore, or $79.51 billion) of the total amount of corporate bad loans written off in the last 10 years was during the five years after April 2014, noted an April 2019 report in The Indian Express. Nearly Rs 1.5 lakh crore was during the nine months ending December 2018. Farm loan waivers have received much criticism as a populist measure while such corporate write-offs do not seem to. How do you explain the problem of non-performing assets and write-offs and its implications on the economy?
The public sees it asymmetrically because one happens quietly while the other does not. The media must put the spotlight on such write-offs for corporates. Of course there may not be much of an option now given that the banking system has frozen up under the burden of debt and is unable to deliver.

The issue is more that the wrongdoers get away with it. Corporate interests are protected by layers of law which are in their favour. The poor farmer mortgages land and loses it when unable to repay loans. Farmers are vulnerable, whereas it is hard to hold corporations accountable. A corporation can go bankrupt without the controlling individuals being affected unless there is a private guarantee involved.

Disclosure: Praveen Chakravarty was a founding trustee at IndiaSpend before he joined the Congress party as chairperson of its data analytics department.

This article first appeared on IndiaSpend, a data-driven and public-interest journalism non-profit.