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Rahul Gandhi's 'Nyay Scheme' is nothing but Socialism 3.0. It will be disastrous for the Indian Economy.

Author: Niraj Patel
Publication: Myind.net
Date: April 5, 2019
URL:      https://www.myind.net/Home/viewArticle/rahul-gandhis-nyay-scheme-is-nothing-but-socialism-30-it-will-be-disastrous-for-the-indian-economy

Addressing a press conference on 25th March, Rahul Gandhi, the 49-year young leader and Congress President, announced that if his party is voted to power in the Centre than 5 crore BPL families will be paid add-on “income” to guarantee minimum income of Rs 12000 per month per family. A new sure shot scheme to combat and end poverty forever.

According to Gandhi, the party’s promised minimum income guarantee scheme called “Nyuntam Aay Yojana (NYAY)” is economically feasible. The name, NYAY – an acronym that means Justice in Hindi – was reportedly coined by his sister Priyanka Vadra in Ahmedabad.

Most economists estimate that guaranteed income scheme NYAY will cost somewhere between INR 3.5 Lakh Crore to 4 Lakh Crore annually which is about 15.5%-17.5% of Tax revenue receipt of INR 22.7 Lakh Crore (Year 2018-2019).

Since announcement, number of affiliated economists have come forward to justify this extraordinary scheme. Although short term goal of these “Darbari” economists is to achieve some favorable political results for Rahul Gandhi, long term goal is to lock-in opportunity to unleash new social experiment in India whenever Congress gets elected again. It is a set up for third attempt at Socialism after previous two failed miserably in its goal of “Garibi Hatao”.

NYAY – “free money for no-work” is a double down on last experiment of MNREGA - “manufactured work-for-all”. There should be no doubt that “NYAY” experiment will fail as miserably as previous two attempts. Moreover, given the amount of money being committed, it will leave Indian economy impoverished for next several decades.

It will fail just like past social experiments because underlying principles are unjust (ANYAY) and impractical.

* Unjust because wealth distribution – Rob Ram to pay Shyam – doesn’t work for long. Very soon, Ram will either escape, evade taxes or rebel against abusing relationship.

* Impractical because Socialism doesn’t scale; may scale to small tribe or village but doesn’t scale to country of billion. As soon as you scale it to state or country, cost of “authority and tragedy of the commons” will significantly exceed benefits of “economies of scale” and “any social upliftment”.

First attempt: State control of economy didn’t work

In 1969, Mrs. Indira Gandhi along with Socialist syndicate (Congress Forum for Socialist Action) sidelined Morarji Desai to take control of Congress Party. Socialist syndicate negotiated with two communist party provide balance of votes (220 Congress + Communist) to achieve parliamentary majority. This political arrangement paved way for communist/Socialist in Congress to unleash first and most lethal social experiment in India.

Socialism 1.0 was all about state control of economy and production capacities. Indira Gandhi initiated nationalization of banking institutions, general insurance, coal mines, oil industry, severely restricted investments by large firms under the Monopolies and Restrictive Trade Practices Act, 1969; License Raj; tightened controls on exports and imports; nearly banned foreign investment under the Foreign Exchange Regulation Act, 1973; effectively denied the firms with 100 or more workers the right to lay-off workers; and severely limited the ownership of urban land under the Urban Land Act 1976 etc.

The results were devastating: per-capita income rose by just 5% from INR 775 in 1969 to INR 815 per month in 1979. The average per-capita income growth during the period was just 0.8% with no reduction in poverty. GDP growth rate in following decade inched up to 2.5%. India lost 25 years with no economic achievements and literally no change in level of poverty. Eventually, it plunged Indian economy into severe Balance of payment crisis brought economy on brink of bankruptcy.

Post Rajiv Gandhi’s assassination, Narasimha Rao’s minority government initiated “liberalization of 1991” and brought economy back from brink of disaster. Subsequent economic reforms led by Atal Bihari Vajpayee government accelerated growth and brought forth the Indian entrepreneurship and enterprises like never.

Second attempt: State manufacturing of work didn’t help

Unfortunately, history repeats itself in 2004. The reformist government of PM Atal Bihari Vajpayee lost the election and the congress party led by Sonia Gandhi comes to power, once again with the aid of communist parties. This returned the socialists within Congress to the forefront of policy making. Sonia Gandhi led National Advisory Council unleashed massive social experiment on India.

Socialism 2.0 was all about principle of “constitutional rights to” and “work-for-all”. NAC initiates bills to guarantee Right to work/job, Right to Education Act, Right to Information Act, Employee Guarantee Act, Right to Food (Food Guarantee Act) etc. Backed by bills, Government initiates welfare schemes such as NREGA/MNREGA, Farm loan waivers and minority welfare programs at a scale never seen before.

All welfare schemes were funded by significantly raising debt levels and increasing tax burden on businesses/individuals. In addition to being inherently inefficient and unjust, every welfare scheme was poorly implemented, and massive levels of corruptions were uncovered in every social audit.

The economic results were again devastating for India. Inflation rate increased to 12%, fiscal deficit at 6.5% in 2013-14 resulting from enormous social expenditure and corruption. PSU Bank NPA reached unprecedented levels of INR 9 lakh crore. All combined, slowed GDP growth down to 5.6% in 2013-14.

Fortunately, Narendra Modi led government got elected with strong mandate in 2014. Last five years have seen considerable pragmatism when it comes to welfare spending and other expenditures. By Jan 2019, Modi Government has brought CPI inflation at all-time low of 2%, fiscal deficit < 3.5% and GDP growth rate > 7%. PSU Bank NPA have been reduced by INR 3.4 lakh crore by successful implementation of Insolvency and Bankruptcy Code, 2016.

Income as an “Absolute Right” won’t work

NYAY hand­out incomes are to be given as "an absolute constitutional right," and not to be withheld "under any circumstances." This means that the recipi­ents are to continue to get this in­come not only if they absolutely re­fuse to seek or take a job, but if they throw the handout money away at the gambling, or spend it on prostitutes, on liquor, cigarettes, drugs or what not. They are to be given "sufficient to live in dignity," and it is appar­ently to be no business of the tax­payers if a recipient chooses none the less to live without dignity, and to devote his guaranteed leisure to gambling, dissipation, drunken­ness, debauchery, dope addiction, or a life of crime. "No government agency, judicial body, or other organization whatsoever should have the power to suspend or limit any payments assured by these guarantees." This is surely a "new principle of jurisprudence."

Who will work?

Suppose, as a married man with two children, your present income from some irregular work is INR 8,000. Comes the income guaran­tee, and you get a direct bank transfer from the government of another INR 4,000. This is accompanied by a SMS telling you that you are en­titled as a matter of uncondition­al right to the poverty-line income of INR 12,000 and this INR 4,000 is for the difference between that and your earned income of INR 8000. You are happy — for just a day. Then it occurs to you that you are a fool to go on working at your nasty job or series of odd jobs for INR 8,000 when you can stop work en­tirely and get the full INR 12,000 from the government.

So, the government will, in fact, pay out a tremendous sum. In addition, it would create idleness on a huge scale. The fifth of the population now judged to be below the poverty line would stop producing even most of the neces­sary goods and services it is pro­ducing now. The unpleasant jobs would not get done. There would be less total production, or total real income, to be shared by every­body.

The Shifting "Poverty Line"

But so far, we have been talking only about the effect of the guaranteed income on the recipients whose previous incomes have been below the poverty line. What about the other four-fifths of the population, whose incomes have previously been above it? What would be the effect on their incentives and actions?

Suppose a married man with two children found at the end of a year that he had earned INR 180,000 (income of 65% of households in 2016)? And suppose he found that his neighbor, with the same-sized family, had simply stayed home watching TV, Cricket etc. during the year and had got a guaranteed income of INR 144,000? Wouldn’t the worker begin to think that he had been something of a sap to work so hard for a mere INR 3000 net, and that it would be much better to lead a pleasantly idle life for just that much less? And wouldn’t the same thing occur to all others whose earned incomes were only slightly above the guarantee?

It is not easy to say how far above the guarantee any man’s income would have to be for this consideration not to occur to him. But we would do well to remember the following figures: The median or "middle" income for all families in 2016 was less than INR 140,000 in 2017. People with these incomes or less — i.e., half the population—would be near enough to the guarantee to wonder why they weren’t getting any of it.

Someone Must Pay

If "everybody should receive a guaranteed income as a matter of right", who is to pay him that income? On this point the Darbari economists of the guaranteed income are either beautifully vague or completely silent. The money, they tell us, will be paid by the "government" or by the "State." "The State would acknowledge the duty to maintain the individual."

The state is a shadowy entity that apparently gets its money out of some fourth dimension. The truth is, of course, that the government has nothing to give to anybody that it doesn’t first take from someone else.

Four ways government can fund this massive scheme:

* Increase tax rates on remaining 80% or implement progressive tax rates to punish rich

* Increase Government debt levels – which will have to be paid back in future by increasing tax rates

* Quantitative easing – nothing but inflation tax which hits poorest of poor the hardest

* Defund existing scheme and fund NYAY - Neither the record of the past nor a knowledge of political realities supports such an expectation. Expect huge outcry against discontinuing and constant push to expand income guarantee.

The whole guaranteed-income proposal is a perfect modern example of the shrewd observation of the French economist, Bastiat, more than a century ago: "The State is the great fiction by which everybody tries to live at the expense of everybody else."

Not enough Rich to Soak

In today’s highly globalized world, it will be extremely difficult to retain top enterprises, its income and highly talented individuals (brain drain) if they are taxed more heavily compared to other competing economies. Flight of enterprises, HNI individuals, production capacities and innovation engines will result in massive loss of direct and indirect jobs, and unemployed will add to NYAY beneficiaries.

Given modern technology and global economy, it will be almost impossible for government to stop flight of value even with most stringent regulations.

Even with course correction in future, it will be difficult to attract global capital again having lost their trust in the past.

Rahul Gandhi’s NYAY scheme rather than guarantying end to poverty, it guarantees “Poverty for all”.

Seeds of Conflict – Class vs Class; State vs State

NYAY will be act of pitting one class of Indian against another. Upper class will not only be deprived of the benefits that they see millions of others getting. It is they who would be expected to pay these benefits, through the imposition upon them of far more burden­some taxes (including inflation).

Difference in per-capita income between North-eastern (Bihar $2,390) and Western-Southern states (Goa $21,218) is huge. It will very likely result in regional strife and in further political insubordination /emergence of regional political powers.

Delusion of administering claims at India scale

Darbari economists argue that administering income will be "simple" mechanism of having every state & its officials survey and fill out family income database (lack of IT returns), whereupon the government will direct bank transfer to everyone who falls below the government’s set "poverty-line" minimum. However, implementation being simple is a delusion.

It is altogether probable that more evasion goes on in the low income-tax returns than in the high ones—not because the big-income earners are more honest, but simply because their chances of being examined and caught are higher. The amount of concealment and falsification that would be practiced by persons trying to get as high a guaranteed income as possible would probably be enormous. To minimize the swindling and official corruption, Government will have to provide considerable investigatory and discretionary powers to Babudom. It should be obvious to any Indian what happens next.

So how can we meaningfully combat poverty and win?

We have lot to learn from Chanakya’s Arthasastra. It provides several pointers to creating prosperous and content nation.

On Governance, Economics and Dharma:

“Sukhasya moolam Dharmah; Dharmasya moolam Artha, and Arthasya moolam Rajyam”

It is primary responsibility of State is to make economic policies which are just and rooted in Dharma. The art of Dharmic economics consists in tracing the consequences of that policy not merely for one group but for all groups; it consists in looking not merely at the immediate but at the longer effects of any act or policy.

On taxation & governance:

"Taxation should not be a painful process for the people. There should be leniency and caution while deciding the tax structure. Ideally, governments should collect taxes like a honeybee, which sucks just the right amount of honey from the flower so that both can survive. Taxes should be collected in small and not in large proportions."

Lower, consistent and just taxation has several consequences:

* Smaller government – less resources will make governance more focused and meaningful. Unnecessary government is not only weight on nation, but it increases surface area vulnerable to exploitation and corruption.

* Rewards enterprising – more businesses and investments will result in more jobs; more jobs will result in even smaller need for social support and more taxes.

* Social harmony – a violent race to secure political offices by hook or by crook will become meaningless as there won’t be much to loot. Practice of Dharmic economics is to keep the state small but focused and meaningful.

In short, a key to happy and prosperous nation (Ram Rajya) is a

* Government which is compassionate but just when it comes to policy making

* Government which is small but focused and meaningful

* Government which is liberal but effective in enforcing rule of law
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