Economic Survey Wants To Talk About Universal Income, But Not Necessarily Implement It

The Economic Survey 2016-17, the annual document authored by the chief economic adviser, had piqued interest far more than in earlier years. That was because of the buzz around two big things – one that had already been done (demonetisation and its impact) and the other that is supposed to be done (universal basic income).

So, what are the key takeaways?

One, subdued growth. In a first official word of the impact of demonetisation on the economy, the Survey has pegged growth in this fiscal at between 6.5 per cent and 6.75 per cent, down from the 7.1 per cent figure in the advance estimates put out by the Central Statistical Office earlier this month. That figure did not take into account the impact of demonetisation. The 6.5-6.75 range is closer to estimates of various rating agencies as well as banks. As for 2017-18, the Survey puts growth in the 6.75-7.5 per cent range. So the promised 8 per cent growth has once again moved out of touching distance.

Apart from the still-unknown medium- and long-term effects of demonetisation, the Survey points to three other dark horses on the global front – interest rates, hardening oil prices and growing trade tensions, thanks to rising protectionism in the western world.

Demonetisation, the Survey notes, presented a demand shock, a supply shock and an uncertainty shock. It admits that it is too early as well as difficult to quantify all these three shocks, but makes the point that the extent of cash reduction was lower than commonly perceived. The post-November 8 currency decline was 25 per cent in end-November and 35 per cent by end-December (and not 62 per cent and 41 per cent that it was said to be).

But the Survey also points out that the magnitudes of the short-term costs and the timing and extent of the long-term benefits remain uncertain. How these will play out, it says, will depend on policy responses. It makes a pitch for speedy remonetisation by ensuring more cash is available to the public along with bringing land and real estate into the goods and services tax (GST) regime, reducing taxes and stamp duties and ensuring that ordinary people are not unduly harassed by the taxman.

Interestingly, while the government’s minister and NITI Aayog are going flat out to promote digitisation, CEA Arvind Subramanian cautioned at his press conference that the transition to digitisation must be gradual and inclusive and take into account the fact that sections of society may have a genuine problem in non-cash transactions.

Two, given the uncertainties on the global front, the Survey makes a strong pitch for an unwavering focus on domestic policy actions. The Survey lists the several reform measures that this government has taken – the bankruptcy code, the setting up of the monetary policy committee, the legal status to Aadhaar, the package of reforms for the textile sector and the United Payments Interface, among others.

But that’s not enough, the document argues. It wants further reforms to tackle three challenges: reducing inefficient redistribution, strengthening state capacity in delivering essential services and regulating markets, and dispelling the ambivalence about protecting property rights and embracing the private sector.

Three, the Survey throws two balls in the air. One is the UBI idea, which was expected. At his press conference, Subramanian said this was an idea whose time was ripe for further deliberation and not necessarily immediate implementation. The promised chapter on UBI underlines the problem of poor delivery of existing welfare schemes and stresses that it meets the tests of social justice, poverty reduction, agency (giving the poor choice over how they want to spend their money) as well as administrative efficiency.

Acknowledging that the universality of such a scheme might be hard to sell, the Survey suggests a de jure universality but de facto quasi universality, where people could be excluded (it talks about four ways to do this). Such a quasi-universal scheme which excludes the top 25 per cent of the income bracket, it says, could cost in the range of 4-5 per cent of GDP and reduce poverty by 0.5 per cent.

Where will the money come from? The Survey neatly side-steps the hot potato of continuation of the food security scheme and NREGA (the two biggest welfare spending heads), and suggests that the government will have to decide which programmes to prioritise to finance a UBI.

The second ball the Survey throws up is the setting up of a Public Sector Asset Rehabilitation Agency (PARA). Red-flagging the twin balance sheet problem (stressed corporate and banking sector balance sheets), the Survey suggests that the proposed PARA would purchase certain categories of large loans from banks and then work them out, either by converting debt to equity and selling the stakes in auctions or by granting debt reduction, depending on professional assessments of the value-maximising strategy. Once the loans are off the books of public sector banks, the government could then recapitalise them. This step will also restore the financial viability of over-leveraged companies, letting them consider fresh investments. Something like this is needed, the Survey says, because the bad loan problem was not just about bank capital; resolving these debts was also vexed.

Budgets do not, generally, take forward ideas put forth in the Economic Survey. But how the government takes these two balls and runs in the course of the year will be interesting to see.

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