Soon after Prime Minister Narendra Modi came to power in 2014, he called the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) the epitome of the failure of Manmohan Singh-led United Progressive Alliance (UPA) government. Among other things, he had ridden to victory on the wave of his jobless growth tirade against the UPA II government. During the campaign, he had proposed an economic model that preferred creating jobs in the formal economy over doling out cash to villagers for digging ponds under the MGNREGA scheme.
Ironically, eight years after coming to power, Modi’s own economic advisory council recently proposed a MGNREGA-style scheme for the urban poor. This came along with a proposal to introduce a universal basic income (UBI) scheme that was earlier proposed by former chief economic advisor Arvind Subramanian in 2017.
Both the schemes are based on the ideas of Keynesian economics that support demand creation through direct cash transfer to the poor. But why is an economically right government, full of fiscal hawk economists, considering a policy with left liberal ideals?
Elusive Employment Solution
Since the 2000s, successive governments have tried to generate jobs in manufacturing and other industrial activities only to realise that it always falls short of absorbing the large number of people that join the country’s workforce every year. Estimates suggest that India adds around 12 million people to its workforce every year—a number that neither manufacturing nor the services sector can absorb.
Data from the consumer pyramid household survey conducted by the Centre for Monitoring India Economy shows that the share of agriculture in total employment went up from 35.3% in 2017-18 to 36.1% in 2018-19 and touched 38% in 2019-20. If this data indicates a trend, it shows that even before the pandemic, India had failed to create jobs in manufacturing and services.
The jobs crisis is predicated with a fall in income levels, a phenomenon that dates back to pre-pandemic times. There is a crimping of income at the national level and the slowdown is a decade old. As per data from the World Bank, between 2011 and 2020, India’s per capita GDP at current prices in US dollar terms compounded 3.69% annually—less than half the growth of 7.69% in the preceding decade.
The shrinking consuming class has also had a bearing on corporate investments across sectors. Private sector investments were slowing before the pandemic. Post pandemic, it was expected that it would follow the government’s expenditure push to generate demand. In 2019, to nudge the private sector to invest, the government cut corporate tax rate to 22% for companies that do not avail any tax incentive. For new manufacturing companies, there was an even bigger tax cut, brought down to just 15%. The corporates, however, have not responded with investments so far, leaving the workforce-investment linkage broken as it was.
Industry data suggests that BSE 500 companies account for just 12% of the corporate investments in the country. The remaining companies, including non-BSE 500 and the unlisted corporates, account for 75% of corporate investments in the country. Out of the total workforce of 460 million in India, the listed companies provide employment to just seven million or about 2% of it.
There are concerns that an urban jobs scheme, like MGNREGA, will lead to an increase in input costs for India’s industries, while pushing up wages and keeping them elevated despite a demand mismatch.
“We must ponder on why India has a low labour force participation in the private economy. One of the explanations is the distorted high wages caused by welfare programmes. We then become a poor country in which firms cannot export based on low wages,” Ajay Shah, economist and researcher at XKDR Forum, says, voicing concerns about the impact of such a scheme on corporate India.
The opposition has been ruthless in its criticism of the Modi government for failing to generate the required number of jobs in the economy.
Earlier this year, in the Uttar Pradesh assembly election, Samajwadi Party president Akhilesh Yadav had built his party’s campaign against the Bharatiya Janata Party over issues like unemployment and rising inflation. In 2020, the Congress youth wing launched a campaign to raise its voice against unemployment, as Rahul Gandhi alleged that the Modi government’s decision of demonetisation, faulty implementation of goods and services tax and the Covid-19 lockdown had destroyed the country’s economic structure.
So far, the cacophony around the lack of jobs has not had any adverse electoral impact on the government, but the protests against the latest Agniveer scheme are an indication that the opposition’s constant focus on the jobs issue may yield political benefits in the future.
Possibilities and Hurdles
While there is a precedent of a successful rural jobs guarantee scheme in India, nobody is sure how a similar scheme can be implemented in urban areas.
Almost a quarter of India’s informal sector workforce, which constitutes about 80% of the overall workforce, is estimated to be employed in urban areas. During the second wave of Covid-19, there was a steeper rise in urban unemployment as compared to rural unemployment. In 2021, urban unemployment rose from 7% in March to nearly 15% in May, while rural unemployment rose from 6% to 10%.
“Neither the urban jobs scheme nor the UBI scheme are suited to deal with poverty in India. MGNREGA was designed to be a scheme for seasonal underemployment and for providing jobs during droughts. Any extension beyond that is inefficient and unwarranted,” argues Arvind Virmani, chairman, Foundation for Economic Growth and Welfare, and former chief economic advisor.
The report of the Economic Advisory Council to the Prime Minister, however, makes a case for both the policy actions, which have been presented as recommendations for increasing jobs, potentially translating into greater growth prospects for India. The recommendations aim to increase incomes and consumption expenditure of households in ways that trigger their upward mobility and make them resilient to economic shocks.
But what works in terms of addressing rural poverty and unemployment might not be effective in the case of urban unemployment, which is different in nature. An urban version of MGNREGA has been discussed for a while now and the fact that it has not been implemented yet says something about its unsuitability to urban conditions.
The nature of urban demographics makes it unattractive to statisticians who prefer firm definitions to consider state support. Pronab Sen, former chief statistician of India, explains why the scheme could be problematic: “The population in urban areas is fluid. How do you determine the days of work? It is for households based in rural areas.... The notion of a household in an urban area is more fluid. The migrant worker in urban areas, in terms of statistical definition, is a household on his own. He may also have a MGNREGA card, in which case, he is getting both rural and urban cards. So doing [urban jobs scheme] in an area where there is large-scale rural-urban as well as urban-urban migration is a problem.”
K.R. Shyam Sundar, professor, XLRI, Jamshedpur, argues that to address urban unemployment, policy discourse has to move away from households to individuals. “Even trade unions demand that in urban areas, it should be about individual units. Household units were a way of beginning a welfare scheme in 2005. Now that scheme has been institutionalised, even in rural areas, household units do not make sense. For it to become a universal employment assurance scheme, the household unit is the delimitation,” Sundar says.
In case of budgetary provisions, he says that in urban areas work can be provided for 50 days, instead of 100 days for which the scheme is availabe in rural areas. Since in rural areas, farm activities constitute a lion’s share of employment, 100 days of employment works. But, in urban areas, the labour market, whether formal or informal, is fluid and the jobs are present throughout the year.
“If an individual is the unit of remuneration and work is provided, say, for two months in a year under an urban jobs scheme, one can see how it works for two to three years. I think this will increase family income, thereby increasing consumption and also aggregate demand. Urban amenities will also get better and the standard of living will go up,” says Sundar.
In urban areas, there is a very high incidence of open unemployment where educated people are willing to work but are unable to land a formal job. This queers the pitch for economists. “The problem in urban areas is that a very large proportion of these people are educated and could be casual labourers. There is no seasonality to that. These people are [hired] on a daily work basis. So, to do a MGNREGA-type programme, you must know how many people you have available at any given point in time,” says Sen. He adds that moving away from the physical nature of the job, as envisaged by MGNREGA, to customise an employment scheme for literate and semi-literate worker could make the urban employment scheme unfeasible.
Stopping the Gap with UBI
In that case, will a universal kind of direct benefit transfer scheme be better suited to address India’s poverty concerns?
Many feel that a UBI programme could mitigate the unemployment crisis caused by dwindling job opportunities. A UBI scheme, which entails the provision of an unconditional fixed amount to every citizen, is also deliberated as an effective poverty-eradication tool. Countries like Kenya, Brazil, Finland and Switzerland have bought into this concept and have begun controlled UBI pilots to supplement their population.
XKDR Forum’s Shah believes that UBI is an idea whose time has not come yet. “Yes, there are poor people in urban areas also. So, it will be better to spread the same Rs 100 of fiscal expense on finding the poorest people in both rural and urban rather than keeping it rural only.”
While Virmani contends that the UBI in its present form is a foreign import that is unsuitable for India, he does agree that India needs a universally targeted payout model to deal with poverty. “What India needs and is overdue is a direct cash transfer (DCT) scheme, which pools all the funds spent in subsidies and transfers into an integrated weekly or monthly payment into the mobile wallet of every beneficiary,” he says.
Sen says that UBI is a more straightforward policy that is easier to implement, as it will not look at any identification of any beneficiary. “UBI, in its purest form, is simply a certain amount of money that is the entitlement of every Indian citizen. In terms of administrative ease of implementation, it is way ahead of anything else,” he says.
But, it can also become complex. Sen explains: “If we circumscribe the UBI as [something that] only the bottom 50% get, then we need to define who that bottom 50% will be and identify them. That will become tough because of the lack of adequate data to make that identification. If it was a stable economy, like rural India, that identification will still be possible.”
The Price to Pay
In its 2019 election manifesto, the Congress had promised the Nyuntam Aay Yojana, which was expected to cater to a target population of five crore families comprising the poorest 20% of India. Each family was guaranteed a cash transfer of Rs 72,000 a year. The idea did not appeal to the electorate, as the election result showed.
The Economic Survey of 2016-17 had proposed a UBI scheme at Rs 7,620 per person per year at 75% universality. It would have cost India 4.9% of its GDP at that calculation. A UBI scheme on par with the numbers suggested by the Economic Survey could lead to targeted household incomes increasing by almost Rs 40,000 per annum, since the average Indian household size is approximately five.
The then finance minister Arun Jaitley had put the idea on the back burner, anticipating the politics around the implementation. “We will be landing in a situation where people will stand up in Parliament and demand continuation of the present subsidies and over and above that [UBI],” Jaitley had said.
Sen explains why it could be tricky: “If a UBI scheme is implemented after doing away with the existing schemes, a certain section that is not getting any transfers will benefit, but the ones who are getting benefits will lose. That can create a political problem. To implement a UBI scheme, one has to calculate backwards. You take an estimate of how much the exchequer can bear and divide that by 1.3 billion. It will tell you what each person gets.”
However, Virmani’s idea of a direct transfer scheme bats for subsuming existing subsidies and transfers, which makes it less of a burden on the exchequer. “As the DCT will be funded by pooling existing subsidies, there will be no additional cost. On the contrary, there will be significant savings in administrative cost which can be used to improve hard and soft infrastructure in rural areas,” he says.
In its budget for 2022-23, out of total expenditure of Rs 39.44 lakh crore, the Centre has allocated 8.09 lakh crore under various social welfare schemes and subsidies. This accounts for over 20% of the Centre’s expenditure. This is the math that Virmani is hinting at. However, the issue of UBI does not revolve around the efficiency of subsidy delivery. Instead, it is about putting a minimum amount in the pocket of each individual in the absence of economic activity that allows able individuals to earn a sizeable sum on their own. After the Agniveer protests among jobseekers and vast joblessness, there is certainly pressure on the Modi government to bite the bullet and implements the two ambitious schemes.