The main opposition party of India, Indian National Congress, has announced a new scheme, NYAY (Nyuntam Aay Yojana), as a political promise to the poor people of India. According to the announcement from the Congress party president Rahul Gandhi, this minimum income guarantee scheme will assure a payment of Rs. 72,000 a year for India’s poorest families if the Congress came to power. The money will be directly transferred to the bank accounts of 20 per cent of the poorest in the country. The scheme would lift five crore families or 25 crore people out of poverty. Rahul Gandhi further said,
It is not acceptable to the Congress that there is poverty in India in the 21st century. The final assault on poverty has begun.
He further said, that if the incumbent Modi government can give thousands of crores of rupees to few rich people of India then Congress party can definitely give this 72000 crore to the poor Indians.
So, is this scheme really a final assault on poverty? Can a free handout of 72000 crore rupees alleviate poverty of Indians? To know the answers of these questions we need an understanding of basic economics. We do that next.
What is poverty and what are its causes?
There are many definitions poverty based on its two types viz., 1) Absolute poverty and 2) Relative poverty. Absolute poverty means extreme level of material deprivation where people don’t even have enough food to eat, water to drink, home to live and clothes to wear. Relative poverty is like person A is poor in relation to person B because A owns a Honda City car and B owns a Lamborghini. The first type of poverty is what we see in India. The second type we can observe in places like America. India first needs to remove the absolute poverty of Indians and then it can talk about relative poverty. The abject material deprivation of millions of Indians is what the real poverty problem in India is. The following discussion is about how to remove this material deprivation of absolute poverty.
The literature of economics is full of various causes of poverty, but as Per Bylund reminded us, what causes poverty? Nothing. It is the original state, the default and starting point. The real question is what causes prosperity?
How to become rich?
Everyone’s starting position is poverty. So how do we all escape from this starting position of poverty? As Robert Murphy has very lucidly discussed in his important book, Lessons for the Young Economist (chapter 4, Robinson Crusoe Economics), this process requires first producing some economic good(s) like a coconut or fish or wheat etc., and then saving, by consuming less than its production, and investing it in building and then accumulating physical, like machines, and human capital i.e., skill and knowledge. Producing wealth (real economic goods) and then accumulating it is the only way to become rich and escape poverty.
Is this scheme NYAY going to follow this process? Not at all. On the contrary, this scheme will encourage people to consume without first producing anything! This is an impossible task.
NYAY scheme, instead of making people rich, will only make them more poorer. By handing out freebies to poor people, government will only make them more lazy. This scheme will remove incentive for working hard. When poor people of India will know they will get 72000 rupees without doing any work, they will not work. This scheme will prove to be an incentive for not working! And without this hard work and production there will be very little physical capital in the Indian economy. People will not do anything much to enhance their skill and knowledge too. The end result of this, more poverty!
Moreover, the fiscal burden of this scheme will add to the growing indebtedness of the Indian government. The day will come when the Indian government itself will go bankrupt like the government of Greece. The resources are simply not available to fund such massive scheme. If the Indian government will resort to the policy of inflation, printing rupees, then it will ravage the Indian economy and make almost everyone poor.
As we have seen above, this scheme makes no economic sense whatsoever when it comes to its stated goal of alleviating poverty of Indians. Instead of alleviating poverty, it will only increase it by making poor people more dependent on the government’s freebies. Our economy cannot distribute something that it has first not produced. Rupee notes (money) are not real income or wealth. Without prior production there won’t be any consumption.
If Rahul Gandhi and his Congress party has devised this scheme to unseat Modi from power then it can make sense as a populist political tool to win power back. But if Congress is serious about implementing this scheme then Indians must get ready for more poverty and destruction of their economy, which I think is the fate of Indians. If implemented this scheme will not do any NYAY (Justice) to poor of India, but do all kinds of ANYAY (Injustice) to them!