Is greed good?

A more caring India would provide for Universal Basic Income

An unpalatable reality is that the effectiveness of the 2016 Insolvency and Bankruptcy Code has been whittled down systematically over the last few years. Former Reserve Bank of India governor Urjit Patel’s book, Overdraft: Saving the Indian Saver, details the extent to which huge debt defaults to public sector banks (PSBs) were glossed over by the government and the RBI till about 2015. Subsequently, a February 12, 2018, RBI circular made it mandatory for lenders to take defaults of over Rs 20 billion which remain unresolved for 180 days to the National Company law Tribunal (NCLT). Owners of defaulting large firms who risked losing their assets have often retained control using all manner of legal strategies. A self-serving logic used was that even those firms that could be revived would be shut down under RBI’s 2018 order and lead to workers being retrenched. On balance, the Ministry of Finance (MoF) has sided with defaulters and so did the Supreme Court when it struck down the 2018 RBI circular in April 2019.

In fiscal year 2019-20, Indian gross domestic product (GDP) growth had slowed officially to 4.2 per cent and was probably lower. Under these pre-existing circumstances of anaemic economic growth, the recent hostilities along the Line of Actual Control with China and the Covid-19 pandemic will further impoverish the destitute in the country. The reality is that defence expenditure would need to be raised while economic activity and consequently tax revenues, which have shrunk in the first quarter of 2020-21, may take a year or more to recover.

Estimates of Indian GDP growth for 2020-21 range from around (-) 5 to (-) 14 per cent. Consequently, the RBI may cut the overnight repo rate again but banks are flush with liquidity and it is creditworthy borrowers that are in short supply. Government needs to foster consumption demand by spending and providing grants. Finance ministry officials stated last week that the central government is waiting for a Covid-19 vaccine to be developed before it considers raising demand through public spending. The MoF has argued that even if  government were to monetise its deficits directly with the RBI and thus borrow at the current reverse repo rate of 3.35 per cent, recipients of the resulting largesse would save rather than spend such funds. This may well be true since weaker economic sections could perceive handouts as a one-time generosity and prefer to save for emergencies rather than spend on consumption.

It is in this context of huge uncertainties that the government needs to step in as the provider of capital of last resort. If funds raised through direct monetising of deficits were to be deposited in Jan Dhan bank accounts as an assured monthly Universal Basic Income (UBI), it would raise confidence and consumption. Many are against any form of UBI as unaffordable.

Illustration: Binay Sinha

Nevertheless, the central government could begin UBI with a relatively small amount per person. Only for illustrative purposes, Rs 6 trillion annually, which is about 3 per cent of GDP, could be provided as UBI to women who are above 21 years of age, have an Aadhaar card and Jan Dhan account. The objective should be to provide Rs 5,000 to every eligible woman. Anyone who has more than  Rs 100,000 in any bank account or immovable property registered in her and/or husband’s name worth more than Rs 500,000 should be ineligible. Instead of introducing an equally messy and leaky MGNREGA for urban workers, the existing MGNREGA should be phased out as experience is gained in implementing UBI.

For purposes of comparison with the never ending loot via PSB lending, the government has already provided about Rs 3 trillion to PSBs in the last four years. Even if the total amount spent to recapitalise PSBs were to rise to Rs 10 trillion or more, it could be maintained that this would be a one-time expense rather than annual outflows as for UBI. This is not a convincing argument as there have been bank bailouts with metronomic regularity in the past. To make UBI affordable, the costs have to be shared between the central and state governments and should be accompanied by a phasing out of distortionary subsidies— for example, fertilisers and power.  

Quips about how India grows at night while the government sleeps raise laughs at cocktail parties. If any proof was needed the pandemic has dramatically illustrated that all countries need government and central bank support for the economy and to provide affordable medical care. In the 1970s and 1980s, India had a number of highly restrictive laws and regulations, which strangled private sector initiative. Now in 2020, although fitful progress has been made, implementation of the incessantly talked about land, labour, inspector/investigation “raj” and police, judicial system reforms are disappointingly still among the principal challenges. At this stage, flippant suggestions such as private-sector trains without addressing the corroding ills of private gains and public losses in lending by PSBs would be counterproductive to say the least.

Karl Polanyi, a Hungarian-American economist and sociologist, in his seminal book, The Great Transformation, which was published in 1944, makes an ever relevant point— namely, that market economies are not an end by themselves. On a lighter note, in a 1987 movie called Wall Street, Michael Douglas plays an unscrupulous character called Gekko who declares smugly that “greed is good”. In the 2010 sequel titled Wall Street: Money Never Sleeps, after having served 10 years in jail for insider trading, Gekko announces “now greed is legal and it is everywhere.”  

To sum up, the abetment of private greed by PSBs/RBI/central governments has had extremely costly consequences for Indian tax-payers, savers and citizenry at large. Further, an unthinking rightwards drift economically in India needs to be subjected to painstakingly honest examination on a sector by sector basis. For now, the crying need is to use the political capital provided by the Covid-19 pandemic to implement a well-crafted UBI. 

j.bhagwati@gmail.com . The author is a former Indian ambassador and World Bank finance professional