Welfarism and bias

Income tax rebate less justified than farm income support

Two of the major new initiatives in the interim Budget presented last week have met with sharply different reactions even though both were fiscally expansionary measures. In one, the government decided that small farmers who own less than 2 hectares would receive income support from the Union government. The amount was relatively small: ~6,000 annually, transferred in three instalments. Because of the fragmentation of landholding in India, the number of theoretical beneficiaries of this policy is vast — about 120 million households, according to Finance Minister Piyush Goyal. This is a significant portion of the population. The scheme would next year, according to the Budget, cost the exchequer ~75,000 crore. The other decision that grabbed the headline was also a giveaway, but in the form of tax relief. This would be rebate for taxpayers with a taxable income of ~5 lakh annually or less. Together with some other changes to taxation rules, this would cost the exchequer ~23,000 crore.

It is unfortunate that the reaction in the public discourse to these two proposed policy changes has been disparate. It is one thing to decry all welfarist moves at a time when the focus could be squarely on fiscal consolidation. Yet, it is absurd to welcome a tax cut while also condemning a relatively minimal amount of income support to the most marginal farmers. India’s per capita income — measured using net national income, or NNI, in 2017-18, according to the First Revised Estimates issued on January 31, 2019 — may be around ~1.1 lakh a year. In other words, giving tax-free status to all those with an income of up to ~5 lakh means that even those with an income just under five times higher than the mean income will no longer need to pay income tax. This is surely an unusual situation. Even if calculated in terms of earning power per household, the scene is not much better. Compared to the ~12,500 per person tax break given to those up to five times richer than the mean, the ~6,000 (per household of, on average, five people) basic income given to the most marginal land-holders in India is not vast. That may benefit 120 million of 250 million or so households in India; the income cut reaches merely 30 million people at best. And yet the income support is only between three and four times as expensive. There is little doubt which should be preferred, even leaving questions of progressive taxation or income redistribution aside.

The problem with an entrenched middle-class bias in evaluating policy is that it may increasingly be out of step with the times. It is important to evaluate the fiscal and other benefits of even welfarist measures as neutrally as possible. In this case, the tax cut was a fiscal luxury as compared to the income support — which may, arguably, be the cheapest way to address widespread income fragility and rural distress. In any case, the differing responses to the two measures — the welcome for one and the disdain for another — should be dismissed as hypocritical.