Daily Management Review

India will give out cash to fight poverty


Financial help to poor Indian population could almost eradicate poverty in the country, but it will cost between 4% and 5% of GDP, said the country's government report.

Universal basic income is a radical idea, which looks increasingly appearing to authorities in countries such as Finland and France. Its essence involves providing each citizen with funds to meet basic needs.

Some economists support introduction of an unconditional income in Asia's third largest economy. Despite the rapid growth of the economy, there is an extremely high level of poverty.

According to economic surveys, unconditional income will form basis of India’s annual budget and will be a convincing alternative to existing social security measures. However, there are risks of potentially high costs associated with such measures.

"A key advantage of introduction of an unconditional income is that this measure has a potential to improve currently poor targeting of support schemes", - said Arvind Subramanian, Chief Economic Adviser to the Ministry of Finance at a press briefing.

In prices of 2011-2012, the unconditional income could reach 5.4 thousand rupees ($ 79.59) per person per year, so that many economists wonder how this step could help in the fight against poverty.

India currently gives 3% of GDP on subsidies, many of which are addressed to the middle class. The government is spending billions of dollars on a number of the world's largest social welfare programs, including provision of more than 800 million people with cheap food and creation of jobs for 50 million households.

Critics of the existing social support programs in India say their low efficiency is directly related to corruption and diversion of funds.

Most economists do not hesitate to say that fast ban on a significant part of local currency will almost certainly have a negative impact on its economic growth. 8 November 2016, India decided to hold this crazy experiment, and suddenly outlawed two largest banknotes (face value of 1 thousand and 500 Rs.), which total amount accounted for 86% of the outstanding cash.

As expected, the economy almost immediately felt consequences of sudden "demonetization". Negative effects of the reforms keep showing up, while its profits look increasingly doubtful.

Latest statistics clearly shows economic price of demonetization. Consumers, companies and investors suffered heavy losses at the end of 2016. Sales of consumer goods, traditionally the most reliable growth sector, dropped by 1-1.5% in November, says Nielsen research group.

Durables seem to be affected the most. Sales at Hero Motocorp, the largest manufacturer of two-wheeled vehicles (motorcycles and bicycles), collapsed in December by more than a third compared to last year.

Poll of managers in the industrial sector recorded negative mood: the surveyed are now expecting mild recession.

Offers of investment companies reduced from an average of 2.4 trillion rupees ($ 35 billion) to 1.25 trillion rupiah in the last quarter of the year, according to research agency Centre for Monitoring Indian Economy. As a result, growth of corporate lending, already quite sluggish, slowed to its lowest level in 30 years.

All this led to a "significant but not catastrophic" consequences, says an analyst at Capital Economics Shilan Shah. Forecast of GDP growth, ending in March of the fiscal year, was lowered by about half a percentage point to 7%.

Other factors, such as rising oil prices and the stronger dollar after election of Donald Trump, also played a negative role, the expert believes.

source: economist.com, reuters.com

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