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Union budget offers unequal interest support to people in different economic classes

By Our Representative 

Commenting on the Union Budget, Prof Amitabh Kundu, who is Professor Emeritus at the LJ University, Ahmedabad, has said that the Finance Minister has failed to address the issue of unequal interest support to people in different economic classes.
Talking with Counterview, he said, “The expectation from the budget was of a substantial increase in interest support for the poor”, insisting, this was necessary “so that the monthly instalment can be reduced or their inability to pay during periods of unemployment can be addressed.”
According to Prof Kundu, “It is a matter of disappointment that no thought has been spared for improving the scope and coverage of the old-age security for the poor when the country is working towards the goal of one earth, one family and one future.”


Counterview: Do you think the current budget has sidelined the long term developmental concerns in the country by focusing on short term demand management?
Prof Kundu: It is a bit surprising that thrust on long term structural issues are somewhat diluted in the present than the earlier budget. It is more so as there is still sometime for the General Election and there does not seem to be any immediate threat to the present government on that front. It is evident that the Finance Minister is doing a tight rope walking in resource mobilisation, reducing budgetary deficits, cutting down or not enhancing allocation for the Ministries dealing with social sectors. The budget has also to address the long term infrastructural deficits and unequal access to skill development and employment opportunities to people in rural areas and backward regions. A recent study by Asian Development Bank warns that these regional and socio-economic inequalities can seriously inhibit realisation of the 21st century which could belong to Asia and more particularly to India.
Counterview: The government is proudly noting that Indian economy has shown a phenomenal rate of post-pandemic recovery in GDP, hovering between 6 to 7 present because of its structural strength against the global figure around 2 per cent for the next year. How does the government then justify the tax and other concessions to middle class for sustaining the present rate of recovery?
Prof Kundu: To be fair, the Economic Survey has underlined its global concerns that can adversely affect growth in coming years. The best way to handle this would be to strengthen internal demand through rural infrastructural investment, addressing inequality in access to endowments and factors of production and promoting balanced regional development, as envisioned in Goal 11 of the Sustainable Development Goals (SDGs). It is not clear why at this stage the government should depend on increasing personal disposable income of the middle class by increasing their professional and interest earning through tax concessions and interest subsidies.
The Finance Minister has indeed decided to overcome political hesitation by offering windfall gains via changes in the income tax rates and interest earnings on middle-term investments. In the process she had given the market a sudden buoyancy, the long-term implications of which need to be worked out. 
The concessions granted under various income slabs have been estimated to bring down budgetary revenue by about Rs 35,000 crore, in addition to the deficits due to interest subsidies to the middle class. 
These would result in a revision in projected budgetary deficits, impacting on the rate of inflation and long-term infrastructure investment. Besides, there are apprehensions that measures to promote investment in MSMEs and indigenous production may be inadequate and cannot halt the kind of premature deindustrialisation, currently seen in several other developing countries.
Counterview: What about the critical concerns about unemployment and inflation? One did not hear much about these after the budget.
Prof Kundu: You are right. Policymakers, academics and stock market have got busy computing the impact of the increase in personal disposable income, putting the macro concerns of price rise and joblessness in the backburner. The decline in the inflation rate during the past few months has led to complacency that increased production can tackle the problem of inflation. Similarly, the Economic Survey has underplayed unemployment by quoting an Indian Labour Organisation (ILO) report of 2013 to suggest that India is in a comfortable position in terms of total employment, including unpaid family-based employment for men and women, without bothering about its quality or productivity.
Counterview: Most of the concessions announced are designed for those who have reasonable accumulated income or savings and not for a large majority of the people in the informal sector, who simply don't have that. How do you think the government proposes to address the problem of the poor or workers in informal sector?
Prof Kundu: The budget of 2015 had announced Atal Pension Yojana (APY) for people outside the net of direct taxes, and who don't enjoy pensions and interest earnings. This savings scheme was largely aimed at the country’s unorganised workers through long-term interest support. APY was criticised for the government’s contribution, equal to that of the member of the scheme for five years, being withdrawn within a year of its launch. 
Furthermore, the monthly installment of Rs 126 for those who join at the age of 18 years for a pension amount of Rs 3,000 a month was considered unaffordable for the poor. The Finance Minister had stumped critics by proposing the Pradhan Mantri Shram Yogi Mandhan Scheme (PMSYM) in the budget for 2019-20, by maintaining the government’s contribution during the total period of accumulation (till age 60), and by reducing the individual’s monthly contribution to Rs 55 only. A similar scheme named National Pension Scheme for Traders and Self-Employed Persons (NPS-Traders) has been launched for the traders and self-employed persons.
Counterview: Could you kindly elaborate the basic difference between the two schemes?
Prof Kundu: It must be pointed out that APY, as a long-term saving scheme, has the advantage of guaranteed interest and a lump sum amount at age 60. Alternatively, one can choose monthly pension for one's lifetime and authorise the spouse/ nominee to get the principal amount on death. It espouses that the corpus a member builds through fixed monthly contribution and guaranteed interest is his/her entitlement. 
It is not clear why the government should depend on increasing personal disposable income of the middle class
This is not clear in case of PMSYM and NPS-Traders, which has been designed with a welfarist perspective for the member only during his or her lifetime, implying that the corpus amount, if remaining, is to be credited to the national fund after the death of the subscriber and spouse. Furthermore, persons who leave the pension scheme in less than ten years would get only their contribution with interest accruing at the savings bank rate.
Workers in informal sector earning less than Rs 15,000 a month or traders with an annual turnover of less than Rs 1.5 crore, and joining the mission at the age of 18 years, would pay 504 monthly instalments of Rs 55 each, spread over 42 years of their working lives. The life expectancy of such persons is likely to be lower than those in the formal sector. One can use the life expectancy of 72.3 years for rural persons aged 18, as estimated by Registrar General’s office, as a proxy, for the computation of the interest rate, implicitly being paid under PMSYM. The interest support works out to be 8.5 per cent per annum during the period of accumulation and that of the pension.
Counterview: You had noted earlier that under PMSYM, the government makes a matching monthly contribution throughout the period of accumulation, unlike APY. But now you mention only the interest support...
Prof Kundu: Yes, I did that to simplify the calculation and making it easy to compare the degree of state support across schemes by making everything the same except the interest rates. For computing interest support under PMSYM, I assumed that the government makes no matching contribution to the beneficiary as under APY and supports this only through a rate of interest. Under this assumption, the rate of interest works out to be 8.65 per cent per year. 
This implies that if the monthly contribution of the beneficiary is Rs 55 only with no matching contribution from the state, an interest guarantee of 8.65 per cent, similar to what is being provided to those in the organised sector is needed so that the accumulated amount at 60 years of age becomes Rs 2.74 lakh. This corpus fund is required to give Rs 3,016 to the worker (and half to the spouse, in case the subscriber dies) for the rest of the life, according to the EMI calculation formula, as shown in the Table. These rates are higher than that of APY, wherein the rate of interest for all age groups is 8.0 per cent during accumulation period and 7.0 per cent during the pension period. 
Counterview: Now, how does the interest support compare with those given to pension schemes for organised workers?

Prof Kundu: Given the above stipulations, one would presume that an informal sector worker, joining this much-hyped programme of the PMSYM, gets an interest support which is about the same or higher than those in the organised sector. This is not the case which I would explain later. One must, nonetheless remember that a worker under PMSYM has the risk of losing the entire deposit (corpus) in case of her and her spouse’s death, since there is no life insurance cover in the scheme. Importantly, the inflation factor has not been brought in the computation as the state is expected to protect the member against high inflation.
Counterview: You were explaining the differential interest rate support to PMSYM compared to that available to workers in organised sector. Is there lack of equity?
Prof Kundu: As far as the workers in the organised sector are concerned, there exists reasonable pension coverage. Additionally, pension-like schemes have been introduced through the post office and banking system, ensuring quarterly payment of interest on an amount up to Rs 15 lakh. The rate of interest was raised from 7.5 per cent to 8 per cent a year recently. A person who has attained the age of 60 years or who has turned 55, but is less than 60 years and retired under superannuation, Voluntary Retirement Scheme (VRS) or Special VRS, can open an account. 
The budget 2023 has further strengthened this by increasing the ceiling to Rs 30 lakh, ten times the amount entitled to interest support under PMSYM at the age of 60 years. The account can be opened individually or jointly with one's spouse. In addition, there was the Post Office Monthly Income Scheme (POMIS) with a limit of Rs 4 lakh for single-account holders and Rs 9 lakh for joint holdings. These limits, too, have been enhanced to Rs 9 lakh and Rs 15 lakh, respectively. The budget has also launched the Mahila Samman Saving Certificate' with a fixed interest rate of 7.5 per cent for two years. This can be opened in the name of a woman or a girl child. with the maximum amount set at Rs 2 lakh.
Counterview: Are you against giving interest subsidy to the rich in their pension like schemes?
Prof Kundu: Not at all. It is possible to make a case for these welfare-cum-resource mobilisation schemes, considering the poor state of social security in the country. It must, however, be pointed out that all these schemes are designed and are being availed by only those who have reasonable accumulated savings. Unfortunately, a large majority of the people in the informal sector simply do not have these. The only scheme that allows them to accumulate up to Rs 3 lakh during their working lives, after making a monthly contribution of Rs 55, backed up by interest support of about 8.6 per cent a year is PMSYM, as discussed above. Given that workers in the unorganised sector have scanty resources and humongous institutional constraints, they may not be able to join the programme or may drop off in between due to exigencies. 
Under the existing arrangements, a worker in the unorganised sector would, at best, get a fifth of the financial support received by an organised worker. The expectation from the budget was of a substantial increase in interest support for the poor so that the monthly instalment can be reduced or their inability to pay during periods of unemployment can be addressed. It is a matter of disappointment that no thought has been spared for improving the scope and coverage of the old-age security for the poor when the country is working towards the goal of one earth, one family and one future.
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