The Questionable Rationale For Govt Schemes

Context: Analysing the issues with a plethora of government schemes and the need for reforms therein.

Issues with having a plethora of government schemes:

• Ineffectiveness in the long-term: Issues in the legal, regulatory and institutional framework may lead to malfunctioning of the market, which usually acts as an effective tool of resource allocation.
  • For e.g. While the PM-Awas Yojana will not be able to solve the inherent issues with the home prices because of two underlying factors:
    • We still have variants of the licence-permit-quota raj in the real estate sector (this kind of a raj was abolished in 1991 in a few sectors only).
    • We have had some variant of what is now familiar as the Land Acquisition Act, 2013.
• Mispricing and misallocation of resources: While we do have different tax-subsidy rates for different goods and services, however, the rates are often not determined on the basis of where we have a possible market failure in ensuring correct pricing.
  • On the one hand, some tax laws are still unreasonable and, on the other hand, we have too many tax exemptions and some taxes are not imposed at all!
• Issue of poverty and inequality: Which necessitates special schemes like low charges for an essential commodity like water or even a separate scheme like the Jal Jeevan Mission.

Way Forward:

• Increase tax-GDP ratio: To address poverty and inequality, We do not need special schemes like low charges for an essential commodity like water. Instead, we need to increase the tax-GDP ratio.
  • Then, the government can provide more income support, and it can also spend more on infrastructure, which includes things like an adequate supply of (clean and running) water.
• Schemes should be run as a short-term intervention.
• Addressing the mispricing and misallocation: Often, a rule-based tax-subsidy policy is a good way of intervention. Sometimes an awareness campaign can be used so that people are nudged.

Conclusion: It is important to shift, in a phased manner, to a good and general policy framework from a situation of a plethora of schemes. This shift will help in achieving a high long-term rate of growth of GDP.