The case against universal basic income
At this stage of development, there is no reason why the government should transfer cash to the entire population
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The need for providing a basic income to all citizens is being discussed actively in various parts of the world. One of the reasons why the idea is gaining more attention in the developed world these days is the increasing use of robots in the industrial sector. As automation increases, the fear is that more people will find it difficult to get jobs. Moreover, the thought is to give all citizens a basic income that will allow them to live with dignity, irrespective of their earning capability. However, opinion remains divided and voters in a rich country like Switzerland rejected the idea by an overwhelming majority in 2016.
A number of economists have argued that universal basic income (UBI) can be implemented in India as a significant proportion of the population is still in poverty and anti-poverty spending is marred by leakages. It is likely that the government is mulling the possibility of implementing it in some form and chief economic adviser Arvind Subramanian has hinted that UBI will be a key theme in this year’s Economic Survey.
The concept of basic income is not new for India. The Perspective Planning Division of the erstwhile Planning Commission worked on the idea of providing minimum income in the early 1960s. More recently, economist Pranab Bardhan suggested this in an article published in the Economic and Political Weekly in 2011. In another article published in these pages last year, Bardhan said: “...the main pragmatic justification for UBI is that in many current programmes targeting the poor, through a process of political and administrative collusion and connivance, benefits continue to leak to non-targeted, better-off people, while many of the intended beneficiaries are left out.” Bardhan showed that if a UBI of Rs10,000—indexed to 2014-15 prices (three-fourths of the poverty line that year)—is given to all citizens, it will cost about 10% of the gross domestic product (GDP), which can be funded by ending regressive subsidies and revenue forgone.
Economist Vijay Joshi, in his book India’s Long Road: The Search For Prosperity, has discussed the subject in detail. With the Suresh Tendulkar committee poverty line and using the poverty gap index, at 2014-15 prices, Joshi arrived at a figure of Rs17,505 per household per year. This will cost about 3.5% of the GDP for the entire population. Economist Debraj Ray has proposed an interesting variant where instead of a fixed sum a fraction of the GDP is committed as universal income.
So, is there a case for implementing UBI in India? To be sure, the political economy of the country is far more complicated and there are a number of reasons why UBI is not feasible for India.
The main reason why Swiss voters rejected the idea was fiscal implication. Most of the suggestions in favour of UBI in India are made fiscally feasible with a number of assumptions. The first implicit assumption is that the amount of money being spent on various kinds of subsidies is justified, and the only issue is of targeting, which can be addressed by the transfer of basic income to every citizen. This is not correct. The widely quoted 2003 National Institute of Public Finance and Policy study showed that both Centre and state government subsidies amount to about 14% of GDP. The idea should be to reduce expenditure on non-merit subsidies and use the savings to boost capital spending that India badly needs.
Differently put, just because the government has been misallocating resources over the years is no reason why it should continue to do so—this time more efficiently.
The second assumption is that the non-merit subsidies can be rolled back easily. It will not be easy for the government to roll back subsidies such as food, fertilizer, fuel, electricity and water. In fact, politically, it will become even more difficult to arrive at the amount that will need to be transferred under UBI if subsidies are rolled back. In this context, it is important to recall the political backlash when the Tendulkar committee showed a poverty ratio of 21.9% for the year 2011-12. The government had to constitute another committee under C. Rangarajan which gave a higher poverty ratio.
The third assumption is that reduction in revenue forgone can augment resources for UBI. Again, this may not happen. The revenue forgone is basically a reflection of problems in our tax administration which need urgent reforms. For instance, India has one of the highest rates for corporate tax among its peers.
Apart from fiscal feasibility, there are other issues that go against UBI. At this stage of development, there is no reason why the government should be transferring cash to the rich and the middle class. It needs to invest resources in building productive capacity in the economy rather than doling out cash to the entire population. Further, the government needs to be careful about unintended consequences. For instance, what will be the impact of UBI combined with programmes like the Mahatma Gandhi National Rural Employment Guarantee Act on the labour market? It is unlikely to help India’s case as a low-cost manufacturing destination.
Instead, the government should focus on increasing the use of conditional cash transfers with better targeting, which will not only help the poor but will also plug leakages. Progressively, the state would do well to rebalance its spending in favour of augmenting productivity and economic growth which will lift people out of poverty more decisively.
Rajesh Kumar is deputy editor (views) at Mint.