Will a universal basic income work in India?
The idea of a universal basic income to replace subsidies appears appealing but may be hobbled by implementation hurdles
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The persistence of high inequality and the prospect of job losses owing to automation in the advanced world has led several advanced economies to consider the idea of a universal basic income (UBI) to guarantee their citizens a minimum level of income support.
The same idea seems to be gaining favour among a growing number of economists and policymakers in India, but for different reasons. One of the key themes of the economic survey this year is likely to be UBI, the chief economic advisor to the finance ministry Arvind Subramanian had said in a 29 September interview to Business Standard .
Speaking at an event to mark Gandhi Jayanti on 2 October, Subramanian had spoken about objections Gandhi might have to such an idea before he outlined his responses to such objections, according to an Indian Express report.
“The first thing that I will tell Gandhiji is that today the government spends a lot of money on schemes to help the poor,” said Subramanian. “Today there are at least 1000 schemes that the Central government runs for the poor…It is not clear that the money actually reaches the poor. So the question is whether the UBI is a more effective way of reaching the poor that the current schemes that government employs…We have historically focussed on individuals who are poor by virtue of accident of their birth — they are dalits, adivasis, etc. But what is happening now is that the accident of birth has become less important than the accident of life. People fall into poverty due to reasons like drought, declining opportunities in agriculture, disease and so on…. So the safety net provided by the government should be quite wide and that is why this UBI has some merit.”
The renowned development economist, Pranab Bardhan, had made similar arguments in a 2014 interview to Mint .
According to the emeritus professor of economics at the University of California at Berkeley, the idea of the UBI is even more relevant for India than for the advanced economies which have been considering it so far since governments in India tend to ‘mess up’ when it comes to distinguishing the poor from the non-poor.
As a result, the poor get very little of what is spent in their name. The last economic survey published in February 2016 made the same point, as the chart below illustrates.
The idea of direct cash transfers replacing leaky and price-distorting subsidies is not new, and had been proposed by the then chief economic advisor, Kaushik Basu, in the economic survey of 2009-10. Basu had argued that providing direct cash transfers by bypassing a corrupt bureaucracy is a more efficient way of helping the poor than providing subsidies. What makes the current proposal different is the ‘universality’ of the cash transfer, which means the government does not have to waste resources and time in identifying beneficiaries.
But is such an idea feasible in India?
An acceptable level of the UBI could be an income equivalent of the poverty line (the Tendulkar committee poverty line), which is about Rs1,090 per month for each individual, in 2015-16 prices. The total cost of providing this income to all Indians would amount to 12.5% of GDP, which is nearly equal to the size of the Union Government’s budget. Thus, such a UBI which provides poverty line-equivalent income to all Indians does not appear to be feasible because of budget constraints.
However, it may not be necessary for the UBI to match the poverty line, as studies have shown that even much lower levels of income transfer could materially improve the lives of the poor. A pilot study conducted by UNICEF and the Self Employed Women’s Association (SEWA) in a few villages in Madhya Pradesh in 2011 showed that a monthly unconditional grant of Rs300 to each adult and Rs150 to each child led to considerable improvement in their lives and reduced distress driven out-migration. Adjusting that amount for inflation, adopting an equivalent UBI amounting to around Rs450 per person per month in 2015-16 prices would cost 5.1% of GDP. This calculation is based on a universal entitlement of Rs 450 for adults and children as a variable UBI (with different entitlements) would add an additional function for the bureaucracy. Hence, the proposed UBI would amount to Rs1,800 per month for a family of four, in 2015-16 prices.
The Economic Survey 2014-15 noted that the central and state governments together spend 4.2% of GDP on a set of major explicit subsidies, which includes the subsidy cost under the Public Distribution System (PDS), fertilizers, railways, electricity, sugar, LPG, kerosene and water. This does not include social sector spending such as that on education and healthcare. Even if the central and state governments agree on phasing out half of these subsidies, say by retaining subsidies relating to the PDS, which benefit the poor more than other subsidies, it will generate savings worth at least 2% of GDP. If the Centre and the states can also agree on a relatively flat tax structure without exemptions for the goods and services tax (GST), this will help generate additional tax revenues worth 2.7% of GDP, according to the calculations of the Subramanian committee on GST. The plan to phase out corporate tax exemptions could fetch the government another 0.5% of GDP. The total savings worth 5.2% of GDP would therefore be roughly equal to what is required for the limited UBI worth Rs450 per person per month.
There are however several challenges involved in implementing such a radical plan. One big challenge relates to the phasing out of food-related subsidies. Any plan to replace food related subsidies has to contend with the implications of such a move on food security of the country, as an earlier Mint column had pointed out. Whether farmers will continue to produce enough foodgrains in the absence of price incentives remains a big question. Also, the argument that food markets may not work effectively in all areas of the country, requiring state-led distribution networks to provide in-kind food transfers is acknowledged even by many proponents of cash transfers, who advocate a gradual shift to cash transfers, starting with areas with well-functioning competitive markets.
The Shanta Kumar committee report on restructuring India’s food procurement and distribution system, for instance, recommended a shift to cash transfers initially in the large cities. Given that food subsidies are less regressive compared to others, it may make sense to retain food subsidies at least for a few years even while an UBI initiative is launched.
Eventually, the amount spent on such subsidies may be added to the UBI kitty. As the charts below show, the poor benefit more from the PDS compared to the rich but still seem to prefer cash to in-kind transfers.
The other big challenge relates to co-ordination between state and central governments. Any plan to phase out subsidies and tax exemptions (relating to the GST) will require an extraordinary degree of co-operation between the states and the Centre.
Finally, any pre-specified commitment by the government such as an inflation-indexed UBI worth Rs450 per person could generate fiscal stress during an economic downturn. One proposal to circumvent this problem is the idea of a ‘universal basic share’ mooted by the development economist Debraj Ray. Under Ray’s proposal, all individuals would be guaranteed a share of the country’s GDP, which would ensure a relatively lower burden for the government when the economy slows down and tax revenue falls.