Is it time for a universal basic income in India?
Photo: Indranil Bhoumik/Mint
Unconditional cash transfers may sound like a smart way to fight poverty, but questions remain over whether the country can afford it
First Published: Sat, Aug 27 2016. 11 35 PM IST
Even after three decades of sustained economic growth and a proliferation of welfare schemes, roughly one in three Indians still live below the poverty line, according to the last report on poverty estimates submitted by the Rangarajan committee in 2014.
While those estimates have been questioned, the fact remains that there is little dispute over the fact that too many Indians remain trapped in poverty. The persistence of poverty and significant leakages in welfare schemes that aim to alleviate it has prompted many academics and policymakers to explore more efficient alternatives to India’s creaky and leaky welfare architecture.
One of the suggestions has been to move towards a “universal basic income”. The idea is already gaining currency in the developed world, as fears of automation and consequent job losses have spurred thinkers in the West to devise ways wherein all individuals would be guaranteed some income.
The Swiss voted on and rejected a proposal to guarantee every adult citizen and long-term resident 2,500 Swiss francs (around Rs1.7 lakh) per month. Meanwhile, Finland is set to experiment with the idea on a pilot basis. It is likely that more countries will experiment with this idea in the coming years.
Although it has gained popularity in recent years, the idea itself is several centuries old. One of the earliest proponents of some form of basic income was Spanish philosopher Johannes Ludovicus Vives, who proposed that the government should ensure the minimum level of subsistence for all, but only to those who showed willingness to work. Thus, Vives’s idea of a basic income was not unconditional.
Subsequently, many other philosophers explored variants of the idea of basic income, not necessarily always drawing inspiration from or building upon previous work.
Thomas Paine, one of the US’s founding fathers, argued that every person was entitled to an equal basic endowment because “the earth, in its natural, uncultivated state was... the common property of the human race”.
However, this concept of equal endowment was, in his view, somewhat violated by the system of landed property. Therefore, property owners ought to contribute to a fund that could be redistributed to everybody, including the rich and the poor, Paine wrote.
Years later, British philosopher and mathematician Bertrand Russell, in his 1918 book Roads to Freedom. Socialism, Anarchism and Syndicalism, argued that “a certain small income, sufficient for necessaries” should be unconditionally provided to all.
The universal basic income, as it is understood today, has three distinguishing characteristics.
First, it is universal and not targeted. In the Indian context, this makes sense because of the less-than-satisfactory experience with targeting welfare services. Apart from the standard arguments against targeting—that it often excludes a lot of the deserving households from receiving subsidies, people often fall in and out of poverty and therefore it becomes difficult to ascertain who are rightfully entitled to receive such benefits.
“With declining poverty, the accident of birth has become less important than the accident of life. People fall into poverty due to illness, drought, declining opportunities in agriculture, and urban blight,” argues Sonalde Desai, professor at the University of Maryland, using results from the two rounds of the India Human Development Survey, conducted in 2004-05 and then again in 2011-12.
Thus, a “universal” programme would not only be more appropriate, it will also reduce the burden of the bureaucracy in so far as it is engaged in identifying the deserving beneficiaries of any targeted programme.
The second feature of any proposed universal basic income scheme is cash transfer in lieu of in-kind transfer. There are standard arguments in favour of cash transfers over in-kind transfers (food stamps or grains provided through the Public Distribution System) as they are supposed to be much less market-distorting than in-kind transfers.
The third distinguishing feature is that it is unconditional. Cash transfers are not tied to exhibiting certain behaviour, and the people are free to spend the cash as they want. An example of conditional in-kind transfer in India would be the mid-day meal scheme, where the meal—an in-kind transfer—is conditional upon attending school.
Thus, the universal basic income seeks to provide unconditional cash to every individual, or household, and the individuals would be free to use the cash as per their discretion and spend according to their own preferences. Thus, the movement for a universal basic income has attracted support from both the left and right ends of the political spectrum.
As Pranab Bardhan, emeritus professor of economics at the University of California at Berkeley, noted in a recent piece for Project Syndicate, “… On the left, it is regarded as a simple and potentially comprehensive antidote to poverty. On the right, it is viewed as a means to demolish complex welfare bureaucracies while recognizing the need for some social transfer obligations in a way that doesn’t weaken incentives significantly…”.
So far so good. So, what are the main arguments against a universal basic income? Two of the most popular arguments are: it would reduce the motivation for work and might encourage people to live off assured cash transfers; and it is simply unaffordable.
With respect to the fear that it might induce poor Indians to work less and live off income transfers from the state, the evidence so far seems mixed. In 2011, two pilots were launched in Madhya Pradesh, funded by Unicef and coordinated by the Self-Employed Women’s Association, to study the effectiveness of income grants.
In the first pilot, eight villages were chosen, wherein every man, woman and child was provided with a monthly payment of—initially—Rs200 for each adult and Rs100 for each child. Subsequently, these payments were raised to Rs300 and Rs150, respectively.
The second pilot was held in a tribal village, where every adult and child was paid Rs300 and Rs150, respectively, every month for 12 months. Another tribal village was used as a comparison.
The results show that people who received the unconditional cash transfers in the pilot did not use it to increase leisure and reduce work. In fact, according to Guy Standing, professor at the School of Oriental and African Studies, University of London, who worked on the pilot, “grants led to more labour and work”, with a shift from casual wage labour to more own-account (self-employed) farming and business activity. There was also a reduction in the migration caused by distress.
In the tribal village pilot, the Unicef report points out that the grants enabled small farmers “to spend more time and also invest on their own farms as opposed to working as wage labourers”.
Thus, it is possible that nationwide implementation of such assured cash transfers might reduce the availability of agricultural labourers willing to work in others’ farms, and this can push up agricultural wages, something similar to the apparent fallout of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).
However, as Bardhan had pointed out in a previous interview with Mint, “… any poverty eradication measure will raise the bargaining power of the poor, and hence their wages…”
Thus, the fact that unconditional cash transfers might raise wages due to the decline in the supply of casual labourers does not seem to be a valid argument against a universal basic income.
More importantly, the pilots showed that those who received grants undertook small-scale investments, such as for more and better seeds, equipment repairs, establishment of little shops, etc., which potentially raised long-run productivity.
Thus, even though the number of hours worked may have declined, productivity may not have declined much. In fact, this is one of the basic arguments for a universal income—that minimum income security would enable individuals to plan their lives better and undertake more meaningful activities rather than be trapped in distress-driven activities in search of subsistence.
The second main argument against a universal income is the cost.
In a recent Indian Express article, Maitreesh Ghatak, professor at the London School of Economics, estimates that paying a basic income equivalent to the poverty line, to each and every adult in India, would entail a cost of 11% of GDP, which is way above the 4.2% of GDP that the government currently spends on explicit subsidies.
By explicit subsidies, we mean the subsidy cost under the Public Distribution System, fertilizers, railways, electricity, sugar, LPG, kerosene and water, as explained by the Economic Survey 2014-15.
Apart from these explicit subsidies, MGNREGS costs 0.4% of GDP. It should be noted that the 4.2% of GDP spent on explicit subsidies does not include spending on education and healthcare.
Ghatak points out that the current welfare spending of the government falls way short of the required basic income transfer of around Rs13,400 per annum to each adult.
However, the 2011 pilots show that even much smaller grants, way below the poverty line, might do the trick. The monthly cash payouts in the pilots were Rs300 for each adult, or Rs10 per day, much below the rural poverty line of Rs32 per day (for 2011).
Despite such a low basic income, the pilot villages did show significant desirable changes. Thus, let us say that India were to adopt a universal unconditional cash transfer programme based on the experience of Madhya Pradesh. Accounting for inflation since 2011, let us fix the monthly payments at Rs400 for each adult in rural areas and consequently Rs587 for each adult in urban areas.
Given present nominal GDP and population, the total cost of such transfers should come to around 4-4.3% of GDP, which is almost equal to the amount that the government spends on explicit subsidies.
But of course, we might be comparing apples to oranges. The pilots in Madhya Pradesh took place under a regime when the government was (and is) very much involved in providing in-kind transfers and running conditional welfare schemes. Thus, it is unclear if a grant of Rs300 per month would be sufficient in a scenario when the government withdraws, say, from the PDS or mid-day meal scheme.
In fact, this has been the third main contention over a possible a move towards a universal basic income—the question of whether a shift towards its should be a substitute for all existing subsidies or whether it should complement the existing ones.
Noted economists such as Jean Drèze and Reetika Khera have written about the perils of India prematurely moving towards “direct cash transfers”, and removing the existing mechanism of in-kind transfers, best exemplified by India’s food distribution system.
In 2011, Drèze, in an article in the Indian Express, had articulated his concerns over cash transfers ranging from erosion of purchasing power on account of inflation to implementation of cash transfers given the lack of an adequate banking network.
While Drèze did concede that he was “… not averse to the idea of a ‘universal basic income’…” he considered it to be practical only sometime in the future.
A previous Economics Express column had also discussed at length the benefits and costs of moving to a cash-transfer regime, concluding that a lot will depend on how the government addresses the design bugs.
Moreover, if one of the arguments for a universal basic income is that the government must shed its paternalistic attitude of assuming that it knows better than citizens how resources must be allocated, then it is only natural to ask the poor, the intended beneficiaries of any welfare scheme, how they would like to receive the subsidy—in cash or in kind.
In a 2013 research paper, Khera noted that in a survey of 1,200 rural Indian households with access to PDS, around two-thirds of respondents expressed a preference for food when asked to choose between the existing system and hypothetical cash transfers. Among the major reasons cited for the preference for food over cash were “cash will be dissipated”, inflation, distance to market, distance to bank and hassles of collecting money.
While some of the challenges of implementing a basic income can be met with the better use of technology and an expansion in banking services, the challenge of affordability remains. How far existing welfare schemes can be trimmed without hurting the poor, and how much public resources can be saved to implement the scheme remains an open question.
According to Bardhan, India could move towards a basic income, replacing “some egregiously dysfunctional welfare spending” but leaving untouched “public education and healthcare, pre-school nutrition programmes, or employment guarantees in public works”.
The required budgetary resources could be raised by trimming the implicit and explicit subsidies to the rich (often in the form of tax breaks or subsidies given to goods largely consumed by the relatively well-off), or by raising additional taxes by “improving property tax collections (currently extremely low)”, he says.
One only hopes that in such a transition to a universal basic income, the government does not resort to raising additional tax revenue through indirect taxes and cess thereon, which are regressive in nature and more distortionary than direct taxes.
Meanwhile, given the fiscal implications of the government committing itself to providing a pre-decided nominal cash transfer to every citizen or resident or adult, several innovative ideas are being floated around, which could help the government to insulate itself against inexorably rising fiscal commitments.
Development economist Debraj Ray, in a blog post, proposed a universal basic share in lieu of a basic income, wherein all individuals would be guaranteed a share of the country’s GDP. This way, the government is insulated from fiscal shocks (i.e., a decline in tax revenues in a particular year) that are correlated with GDP shocks.
There are also other less-than-perfect alternative versions, as enumerated by Ray—for instance, a fixed share of government revenue or expenditure being distributed among citizens equally and unconditionally in cash. However, such a structure might incentivize the government to raise less revenue and spend less.
The debate over universal basic incomes (or universal basic shares) is likely to evolve further as the developed world grapples with the possibility of robots taking over jobs and as the developing world wonders how it can pull people out of poverty while facing a resource crunch.
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