New Delhi: Ahead of Union Budget 2018, the Narendra Modi-led government’s last full-year budget to be presented in February, the International Monetary Fund (IMF) has made a strong case for India adopting a fiscally neutral Universal Basic Income by eliminating both food and fuel subsidies.
Universal Basic Income is a form of social security guaranteed to citizens and transferred directly to their bank accounts and is being debated globally. If indeed the government does go ahead and accepts the proposal, it will be equipping itself with a potent political tool ahead of 2019 Lok Sabha elections.
Finance minister Arun Jaitley had in June said while he is fully supportive of the idea of Universal Basic Income proposed by chief economic adviser Arvind Subramanian in the Economic Survey 2016-17, it may not be politically feasible.
In its Fiscal Monitor report released on Wednesday, the IMF said the potential role of Universal Basic Income as an alternative to the existing system of state subsidies, which are typically characterized as fraught with inefficiencies and inequities.
IMF said eliminating energy “tax subsidies" would require a substantial increase in fuel taxes and retail fuel prices such as petrol (67%), diesel (69%), kerosene (10%), LPG (94%), and coal (455%).
The Fund’s analysis is based on public distribution system (PDS) and energy subsidies in 2011–12 and does not include the recent fuel price reforms like decontrol of diesel and petrol prices, limiting subsidies in cooking gas, gradual increase in kerosene prices and tax of Rs400 ($6) per tonne on coal consumption. Such subsidy reforms has led to reduction in subsidies by 0.2 percentage point in 2016-17 while better targeting of food subsidies has reduced the subsidy to about 1.5% of gross domestic product (GDP).
IMF said the fiscally neutral Universal Basic Income would outperform public distribution system (PDS) and energy subsidies by increasing the coverage of lower income groups by 20% who are not covered at present. It will also be progressive in nature as a lion’s share of energy subsidies at present are garnered by the higher income groups.
IMF proposes transferring Rs2,600 (about $54) in 2011-12 prices to every person in India after eliminating the food and fuel subsidies. This is equivalent to about 20% of median per capita consumption in that year. “Although such a transfer is more modest than that often discussed in public debate, it would still incur a fiscal cost of approximately 3% of GDP," the IMF said.
However, the Fund has cautioned that reaping the potential gains from the introduction of a Universal Basic Income would need careful planning to overcome “political, social, and administrative challenges", especially because such subsidy reforms involve large price increases.
“These factors include, for example, a comprehensive energy sector reform plan, transparent and extensive communication, price increases that are phased in over time, measures to protect the poor, and institutional reforms that depoliticize energy pricing, such as the introduction of automatic pricing mechanisms," it added.