Photo: Hindustan Times
Photo: Hindustan Times

Opinion | Guaranteed basic income is not a solution to mass poverty

Let economic growth work for the top eight income deciles, and govt welfare spending focus on the bottom two

The first serious attempt to figure out how to guarantee a minimum standard of living for every Indian was made way back in 1962. This nugget of economic history is worth recalling at a time when the idea of a universal basic income has caught the imagination of the Indian political system.

A group of economists at the Planning Commission, led by Pitambar Pant, wrote about how every citizen could be guaranteed a minimum standard of living by 1977, or 15 years later. Their analytical approach is now more relevant than the actual numbers they worked with, since India in 2019 is a world apart from India in 1962.

The Planning Commission economists said that India needed to grow its economy more rapidly if living standards had to be raised. India was too poor a country to depend primarily on redistribution. They said that families in the top eight income deciles would benefit from accelerating growth, while those in the bottom two deciles would need some form of direct income support to maintain a minimum standard of living. So, the idea of an income transfer was basically meant for the poorest fifth of the population, which was not in a position to take advantage of the opportunities that would become available from economic expansion.

It is interesting that the recent proposal by four economists—Josh Felman, Boban Paul, M.R. Sharan and Arvind Subramanian—has turned this distribution on its head. They have recommended an income support scheme in which the bottom eight deciles in rural India (or the bottom four deciles in the country as a whole) will need income support. They implicitly seem to have less confidence in the ability of economic growth to lift living standards compared to the 1962 report.

The merit of their scheme is that it is more progressive than a farm loan waiver or the Rythu Bandhu scheme in Telangana, which benefit landowners rather than tenants or farm workers. Felman and his co-authors also argue that the fiscal cost will be manageable, since the income transfers will be funded by money released from the scrapping of schemes such as the Fasal Bima Yojana and the fertilizer subsidy. However, there are a few issues that need to be highlighted.

First, the assumption that a basic income for the poorest four deciles in rural India could be fiscally neutral looks good on paper. The tricky question is whether any political party will be ready to upset the fragile political equilibrium in the rural areas by, for example, moving budgetary allocations from the fertilizer subsidy to direct income support. This in effect would entail a shift of spending from large farmers to the rural poor. It is quite likely that income support is offered without cutting back elsewhere, with the obvious fiscal consequences.

Second, the growing support for a basic income in developed countries comes against the backdrop of stagnant median incomes over several decades. There is also the fear that the fourth industrial revolution will displace millions of workers. The current Indian context is quite different. Incomes have been rising across the spectrum even after taking into account higher levels of inequality. It is one thing to argue for immediate help to address the distress in rural India and quite another thing to push for a guaranteed entitlement that gets locked in. The more important task over the long term is to create fiscal space to boost spending on rural public goods, as well as basic services such as health and education.

Third, data on Indian poverty needs to be updated. The last official data comes from the NSSO Consumer Expenditure Survey for 2011-12. The latest survey for 2017-18 is done, but it will take some time for the numbers to be made public. It is quite likely that the new survey could show a further decline in poverty as defined by the Suresh Tendulkar committee. There may thus be a need to reassess what constitutes the minimum consumption basket used to define poverty in India. Much of the subsequent basic income calculations will have to be rejigged.

The current proposals for direct income support—be it from economists or political parties—falls well short of the promise of an unconditional basic income for all citizens. This is in contrast to the proposals in developed countries. For example, Rahul Gandhi has promised income support for “every poor person"—and not every Indian. He has neither specified who should be considered poor or how the programme will be funded.

The case to reshuffle government spending from non-merit subsidies to cash transfers to the poor is a compelling one. But, as the Planning Commission economists pointed out in 1962, there can be no frontal attack on mass poverty without accelerating economic growth. This is how China did it. The argument is even clearer when one thinks of individual states such as Uttar Pradesh rather than India as a whole.

The logic underlying what Pant and his Planning Commission colleagues had said still resonates—let economic growth work for the top eight deciles, while the focus of government welfare spending should be on the bottom two deciles that are denied opportunities for various social or geographical reasons.

Niranjan Rajadhyaksha is research director and senior fellow at IDFC Institute. Read Niranjan’s previous Mint columns at www.livemint.com/cafeeconomics

Close