Under the creatively worded title of “Universal Basic Income: A Conversation with and within the Mahatma,” chapter 9 of the recently presented 2016-17 Economic Survey lays out a case for a Universal Basic Income (UBI) for every Indian.
Under the proposal, every Indian would get Rs 12,000 per year as basic income from the state. This is touted as a very significant anti-poverty measure as this sum would reach every Indian, rich and poor. As a proportion of household income, this sum would be much higher for the poor than for the non-poor.
Hence, it would have the beneficial effect of reducing poverty. Indeed, by substituting for a number of anti-poverty programs that are not well functioning anyway and are disproportionately favouring the rich, this would be a significant anti-poverty measure.
Additionally, the UBI could reduce or replace a number of subsidies and thus end up easing fiscal pressures on the government. Stated this way, the UBI seems to be a win-win proposition and should, therefore, be adopted. The budget makes a persuasive case for adopting UBI but, to its credit, advises caution and gradualism in its adoption. However, in this article, I want to argue that the adoption of UBI is at least premature, if not outright avoidable.
The foreign media (including Foreign Affairs, The Economist and The Wall Street Journal) has commented extensively and mostly favourably on this proposal. For example, Foreign Affairs claims that a transfer of a paltry sum of $4 per person per month could reduce the head count ratio of poverty in India from 22 per cent to 7 per cent and cost only (sic!) about 442 billion or 2 percent of GDP. This is about the amount that the government spends on food, fuel and fertiliser subsidies.
Eminent economists have also written in support of this potential policy initiatives. However, there are some very important arguments to the contrary which also need to be considered. In the short run, the administrative cost of setting up a mechanism for disbursal under the UBI could be prohibitive. Even if these costs can be met what assurance is there that some people will not make multiple claims? It is not enough to argue that the Aadhar card could be used to ensure that no one gets multiple benefits.
The Supreme Court has already ruled that the Aadhar is not mandatory for using the welfare programs. There is a real risk that some may get the benefits of UBI more than once in any given year. Even more worrying is the fact that this possibility might deter citizens from applying for Aadhar cards. This card has so far served as an exceptionally useful tool for identification and banking purposes, not to speak of this card’s phenomenal contribution to increasing financial inclusion. This is a real risk which the government should be aware of.
Second, the statement that transfer via the UBI will reduce the head count ratio of poverty from 22 percent to 7 percent is vacuous. The head count ratio of poverty in India has traditionally been based on expenditure on food (consumption of nutrients, mostly calories) and non-food expenditure like health, education and other needs.
What is there to guarantee that the money will be used in these areas and not as wasteful expenditures? If UBI transfers lead to a reduction in food, fertiliser and fuel subsidies and their prices go up how can it be ensured that the UBI funds are used on such items? If for example, fertiliser consumption goes down because of the price rise, there will be deleterious effects on agricultural production.
The increase in the price of fuel will similarly hurt commerce and increase in the price of food will lead to lower nutrition. The last has been demonstrated rigorously in “Demand for Nutrients in India:1993 to 2004” by Raghav Gaiha, Raghbendra Jha and Vani Kulkarni, Applied Economics, vol. 45, 2013, pp. 1869-1886. It has also been demonstrated that transfers through the Public Distribution System have a better impact on nutrition as compared to an equivalent cash transfer, say through, the MGNREGA scheme.
The relevant reference is “Social Safety Nets and Nutrient Deprivation: An Analysis of the National Rural Employment Guarantee Program and the Public Distribution System in India” by Raghbendra Jha, Sambit Bhattacharyya and Raghav Gaiha. Journal of Asian Economics, vol. 20, 2011, pp.189-201.
Hence, there are two keys for the UBI’s success i) Whether these funds are efficiently transferred to all citizens, and ii) Whether the funds transferred are used to purchase the goods and services on which the subsidies are being reduced or eliminated.
Basic microeconomics tells us that when a flat income transfer is made, the consumption of all goods could go up and there is no guarantee that the funds transferred under UBI will only be used to purchase goods and services on which subsidies have been reduced or eliminated.
India’s explicit subsidy bill in 2016 was stated to be less than 2 percent of GDP. In 2013 subsidies accounted for less than 20 percent of government expenditure. These magnitudes are not inordinately high when compared to countries at levels of development similar to India.
So far as containing fiscal pressures is concerned, the raising of resources through taxes must take precedence. This is not to say that subsidies do not need reforming. Indeed they do. The efficient administration of subsidies, identification of the right beneficiaries and reducing the distortionary impact of subsidies (say inappropriate fertiliser mix or excessive withdrawal of ground water because of the availability of free electricity) are all parts of a critical agenda for subsidy reform.
The reform of subsidies is a hard task. But the solution lies in meticulous governance and policy reform and not in the elimination of subsidies.
The author is Professor of Economics, Australian National University
Email: r.jha@anu.edu.au