Tamil Nadu’s initiative to provide Rs 1000 per month to eligible women in the state, as a magalir urimai thogai (women’s entitlement fund), covering one crore women at a cost of Rs 7000 crore, seems to be the largest Universal Basic (UBI) Income scheme. While it has evoked positive responses, there may be some challenges in implementing the programme.
Universal basic income (UBI)
The idea behind the UBI is to provide a basic income to all citizens of a given population out of government tax revenues -- regardless of their socio-economic status -- to ensure that everyone has access to a minimum standard of living.
Economists Karl Ove Moene and Debraj Ray proposed a UBI linked to a country’s economic output (10-12% gross national income), while economist Milton Friedman advocated for a negative income tax i.e those with income below the taxable limit will get ‘tax credits’ which could be sold to those with income above the taxable limit and could be adjusted against the taxes.
Many countries attempted UBIs. In 2017, Finland provided a monthly income of Euro 560 to unemployed individuals. Canada provided a basic income to 4,000 low-income individuals. Spain, in 2021, provided Euro 462 to 1,000 households with an annual income of less than Euro 11,200. Iran’s targeted subsidy programme provides a basic income of USD 45 to beneficiaries. Alaska, one of the pioneers of UBI, provides an average of USD 1,000 per annum to every citizen from its oil sales’ revenue known as a ‘Permanent Fund’.
Proponents of UBI argue that it has several benefits. Firstly, UBI can help reduce poverty and inequality by providing a minimum income and enabling all citizens to have access to basic necessities such as food, housing, and healthcare. Secondly, it increases consumer spending, thereby boosting demand for goods and services and stimulating economic growth. Thirdly, UBI can help reduce bureaucratic inefficiencies by simplifying the welfare system and reducing administrative costs.
Fiscal federal challenges
Welfare schemes to the poor/marginalized, including UBIs, are fundamentally on the principle of taxing the rich and subsidising the poor. However, the Indian fiscal structure poses a challenge to its implementation as it is more centralised, with the union government having full authority to devise the direct taxation policy (eg: income tax, corporate tax) and its implementation. In advanced countries like USA and Canada, taxation powers are decentralised and vested with the states/provinces as well, so the states could adjust direct taxation rates (taxing the rich) to fund UBI schemes.
Further, since the BJP came to power at the centre in 2014, the union government seems to rely more on indirect taxes than on direct taxes. While direct taxes like corporate taxes have been slashed from 30% to 22% (resulting in a loss of Rs 1.84 Lakh cr in 2019-20 and 2020-21 & expected loss of Rs 1 lakh crore for 2021-22 to the Union), benefitting the rich, indirect taxes have gone up manifold particularly on fuel and food (rice, milk and cereal), on which the poor spend a major portion of their income. This imposes a financial burden on the poor, in turn leading to high inflation and resulting in inequality and lower growth.
Chief Minister MK Stalin’s magalir urimai thogai attempts to address this asymmetry. Research indicates that any money saved by women is spent on food and other essentials for her children and other dependents, than when saved by her male counterpart. However the unitary taxation structure and union government’s increasing tendency to centralise pose a challenge to the implementation of any welfare schemes by the state, affecting co-operative fiscal federalism and resulting in mistrust between the states and the union, which needs a re-look.
Footnote is a weekly column that discusses issues relating to Tamil Nadu.
To cut poverty
UBI can help reduce poverty and inequality by providing a minimum income and enabling all citizens to have access to basic necessities such as food and housing