Poverty & Inequality

A proposal for universal basic services

  • Blog Post Date 21 May, 2017
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Himanshu .

Jawaharlal Nehru University

himansu2@gmail.com

In the context of the ongoing debate on the idea of a universal basic income for India, Prof. Himanshu of Jawaharlal Nehru University argues that we first need to ensure that all citizens have access to basic services such as health and education, provided by the government.

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The idea of a universal basic income (UBI) is not a new one. This has been proposed and debated for quite some time in different forms and in different countries, although it is yet to be implemented anywhere. It has gained traction recently in the context of such proposals in some of the North European countries. A number of economists have joined the bandwagon in proposing such a mechanism for developing countries also, notably India. A good selection of several proposals in this regard on India can be read here. Even the Economic Survey 2017 included a chapter on the UBI.

In simple terms the proposal is to give some amount of money as cash to every citizen of the country. In its pure form, the UBI is based on the two fundamental principles of universality and provision of basic living income to citizens of a country. It is important to emphasise at this point that the idea of UBI is different from various conditional and unconditional cash transfers that many countries, including India, have in existence. Such cash transfers are usually targeted at households/individuals who are unable to participate in the labour market due to some reason. For example, in India social pensions for widows, elderly and disabled have existed for a long time1. Similarly many countries give an unemployment allowance for those who are unable to participate in labour market temporarily or due to other factors such as disability. UBI is not a substitute for any of these but is complementary to the existing social security measures as well as provision of basic services by the government.

The appeal of the UBI, therefore, lies in its insistence on the principle of universality without any conditionalities. The idea of a UBI is certainly welcome, given increasing inequality all over the world. However, the current context in which this is being debated differs between developed and developing countries. In developed countries, the push for UBI is a response to the anxiety created by current trends of automation which may lead to an increase in unemployment. A proposal for UBI was put to vote in Switzerland but was rejected by a three-fourth majority. The only country which has agreed to start a pilot is Finland. Even in Finland it is not UBI but a social protection scheme aimed at unemployed that is being tried out2. Proposals for pilots in Netherlands and Scotland are yet to begin3. There have been some instances of pilots in developing countries as well4. These have varied in content as well as design of the programme.

However, unlike in the developed world, the clamour for UBI in developing countries, particularly India, has been not as much due to a fear of automation and unemployment but a response to ‘inefficient’ public spending on social sector schemes5. UBI is seen as a substitute to various subsidies and public services including health, education, and nutrition programmes.

Financing UBI in India

UBI has remained more of a conceptual idea than a reality even after decades of being proposed. One reason why it has not found favour with governments is the high cost of implementation, even for developed countries. Most estimates for UBI in India suggest a minimum basic income equivalent to poverty line. The latest available poverty line from the Rangarajan Committee report suggests a figure of Rs. 972 per person per month in rural areas and Rs. 1,407 in urban areas for 2011-12. Updating the lines with CPIAL (Consumer Price Index of Agricultural Labour) for rural areas and CPIIW (Consumer Price Index of Industrial Workers) for urban areas leads to a poverty line of Rs. 1,368 in rural areas and Rs. 1,947 for urban areas6 for 2016-177. The total cost of providing UBI at the poverty line for all the citizens of India would be Rs. 24.2 trillion per year. This incidentally is higher than the total tax revenue of the government (centre and states combined) at Rs. 23.4 trillion for 2015-16. Clearly, the UBI in its pure form cannot be financed at the given level of tax revenues of the government9.

The impossibility of financing UBI can also be gauged from the following facts10. Total receipts of the central government (revenue + capital) are Rs. 21.5 trillion of which 29% goes as share of states and other finance commission transfers, 18% goes to interest payment, 9% goes to defence, and 11% goes as pensions and general administrative expenditure11. The total amount remaining with the government after these is only 33% of the total receipts. That is, one third of the total central government expenditure is what is available to fund not just UBI but also various economic and social services of the government. The fact that UBI in its true sense cannot be financed has been accepted by most of those who have argued in its favour12, and various alternatives have been proposed. These have ranged from reducing the coverage of population to less than universal to reducing the quantum of transfer. The Economic Survey 2017 has proposed coverage of 75% of population whereas other suggestions (Surjit Bhalla) have gone further down to 50%. Most of these have also proposed a transfer which is much less than the minimum basic income suggested by the Rangarajan Committee. Almost all of these proposals violate the fundamental principles of basic income (at the poverty line) and the principle of universality, which make the idea of UBI appealing in the first place 13.

But even for a cash transfer with quasi-universal coverage and less-than-basic-income transfers, are there finances to roll out the scheme? Raising resources by various alternatives such as eliminating the tax forgone in the central budget or replacing all current subsidies with by UBI have been proposed. The most popular argument floating around is that the central government gives a total subsidy of 14% of GDP (Gross Domestic Product) and therefore eliminating these would be enough to fund the UBI. The arguments are based on a study by NIPFP (Mundle and Rao 1993) for 1987-88 which suggests that the total subsidy in the economy was around 12.9% in 1987-88. However, an updated calculation by Mundle and Sikdar suggests that it has declined to 10.6% by 2011-12. But how do Mundle and Sikdar arrive at a net subsidy of 10% when the tax-to-GDP ratio is only around 16%14. This magical figure is arrived at by deducting government expenditure on defence and general administration and then taking all expenditure on economic and social services (centre and states combined) net of recoveries, as subsidies - therefore, including all the government spending on education, health, nutrition, and social sector spending as well as economic expenditures such as electricity, roads, railways and infrastructure. By clubbing together all of government expenditure except on defence and general administration as subsidy, the inflated figure not only distorts the basic understanding of subsidy but also any understanding of the role of government in a developing economy. By this logic, the only activity that the government is supposed to undertake is maintaining law and order and regulating markets. Clearly, while the calculations may be right, the idea of what constitutes subsidy is not just flawed but also based on a misplaced understanding of the role of State in economic and human development.

If this idea is implemented, it would essentially mean that the government will give up its obligation of providing basic services to its citizens on education, health, nutrition and also infrastructure and transfer money equivalent to the poverty line. This is neither the intent of the UBI nor is it consistent with the proposals currently in discussion in the European context, where UBI is supposed to supplement social security provisions and existing government services. For the record, the total explicit subsidy of the government of India as provided in the budget documents is less than 2% of GDP and it has declined by 1 percentage point of GDP in the last five years15.

Cash transfer by a different name

A close look at all the UBI proposals in India also make it clear that these are financially as well as conceptually for replacing existing programmes of delivering public services to citizens by a direct cash transfer. The arguments in favour of cash transfer (in the name of UBI) are basically similar to what have already been made in the context of the National Food Security Act (NFSA)16a few years back and have been debated ad nauseam. Cash transfers are sought to be justified in the name of ‘inefficiencies’ that exist in the current programmes. While the estimates of inefficiencies in government schemes may be exaggerated, there is no denying the fact that they do suffer from leakages and corruption. UBI, according to its proponents will reduce these inefficiencies by providing cash to the beneficiaries. The argument that cash is a better way of delivering benefits to the beneficiaries is not based on any empirical evaluation. Most of the cash transfer programmes such as housing subsidy as well as social pensions have similar, if not higher, levels of corruption and suffer from same problems as that of in-kind transfers such as PDS (public distribution system). A recent evaluation of cash transfer by J-PAL South Asia for NITI Aayog suggests that cash transfers may be as bad as other programmes as far as corruption and leakages are concerned17.

A large part of the corruption is due to targeted delivery of services with significant exclusion and inclusion errors. These will remain with UBI for targeted population as has been proposed by many. A common and popular argument that cash will reduce corruption and leakages also rests on the assumption that Aadhaar18 -based biometric authentication will allow technology to weed out ghost beneficiaries and thereby reduce leakages. On both these counts, there is now evidence to suggest that neither is Aadhaar necessary for ghost card elimination nor is biometric authentication foolproof. In any case, Aadhaar authentication cannot deal with a problem of wrong targeting. In case of biometric authentication, the evidence from MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) in Telangana shows that the failure rate is upwards of one-third of all authentication attempts, rising to over 45% in some districts. Even for PDS, the celebrated example of East Godavari district in Andhra Pradesh shows a failure rate of 13% using finger-based biometric authentication, iris scan and OTP (one-time password), for December 2016. In some districts the figures are as high as 20%.

While technology may help in improving delivery of services, it is not clear why it is only the case for cash and not for in-kind transfers. What is also important is to recognise that cash transfers with all their advantages are no better than other forms of delivering services such as product-linked subsidies. That is, cash is not the solution for all kinds of interventions that governments will have to make to improve the living conditions of its citizens. On nutrition, Himanshu and Sen (2013) have shown convincingly that to maintain the same level of calorie intake, transfer in the form of grains from the PDS is twice as affective as equivalent amount of subsidy transferred as cash.

A move towards cash transfers at the cost of public provisioning also implies that citizens will be left at the mercy of the private sector to avail basic services. There is now innumerable evidence that suggests that leaving some of the basic services such as health and education to market forces leads to large exclusion of the poor and vulnerable affecting not just human development outcomes of the current generation but also of subsequent generations. Precisely because of these reasons, almost all countries of Europe as well as Canada where UBI pilots are being discussed continue to rely on free and public provisioning of basic services. If there is an immediate learning for India, it is the model of free public provisioning of basic services and not the UBI which is a complement to and not a substitute for public services.

Is there an alternative?

Clearly, the rationale for UBI in the current context does not justify the kind of spending that is required for a full or even a partial rollout of UBI. Most certainly, it cannot be at the cost of existing expenditures on basic services such as health, education, nutrition, and livelihood. But during the course of argument, many commentators have suggested various ways to mobilise resources for increasing government expenditure. These include reducing corporate tax exemptions, tax evasion, and corruption. All these are welcome and are necessary for the government to spend more on welfare of the poor and vulnerable. Particularly so, when despite growth rates of GDP accelerating to more than 7% per annum, the tax-to-GDP ratio of the economy has remained stuck at 16-17% range for more than three decades19 .

Even if additional resources are mobilised, will it justify UBI? The answer is an emphatic no. Given the level of deprivation and lack of availability of basic services, what is required is an increase in provision of basic facilities such as education and health20. India is among the countries with lowest level of spending on health and education among its peers of countries with same GDP per capita (PPP) or BRICS countries (Brazil, Russia, India, China, and South Africa) or among the emerging economies club. What is more, as against most of these countries that are showing an increase in these expenditures, India has shown a trend of stagnant expenditure of health and education as percentage of GDP21.

A better way to implement the UBI would be to follow the spirit of UBI which is based on the principle of universality. One of the existing programmes which seeks to deliver basic income to the citizens is the National Social Assistance Programme (NSAP). The NSAP provides for a modest income transfer of Rs. 200 to those who have been excluded from the labour market22, such as widows, elderly and disabled who are also classified as BPL households. One way to follow the principle of UBI would be to make these programmes universal, at least for these groups. It is also important to increase the quantum of transfers to at least half of poverty line at Rs. 1,000 per month from the existing Rs 200 per month23. The total expenditure on this would be less than 0.5% of GDP.

Universal basic services

Most of the countries which are at the forefront of experimenting with UBI are also countries with a long history of welfare State, which is based on the principle of free and universal access to basic services. These apart from health and education also include various forms of social protection such as unemployment allowance. The current debate in these countries is a natural extension of the welfare architecture that has worked with public expenditure over the years. On the other hand, India is yet to acknowledge the importance of public provisioning of basic services leave alone creating an infrastructure for it. While, cash transfers and social support measures are important for those unable to access labour market, what is also important is to increase spending on basic services. An essential component of such an architecture is also the basic principle of universal access at same cost (in most cases free). It has been shown in the Indian context that even the most corrupt programmes such as PDS have seen massive improvement after they were universalised. States of Tamil Nadu, Odisha and Chhattisgarh have shown comprehensively that a universal or quasi-universal programme is much more likely to reduce corruption and leakages than a targeted intervention.

What India needs at this moment is not an expensive adventure like UBI at the cost of all other government expenditure but a push towards universal access to basic services by all sections of the population provided by the government. Such a proposal for universal basic services (UBS) should be a pre-condition before UBI can be considered.

Notes:

  1. Several cash transfer programmes, both at the central and state government levels, have been in operation for more than three decades. These include cash transfers as pensions but also scholarships, subsidy for housing, institutional delivery, etc.
  2. Although it has been called a pilot for UBI, the Finland pilot is only for those who are unemployed and provides a stipend of €560 a month as against average wage of €3,500 a month. Those receiving benefits will also have to forgo equivalent amount of social security.
  3. UBI pilots in most places, even Europe, provide for basic income adjusted for other social security benefits that participants receive.
  4. Notable among these are the pilots in Madhya Pradesh by SEWA (Self Employed Women’s Association) and pilots in some African countries. But these have varied in amount of transfer and coverage of population. Among these, only the pilots in Namibia and Madhya Pradesh were universal in coverage with only Namibia providing basic income equivalent to poverty line.
  5. The implicit assumption is that these existing programmes and schemes are prone to leakages and therefore a programme to provide cash to all the citizens of the country may be a more efficient way of delivering services to the citizens.
  6. The Rangarajan committee recommendations are the most recent estimates of poverty and poverty line based on Modified Mixed recall Period (MMRP) consumption expenditure. Rangarajan committee was appointed to suggest a new poverty line after a public outcry that the Tendulkar committee estimates were too low.
  7. The estimates remain the same even if updated with alternative deflators such as the CPIR (consumer price index rural) and CPIU (consumer price index urban).
  8. The calculation assumes a population of 1.30 billion with 68% rural population and 32% urban population. In terms of per capita transfer, this amounts to Rs. 18,642 per capita per year.
  9. At the nominal GDP (gross domestic product) of Rs. 152.51 trillion in 2016-17, the expected cost of UBI is 16% of GDP, almost the same as the tax-to-GDP ratio of the government (Centre and states combined).
  10. All figures are from budget documents of 2017.
  11. The total tax revenue of government of India is Rs. 19.11 trillion of which of which Rs. 67.5 million is the share of states. The total non-tax revenue is Rs. 5.4 trillion making it a total of Rs. 17.78 trillion as revenue receipts of the government. Of these, Rs. 5.38 trillion are expenditure on defence payments, Rs. 1.5 trillion for pensions, and Rs. 1.82 trillion for defence. Adding the expenditure on general government administration (police, civil service, parliament and so on), total of Rs. 9.74 trillion is essential expenditure which cannot be used for UBI.
  12. Interestingly, similar calculation for the US also suggests that a handout of US$10,000 to everyone will cost almost all of the tax revenue collected by the federal government.
  13. Jean Drèze has termed all these proposals as QUIT (Quasi-Universal Income Top-up).
  14. India’s spending-to-GDP ratio is 26.6% of GDP which is lowest among BRICS countries. It is also lower than the average of OECD (Organization for Economic Co-operation and Development) and emerging economies. Even compared to economies with comparable (Purchasing Power Parity (PPP) adjusted) per-capita GDP (Vietnam, Bolivia, and Uzbekistan) it is lower. Source: Economic Survey 2015-16, pp.107.
  15. Central government subsidies declined from 2.6% of GDP in 2012-13 to 1.6% of GDP in 2016-17.
  16. Incidentally, the NFSA, like the Economic Survey 2017, also follows a quasi-universal coverage of 75% in rural areas and 50% in urban areas.
  17. The study was commissioned to evaluate cash transfer programmes in three union territories of Chandigarh, Dadra and Nagar Haveli, and Puducherry. The research reported that 50% of beneficiaries were either not receiving any cash or less cash than entitled. The study also reported that households have been forced to spend Rs. 103-207 per month more on average from their earnings to buy as much grain from the market as they got through ration shops earlier.
  18. Aadhaar or Unique Identification number (UID) is a 12-digit individual identification number issued by the Unique Identification Authority of India (UIDAI) on behalf of the Government of India. It captures the biometric identity – 10 fingerprints, iris and photograph – of every resident, and serves as a proof of identity and address anywhere in India.
  19. In fact, tax-to-GDP ratio of central government has declined from 11.9% in 2007-08 to 10.8% in 2016-17. The same trend is seen for Centre and states taken together.
  20. The extent of deprivation and lack of basic facilities is well known. This is as much the case with school facilities, higher educational institutions, toilets, and hospitals as it is for basic infrastructure such as potable drinking water, roads, electricity, and irrigation.
  21. India spends less than 3.5% of GDP on education and 1.6% on health (centre and states combined) as against a stated commitment to increase these to 6% and 3% of GDP, respectively. These incidentally are among the lowest even compared to some other Asian countries.
  22. The amount was fixed in 2006 and has not been revised since then. However, some state governments have increased the amount to Rs. 500 and Rs. 1,000 using their own resources.
  23. A proposal to this effect was suggested by the SECC (Socio-Economic Caste Census) expert group (2017) which sought to increase the quantum of transfers to Rs. 500 and make it universal for these groups.
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