Congress president Rahul Gandhi has promised a minimum income guarantee scheme for the poor if the party is voted to power in the upcoming elections. Discussing the proposal and associated concerns, Prof. Maitreesh Ghatak contends that while the idea of building up a social safety net in India is welcome, designing such schemes has to be done with much care.
To understand what is a minimum income guarantee (MIG) programme of the sort announced by Rahul Gandhi last week, it is useful to start with what it is not.
To start with, it is not a universal basic income (UBI) proposal, something I have discussed a few years ago.
The UBI is universal and not targeted to any group, including the poor. Also, it is a flat lump-sum amount that does not depend on the recipient's income level. In contrast, despite the fact that we do not yet know the specifics of the MIG proposal, it appears from media reports and clarifications provided on the proposal that if someone's income falls below some threshold level, then the person will get enough to bridge the gap – like a top-up. This makes it a progressive income transfer scheme – those who are poorer will proportionally receive more. This is the same principle as a progressive income tax, except here we are talking about transfers received and not taxes paid.
What an MIG shares with a UBI is that it is a cash transfer scheme and not an in-kind transfer of goods like subsidised food or fuel, or services like education and health. Also, other than being targeted to the poor, this programme is not contingent on the recipient satisfying any other compliance criteria to receive the assistance. This distinguishes it from other kinds of transfer policies like conditional cash transfers contingent on the monitoring of the health and educational status of children in beneficiary families (for example, as in programmes such as Progresa, renamed Prospera, in Mexico; and Bolsa Familia in Brazil). It is also not targeted at specific groups based on social or demographic criteria in addition to or independent of income, such as pensions, maternity, or child benefits.
The MIG proposal is in line with a recent policy shift in many developing countries as well as in international development assistance organisations like the World Bank and the DFID (Department for International Development, UK Government) towards direct cash transfers, which involve rolling various subsidies and in-kind transfers into a single cash transfer to households. For UBI, this would be a lump-sum irrespective of income; for the MIG, it is in proportion to the income of recipient.
Some of the opposition to cash transfer policies comes out of the fear that they will replace other kinds of anti-poverty policies. However, no serious proponent of cash transfer policies views these as substitutes to the provision of public services or improving market access, both of which are important strategies for inclusive growth aimed at providing a more long-term and sustainable strategy for lifting the poor out of poverty. Clearly, cash transfers can provide a short-term safety net only and their merits and demerits should be discussed with other types of transfer policies and not as an alternative to all other development policies.
Some are opposed to cash transfers because in remote rural areas, the logistics of cash transfers will be harder and markets less accessible and so, the value of in-kind (for example, food) transfers may be more. In a recent proposal for economic reforms put forward by Raghuram Rajan and 12 other economists, a group I was part of, we argued for moving beyond the cash versus kind debate in the context of some specific welfare programmes by taking a choice-based approach. For example, in the context of food distribution through the Public Distribution System (PDS), we propose giving beneficiaries the choice of opting for a cash transfer, instead of policymakers deciding between the form of transfer, namely, PDS and Direct Benefit Transfer (DBT).
Another line of opposition to cash transfers is that they have potentially undesirable effects, such as being wasted on inessential consumption or reducing labour supply. A lot of recent research shows (see here for a discussion) that this stereotype of the lazy and undeserving welfare recipient is without much empirical basis.
Yet others who are opposed to cash transfers to the poor cite the fiscal costs. This is of course a major and legitimate concern. My calculations based on Rangarajan's poverty line of Rs. 47 and Rs. 32 per adult individual per day in urban and rural areas, respectively, translates to an average amount of about Rs. 1,200 per person per month, or Rs. 1,600 if we allow for inflation adjustments since the Rangarajan figures were based on 2011-12 prices. If all Indian adults were given this amount as a lump-sum, which is what a UBI policy would imply, that would be a prohibitive 9% of GDP (gross domestic product) and well above half of total government expenditure. That is clearly impractical.
However, if it is targeted at the poor, then, leaving aside the problems involved in targeting, giving each person this amount as a lump-sum would cost 3% of GDP and 21% of government expenditure. This is still a large amount. As the MIG involves giving an amount that is the shortfall between some target income level and the actual income level, the total budget will be smaller. For example, if the income gap is half for the average poor person – then the bill is the more realistic figure of 1.5% of GDP or 10% of government expenditure.
The scope for spending cuts to accommodate for this certainly exists. The budgetary subsidies in 2011-12 amounted to 10.6% of GDP. Some recent estimates suggest that non-merit subsidies, that is, those that end up going to the non-poor, are about a third of this, making up about 3.5% of GDP.
To me, the main issue with the MIG proposal is the issue of targeting and of incentives, both of which stem from the difficulty to measure income in an economy like India’s where a vast majority of the workforce is employed in the informal sector and a miniscule fraction files income tax returns. The main attraction of the UBI is that it bypasses the problem of targeting, which involves inclusion and exclusion errors as well as direct administrative costs, inefficiencies, and potential corruption. Given the problems of inclusion and exclusion errors, how will the problem of targeting be solved? Yes, we have new technological means like mobile banking, but the devil will be in the details as to how we can significantly improve the accuracy of targeting.
A more serious concern is that of incentives. If this was a lump-sum transfer like the UBI, it does not have any direct incentive for people to change their behaviour since how much a person receives is not contingent on anything. However, under the MIG, it is contingent on income as it involves transferring an amount that is equal to the gap between actual income and a target income level. As a result, the amount of transfer received by someone is decreasing in his or her income. This would create every incentive for individuals to under-report or hide income – if I report I have one rupee less than what I actually have, unless the income verification process is very rigorous, my transfers under a MIG will go up by one rupee. This is a problem that cannot be ignored.
Despite these concerns, the case for building up a social safety net in a country like India where the largest number of the world's poor live is compelling both from the point of view of social justice and political pragmatism. From this point of view, the MIG is a welcome idea. However, designing such schemes has to be done with much care. Otherwise, today's new solution can become tomorrow's new problem.
This article first appeared on NDTV.com: https://www.ndtv.com/opinion/rahul-gandhis-new-game-changing-scheme-could-work-if-only-1985470?pfrom=home-topstories