Poverty & Inequality

Universal basic income for India

  • Blog Post Date 21 October, 2016
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In this article, Vijay Joshi, Emeritus Fellow of Merton College, University of Oxford, sets out his proposal for a universal basic income (UBI) in India. He contends that deep fiscal adjustment, in combination with UBI, has the potential to make a huge positive difference to people’s lives, present and future.


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The case for a universal basic income (UBI) in India is best approached indirectly by noting that one of the main requirements of inclusive growth is ‘deep fiscal adjustment’, in other words, a radical re-orientation of government expenditure and taxation. India spends far too much on dysfunctional price subsidies in the name of helping the poor. Some of the subsidies, for example those on food, fertilisers and oil-related products, are explicitly in the budget. Others, such as the subsidies on electricity, water, and rail travel, are implicit, and take the form of losses or low profits by government departments and enterprises. There are many reasons why these subsidies are counterproductive. They raise fiscal deficits and crowd-out essential public spending. They distort resource allocation by cutting the link between prices and costs. They discourage investment in supply capacity for producing the subsidised items, and encourage over-consumption thereof. At the same time, the subsidies do not achieve their putative goal of poverty alleviation. They are badly targeted and regressive: though a small part of the benefits does percolate down to the poor, most of it goes to the well-off. (This is not surprising, since a price subsidy per unit consumed gives a larger benefit to those who consume more.) Moreover, they are accompanied by leakages and corruption on a large scale.

 

Financing a universal basic income in India
Winding up these subsidies would be highly beneficial from the national standpoint, provided the real incomes of the poor were protected, which could be done with a fraction of the fiscal savings that would ensue. The government’s Economic Survey for 2014-15 estimates that subsidies for the following items amount to 4.2% of GDP (Gross Domestic Product): cereals, pulses, sugar, oil-related products, iron ore, fertilisers, electricity, water, and rail services.1 Previous studies by the National Institute of Public Finance and Policy (NIPFP) indicate that the fiscal savings from eliminating all ‘non-merit’ subsidies2 would be in the region of 8% of GDP. But the scope for fiscal gains does not end with cutting counterproductive subsidies. Expenditure on direct ‘poverty programmes’, of which there are a multitude, amounts to 2.5% of GDP. Some of them are effective but others are not. It would surely be wise to abolish manifestly badly-targeted programmes, while retaining those of proven worth. This would yield significant fiscal savings. There are also many revenue-raising possibilities that have no economic downsides, for example, pruning unnecessary tax exemptions, taxing agricultural incomes above a threshold level, and pursuing a more vigorous privatisation programme for several years. The total fiscal potential of all the above measures put together is at least 10% of GDP annually. Suppose the central and state governments devote, say, 2.5% of GDP for reducing the consolidated fiscal deficit and, say, 4% of GDP for increasing public investment and opportunity-enhancing social expenditures in areas such as education and healthcare. These measures would have a strong, positive effect on inclusive growth, over and above the boost it would receive (via more efficient use of resources) from the closer alignment of prices and costs. And this allocation of fiscal savings would still leave a residue of at least 3.5% of GDP, for other constructive purposes, such as UBI.

 

Setting the level of basic income
The primary purpose of UBI would be to provide an unconditional income floor/safety net that would prevent any citizen sinking below a basic minimum standard of living, irrespective of his or her earning capacity. To prevent possible untoward effects (see below), this minimum should, in my view, be set at a relatively austere level, say the Tendulkar poverty line (TPL)3. In 2011, 269 million people were below TPL, that is, in extreme poverty. It is known that the average income of these people line is about 80% of TPL. So an income supplement equal to 20% of TPL, adjusted upwards suitably to compensate poor people for the subsidy elimination that would finance the programme, would go a long way towards abolishing ‘Tendulkar poverty’4. I show in my recent book (Joshi 2016) that the requisite cash grant would amount to Rs. 3,500 per head per year (Rs. 17,500 per family per year) at 2014-15 prices, indexed to a relevant cost of living index. If the ‘Tendulkar poor’ could be identified and accurately targeted, the fiscal cost of bringing them up to the poverty line would, on this basis, be less than 1% of GDP. But perfect targeting is impossible. In practice, the basic income would have to be given to at least half the population, perhaps to two-thirds of the population, to be sure of reaching all poor people. (This would have to be done on the basis of rough justice, using criteria such as eligibility for income tax, ownership of land above five acres, ownership of houses with more than three rooms, and possession of relatively expensive consumer durables, bearing in mind that these categories overlap to an undetermined extent.) However, there are several good reasons for going further and making the transfer a universal basic income that is paid to every citizen. Such a UBI would cost 3.5% of GDP (see my book for the calculation.) As seen above, this would certainly be affordable, given ‘deep fiscal adjustment’. Note also that the technological means to make a universal income transfer are now available, or will be soon, because of the progress made in spreading Aadhaar5 and Aadhaar-seeded bank accounts.6

 

Why should basic income be made universal?
Firstly, there is a huge bunching of people around the poverty line, with several hundred million people who are very poor (though not in extreme poverty) and continually in danger of falling below the poverty line due to misfortunes of one kind or another, such as ill health. A UBI would supplement their incomes. (But the income supplement would be a flat sum, so the proportionate benefit would fall progressively at higher incomes.) Secondly, ‘deep fiscal adjustment’, especially abolition of ‘non-merit’ subsidies, is essential to improve economic efficiency as well as create the fiscal savings to pursue various desirable goals, as explained above. But this programme will imply real income losses for most of the population, at least for a time. UBI would cushion them wholly or partially against this damage, and thereby also prevent or dilute their resistance to both deep fiscal adjustment and the provision of a basic income for the poor. Importantly, It would also compensate people, at least partially, for adjustments that may be imposed on them by other desirable reforms (for example, liberalisation of the labour market, privatisation, and opening up agriculture to international trade.) UBI has been criticised as wasteful because it would give money to many people who are not poor. For the reason just given, this is a mistaken view. UBI would, instead, provide an essential underpinning for the acceptability of radical economic reform. Thirdly, only a small proportion of the population are so well off as to make the above considerations irrelevant. It is not worth the administrative trouble and expense to identify them and exclude them from the coverage of ‘basic income’. (Some of their basic incomes would in any case come back to the State in the form of income tax; and some well-off recipients would surely forego UBI voluntarily, if nudged by the government to do so.) Experience has shown that selection of deserving recipients brings a host of problems such as cheating and concealment to qualify for benefits, resentment on the part of those who are excluded, administrative high-handedness, and rampant politicisation. UBI would bypass these difficulties altogether.

 

Arguments against UBI
The arguments against a UBI are not convincing.7 I shall briefly discuss here five such arguments:
(i) ‘UBI would reduce the incentive to work and create dependence on doles’: Such an outcome is extremely unlikely given the modest level of the proposed income supplement. (Since UBI is a uniform, lump-sum income transfer, the substitution effect against work will be zero. And since the transfer is small, the income effect against work is likely to be negligible.) Rather, UBI is likely to liberate poor people to achieve more than mere survival. A related argument is that UBI would lower the female labour force participation rate. But progress in this area depends mainly on advances in female education; and, in any case, would it be right to forego an opportunity to make a large dent in extreme poverty, and provide a robust safety net for all, in order to push more women into work outside the home, faster than otherwise?
(ii) ‘UBI would be frittered away on alcohol and gambling’: There is plenty of evidence from trials internationally, and in India (for example, see Davala et al. 2016), that this would not happen. Recipients of an income supplement tend to spend it on things such as food, clothing and footwear, education of children, healthcare, toilets, walls and roofs for houses, better seeds, and even investment of a rudimentary variety. Incidentally, a cash grant would enable the poor to choose their consumption baskets more freely and effectively (including spending on a more balanced diet than the cereals of inferior quality provided by the public distribution system").
(iii) ‘UBI would divert State spending from critical items such as infrastructure, education, and healthcare, which are essential requisites of long-run inclusive growth’: UBI is meant to complement desirable social spending, not replace it. The available fiscal potential is large enough to ensure that this kind of ‘crowding out’ is avoided. In practice, a programme of ‘deep fiscal adjustment’ would require careful sequencing and close Centre-state coordination (‘cooperative federalism’), and take several years to implement. As extra resources become available, they could be divided between fiscal consolidation, extra public investment and enabling social expenditures, and UBI (which could be increased gradually in size until it reached the target level). The desirability of pursuing such a package requires only a weak value judgement that providing a safety net for the whole population quickly, and compensating them (at least partially) for real income losses imposed on them by liberalisation and reform, is as important as other social objectives. This principle would surely command wide support.
(iv) ‘UBI assumes that all benefits are best delivered in the form of unconditional cash grants that people are free to spend as they wish’: This is not so. It is true that paternalism may sometimes be justified: for example, it may be necessary to compel people to send children to school. In other cases, conditional cash transfers (CCTs) or conditional in-kind transfers may make sense. India has some good conditional programmes, for example, midday meals for schoolchildren, cash grants for pregnant women conditional on attending health clinics, and provision of income opportunities under the MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), conditional on work. As discussed in Joshi (2016), other areas where unconditional cash transfers may not be suitable are education and secondary healthcare. Thus, I do not claim that UBI would be a magic solution to all problems. My claim is only that it is an essential component of a robust social protection framework. It does not in any way imply that the State should renege on its responsibility to finance, and where appropriate, produce and deliver, goods and services that the market would, for well-known reasons, fail to provide. It is true that while UBI will put purchasing power in the hands of people, it cannot guarantee that supplies will be forthcoming. But it is hard to see why supply would not respond, except in pockets of the country where markets are thin or non-existent. (For such areas, more conventional arrangements would have to continue for the time being.) For most of the country and for command over many ordinary goods and services, a UBI in cash would work well for poor people.
(v) The final argument against UBI is that ‘India’s political economy makes it infeasible or ruinous. Powerful lobbies and pressure groups will prevent dysfunctional subsidies being wound up. If UBI were introduced somehow, it would in practice be additional to existing subsidies. There would also be unstoppable demands to increase UBI year after year, a recipe for fiscal disaster’: This is a defeatist position that would negate any attempt at bold reform. Deep fiscal adjustment, in combination with UBI, has the potential to make a huge positive difference to people’s lives, present and future. It should not be taken for granted that India’s democracy is irremediably irresponsible. UBI could serve as a unifying and inspiring idea round which reformers, and the majority of the population, could coalesce to overcome vested interests7.

 

I conclude that UBI is worth fighting for, even against long odds.

 

A more extended analytical and quantitative treatment of my proposal for UBI in India can be found in my recent book ‘India’s Long Road: The Search for Prosperity’.8 My proposal differs in several respects from other UBI schemes in its justification and design, and I do not claim to represent the views of other proponents.9

 

Notes:

1. See Chapter 3 of Government of India (2015).

2. ‘Non-merit subsidies’ exclude subsidies on ‘merit goods’ such as education, health, nutrition and rural development.

3. This poverty line was suggested in 2009 by a committee, set up by the Planning Commission, with the late Suresh Tendulkar as Chairman. It was based on 2004-05 prices. The Planning Commission estimated poverty in 2011 using an updated calculation of the Tendulkar poverty line (see Planning Commission, 2013).

4. I also recommend that the employment scheme mandated by the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) be continued for several years to provide an additional safety net, despite its well-known defects. This would provide extra support for people whose incomes are less than the average income of the population below the poverty line. Note that expenditure on this scheme is around 0.3 to 0.4% of GDP. 

5. 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 – ten finger prints, iris and photograph – of every resident, and serves as a proof of identity and address anywhere in India.

6. Aadhaar seeding means linking existing bank accounts with Aadhaar numbers. The Supreme Court has allowed the voluntary usage of the unique identity in quite a number of government schemes. Aadhaar linkage makes it easy for the government to send payments directly to the bank accounts of intended beneficiaries. 

7. For a forceful attack on a UBI for India, see Aiyar (2016).

8. I agree with much of what Pranab Bardhan has to say on the political economy issue (see Bardhan 2016).

9. This book is currently available only in India. It will be published by Oxford University Press for markets outside India in March 2017.

10. The first explicit scheme for a UBI in India was adumbrated by Pranab Bardhan (see 2011). For his latest views on the topic, see Bardhan (2016). Others who have recently supported a UBI scheme for India include Abhijit Banerjee, Debraj Ray, and Maitreesh Ghatak (see Banerjee 2016, Ray 2016, and Ghatak 2016). T.N. Srinivasan (2016) shows that basic income was present as an idea in the early days of Indian planning.

 

Further Reading
Aiyar, S (2016), ‘Universal Basic Income is neither desirable nor practical’, Economic Times, 31 August 2016.
Banerjee, A (2016), ‘Universal basic income: The best way to welfare’, Ideas for India, 27 September 2016.
Bardhan, Pranab (2011), “Challenges for a Minimum Social Democracy in India”, Economic and Political Weekly, Vol. XLVI No. 10, pp. 39-43. Available here.
Bardhan, P (2016), ‘Basic income in a poor country’, Ideas for India, 26 September 2016.
Davala, S, R Jhabvala, G Standing and S Mehta (2016), Basic Income: A Transformative Policy for India, Blooomsbury Academic, London and Delhi.
Ghatak, M (2016), ‘Is India ready for a universal basic income scheme?’, Ideas for India, 28 September 2016.
Government of India (2015), 'Economic Survey 2014-15', Ministry of Finance, New Delhi. Available here (Vol. I) and here (Vol. II).
Joshi, V (2016), India’s Long Road – The Search for Prosperity, Penguin Random House, New Delhi.
Planning Commission (2013), 'Press Note on Poverty Estimates 2011-12', New Delhi.
Ray, D (2016), ‘The universal basic share’, Ideas for India, 29 September 2016.
Srinivasan, TN (2016), ‘Minimum standard of living for all Indians’, Ideas for India, 30 September 2016.
Srivastava, DK, CB Rao, P Chakraborty and TS Rangamannar (2003), ‘Budgetary Subsidies in India. Subsidising Social and Economic Services’, National Institute of Public Finance and Policy (NIPFP). Available here.

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