Insights into Editorial: Will a universal basic income work in India?
The persistence of high inequality and the prospect of job losses owing to automation in the advanced world has led several advanced economies to consider the idea of a universal basic income (UBI) to guarantee their citizens a minimum level of income support. The same idea seems to be gaining favour among a growing number of economists and policymakers in India.
Why the idea of UBI is good in the Indian context?
The idea of the UBI is more relevant for India than for the advanced economies which have been considering it so far since governments in India tend to ‘mess up’ when it comes to distinguishing the poor from the non-poor. As a result, the poor get very little of what is spent in their name. Also, it is argued that many of the subsidies benefit the rich more than the poor.
But is such an idea feasible in India?
An acceptable level of the UBI could be an income equivalent of the poverty line (the Tendulkar committee poverty line), which is about Rs1,090 per month for each individual, in 2015-16 prices. The total cost of providing this income to all Indians would amount to 12.5% of GDP, which is nearly equal to the size of the Union Government’s budget. Thus, such a UBI which provides poverty line-equivalent income to all Indians does not appear to be feasible because of budget constraints.
What should be the acceptable level of UBI?
As per few experts, it may not be necessary for the UBI to match the poverty line. Various studies have shown that even much lower levels of income transfer could materially improve the lives of the poor.
- A pilot study conducted by UNICEF and the Self Employed Women’s Association (SEWA) in a few villages in Madhya Pradesh in 2011 showed that a monthly unconditional grant of Rs300 to each adult and Rs150 to each child led to considerable improvement in their lives and reduced distress driven out-migration.
- Adjusting that amount for inflation, adopting an equivalent UBI amounting to around Rs450 per person per month in 2015-16 prices would cost 5.1% of GDP. This calculation is based on a universal entitlement of Rs 450 for adults and children as a variable UBI (with different entitlements) would add an additional function for the bureaucracy.
- Hence, the proposed UBI would amount to Rs1,800 per month for a family of four, in 2015-16 prices.
What should the governments do?
Presently, the central and state governments together spend 4.2% of GDP on a set of major explicit subsidies, which includes the subsidy cost under the Public Distribution System (PDS), fertilizers, railways, electricity, sugar, LPG, kerosene and water. This does not include social sector spending such as that on education and healthcare.
- Even if the central and state governments agree on phasing out half of these subsidies, say by retaining subsidies relating to the PDS, which benefit the poor more than other subsidies, it will generate savings worth at least 2% of GDP.
- If the Centre and the states can also agree on a relatively flat tax structure without exemptions for the goods and services tax (GST), this will help generate additional tax revenues worth 2.7% of GDP, according to the calculations of the Subramanian committee on GST.
- Additionally, the plan to phase out corporate tax exemptions could fetch the government another 0.5% of GDP. The total savings worth 5.2% of GDP would therefore be roughly equal to what is required for the limited UBI worth Rs450 per person per month.
The idea of a universal basic income to replace subsidies appears appealing but may be hobbled by implementation hurdles. Several challenges involved in implementing such a radical plan are as follows:
- One big challenge relates to the phasing out of food-related subsidies. Any plan to replace food related subsidies has to contend with the implications of such a move on food security of the country. Also, whether farmers will continue to produce enough foodgrains in the absence of price incentives remains a big question.
- UBI is also inevitably linked with government withdrawal from other channels of public service delivery. However, withdrawal of government support from public goods and necessities like health, education is not justifiable as the weaker section have varied needs which cannot be met simply by transferring money.
- It is also argued that unconditional cash transfers might raise wages due to the decline in the supply of casual labourers. There is also question of whether a shift towards it should be a substitute for all existing subsidies or whether it should complement the existing ones.
- The other big challenge relates to co-ordination between state and central governments. Any plan to phase out subsidies and tax exemptions (relating to the GST) will require an extraordinary degree of co-operation between the states and the Centre.
- Also, any pre-specified commitment by the government such as an inflation-indexed UBI worth Rs450 per person could generate fiscal stress during an economic downturn.
A UBI handout by itself would not solve the fundamental problems the poor face in India. Also, the context for a UBI in India is very different from that faced in more developed countries, where a valuable natural resource or a highly advanced productive sector may be leveraged to sustain a UBI. In contrast, the value of a UBI for India has to be evaluated in terms of creating the conditions for its own redundancy—by enabling the poor in India to step out of the “low-reform, low-income trap”. Besides, the real value of a UBI for the poor in India rests on our ability to solve the economic problems and political incentive challenges.