1. India’s time for unconditional cash transfers

India’s time for unconditional cash transfers

We need to move towards a basic income regime, but cautiously, so that the vulnerable population does not suffer

By: | Published: May 17, 2016 7:24 AM

‘Helicopter money’ and ‘negative income tax’ were economic policies proposed by Milton Friedman nearly half a century ago, and today both ideas have converged into something very much like a ‘basic income’—which is gaining popularity in many countries, often for different reasons.

For instance, in Brazil, it targets the poor and has been a way out of poverty; in Iran, it has substituted for subsidies and citizens receive about $500 a year; in Finland, with every citizen getting about $900 per month, it is a way of coming out of recession.

Basic income is a social policy whose time has come, and it needs to be seriously examined as an option for India. A basic income is a cash transfer, which is paid to individuals.

It is unconditional; the beneficiaries do not have to fulfil any conditions or demonstrate appropriate behaviour in order to get the grant. It is regular, so that people know it is coming at intervals and can depend on it. In most literature on basic income, it is universal and is paid to all citizens.

Basic income is sound social policy and cash in people’s hands stimulates the economy, but opponents of cash transfers tend to highlight the popular images of poor men beating their wives and drinking away their earnings.

However, studies show a different picture. The Self-Employed Women’s Association (SEWA) conducted three experiments to understand how cash transfers would impact poor people. The first was conducted in Delhi by substituting PDS entitlements with cash on a voluntary basis. The second was carried out in rural Madhya Pradesh in 20 villages. The third was simultaneously carried out in two nearby tribal villages. These experiments covered over 15,000 people.

The central design premise of the pilot was that the basic income was paid every month to all individuals within a village. The transfers were given to all residents of a village to avoid distortions due to means-testing and to enable evaluation of the impact of basic income on households with different income levels. Crucially, the experiment did not impose any conditionality. The targeted recipients were informed in advance that they could use the money as they wished.

The results for the poorest villages was transformational for families as well as for the local economy. People used the cash mainly for small self-employment, and there was a spurt of growth in livestock, seeds, water pumps and sewing machines. In addition, they spent on living needs such as mattresses and fans. Food sufficiency increased. In families who were poor, but above the poverty line, there was a considerable improvement in schooling and health outcomes. In particular, girls’ enrolment in secondary school was significant. Women’s healthcare improved and, in general, the number of illnesses decreased.

At the community level, there were joint investments in fish-seeding the local pond; a local entrepreneur began running a private bus, improving connectivity to the nearest market; and villagers revived an old custom of pooling their money to pay for local festivals. In all these studies it was found that there was no increase at all in spending on liquor or tobacco; in some villages, it actually decreased!

India has a plethora of schemes and subsidies especially designed to help the poor. In any one village, there are over 300 schemes which would be targeted to help vulnerable sections of society. Each scheme has numerous conditions attached, making it difficult for a vulnerable beneficiary to access the same. The main concern is the effectiveness of expenditures as they are being made today. It is well known that there are massive leakages from most schemes. In the case of PDS, for example, the report of the High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India (January 2015) states that the leakage is almost 47%.

There are few systematic studies that examine leakages in centrally-sponsored schemes. In indicative studies undertaken by SEWA Bharat, it was found that in Madhya Pradesh many schemes reached under 25% of the people, and in a similar study by JPAL in Bihar, the figure was even lower.

The government expenditure on centrally-sponsored schemes last year alone was over R2 lakh crore. This does not include expenditure made by state governments, which would add significantly to the amount. In Tamil Nadu, for example, over R30,000 crore additionally is provided for welfare schemes. These amounts do not include government spend on education and healthcare.

Subsidies constitute another major chunk of government expenditure on welfare. Subsidies for food, fertiliser and cooking fuel (which does not include subsidies on petrol and diesel) is another R2.5 lakh crore. This is in addition to other subsidies such as those on transport and electricity. In short, the Centre is spending over R4 lakh crore on schemes and subsidies for welfare of vulnerable populations.

Given the magnitude of these budgets, the funds certainly exist for a basic income for vulnerable populations. To make a comparison—the National Food Security Act was passed in 2013 to cover 75% of the rural population and 50% of the urban. If this population were to be covered with a basic income of R1,000 per family, the financial implication would be about R1.7 lakh crore. That is 40% of what is spent on schemes and subsidies today.

Basic income is affordable for the vulnerable populations, but is it feasible? Perhaps it will take a while before basic income on such a large scale would be possible. In spite of the Prime Minister’s initiative of Jan-Dhan accounts, access to banks is still difficult, especially in rural areas. Even in richer urban areas, where bank accounts are universally available, the administrative processes are not yet geared towards cash systems, and instead of making the beneficiaries better off, they may increase misery, even if only temporarily. A case in point is the recent experience of the changeover of PDS grain to cash in selected urban areas, which has faced many administrative glitches. In Chandigarh, a well-administered Union territory, nearly 82,000 women were receiving grain from fair price shops, but in the changeover only 42,000 were transferred cash, and many of them said that the cash did not actually reach their bank accounts. So, 50% of those who needed it, received neither cash not grain, adding to their vulnerability.

We need to move towards a basic income regime, but cautiously, so that the vulnerable do not suffer. The first step would be to have a large number of different, well-monitored experiments in basic income with a buy-in of state governments. These experiments could be at a block level and should involve independent research and civil society organisations.

In an economy where over 50% of the people are self-employed, and a majority of workers belong to the informal economy, basic income is perhaps the most effective way of providing a social safety net.

The author is a social worker

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