Designing minimum income guarantee post-Covid-19 collapse

April 25, 2020 6:30 AM

Transfer amounts should also be linked to CPI. While PM-KISAN covers only farmers and is much more expensive and exclusive, such a transfer would avoid narrow coverage, also avoiding inclusion/exclusion errors

The latest NSS All India Debt and Investment Survey (2013) shows over 70% rural population has one or more outstanding loans. The latest NSS All India Debt and Investment Survey (2013) shows over 70% rural population has one or more outstanding loans.

By Santosh Mehrotra, Rakesh Ranjan & Anjana Rajagopalan

Coronavirus lockdown is impacting livelihoods, particularly in the unorganised sector. Is minimum income guarantee (MIG) a solution the government needs to consider? The government is already making cash transfers as part of its Rs 1.7-lakh crore welfare package announced on March 26. However, unemployment, already at a 45-year high in 2018, will only rise post-Covid-19 collapse in output and incomes. Even if there is a V-shaped recovery by 2022 (unlikely), employment growth will take longer to recover.

Universal Basic Income entered common parlance via the 2016-17 Economic Survey. However, in March 2009, one of us (Santosh Mehrotra) was asked by the Planning Commission (while heading its Development Policy Division) to prepare a paper on MIG, but only for the poor. Then the three pre-requisites for an unconditional MIG to the poor were not in place: appropriate identification of poor; bank accounts with every poor household; beneficiaries who could be biometrically authenticated. Today, they are in place, and the idea is administratively feasible.

Why is a MIG-type cash transfer for the poor needed, especially now?
The latest NSS All India Debt and Investment Survey (2013) shows over 70% rural population has one or more outstanding loans. Nearly 74% of farmer households were in debt in 2013 (up from 50% in 1993), as opposed to 64% of non-farm households (up from 43%). The incidence of indebtedness by asset-class indicates that 19.6% of the bottom decile (by assets) of rural households and 22% of next higher decile are indebted; as are 9.3% and 14.6% of the lowest two deciles in urban households. ‘Non-business’ (ie, consumption) purposes accounted for 85% of debt in rural, and 90% of debt in urban areas for the bottom two deciles. These debts heavily constrain expenditure on non-essentials, especially manufactured goods, reducing effective demand for these, leading to low investment in manufacturing. Thus, never-ending debts also have macro-economic consequences.

The strong case for MIG derives from the fact that the poor rarely accumulate assets. They need cash to meet consumption as well as contingency needs; they rarely borrow for productive purposes. Non-routine consumption can push them further into debt and poverty.

Any attempt to identify beneficiaries of MIG based on incomes is a risky exercise in any economy with an extremely high share of informal workforce. Congress’s NYAY design, thus, was inappropriate. India’s reasonably robust Socio-economic and Caste Census(SECC) is useful for identifying households with one or more of seven deprivations, which provide a much better indicator than ‘income’.

The SECC provides data for all 24.49 crore households. Of these, rural households are 17.97 crore, and 6.52 crore are urban. Of rural households, 7.07 crore households fall under the automatically excluded category. After this exclusion, the first category of rural households for MIG should be those automatically included in SECC (15.9 lakh households), fulfilling any of the five parameters of inclusion.

The second category includes rural households with more than one deprivation. There are 5.36 crore such households with over one (of seven) deprivation: one or less rooms, kuccha walls and roof; no adult member in the household between age 18-59; female-headed with no adult male member; a differently-abled member with no other able-bodied adult member; SC/ST households; no literate adult above 25; and landless households with most of their income from manual labour.

The third category includes those that face just one deprivation. The fourth category consists of those that do not report deprivation in any of seven parameters, (given that deprivation parameters are not comprehensive), but are also not well-to-do enough to be automatically excluded (exclusion parameters are more comprehensive). Such households are nonetheless vulnerable and should be included for targeted income transfers.

MIG could offer cash transfers in no case higher than Rs 8,000 per annum. Automatically included rural households with highest vulnerability should be eligible for Rs 8,000 per household annually; rural households with multiple deprivation to receive Rs 6,000 annually; rural household facing just one criteria of deprivation to receive Rs 4,000 annually; while rural non-excluded households considered for deprivation, to be offered Rs 3,000 annually. Also, in the case of urban areas slum households, Rs 3,000 per household has been proposed. This proposed scheme covers 60% of rural households and 20% of urban households and does not cost over 0.28% of GDP (or Rs 56,900 crore pa).

Given limited coverage of schemes in urban areas, we propose an additional category of urban households for better targeting of transfers in urban areas based on Census data. We consider homeless urban households and transfer of Rs 8,000 per annum. While Rs 6,000 per single-elderly household is proposed, we enhance it to Rs 8,000 for households with two elderly members (both over age 60). For households with more than one differently-abled person Rs 8,000 pa per household, and for remaining differently-abled, Rs 6,000 could be allocated. Female-headed households and aged above 50 could be allocated Rs 6,000 per household.

These additional vulnerable categories, comprising 25.9% of urban households, entails an additional cost of Rs 10,628 crore, or 0.05% of India’s GDP (2019-20). This scheme covers 46% of urban households and 60.64% of rural households (as before), at a total cost of Rs 67,528 crore, i.e., 0.33% of India’s GDP.

Transfer should also be linked to CPI. The expenditure is comparable or less than MGNREGA’s (Rs 60,000 crore) and PM-KISAN’s (Rs 60,000 crore). While PM-KISAN covers only farmers and is expensive and exclusive, our proposal avoids narrow coverage and inclusion/ exclusion errors.

Income transfer of Rs 6,000 per annum per household (assuming household size of 5) is equivalent to 20% of household’s annual expenditure (2011-12, the last year for which NSS consumption expenditure data is available) of the bottom decile among rural household (14% in urban areas). Such an amount would not cause a leftward-shift of the labour-supply curve but reduce their vulnerability. With such low fiscal cost, MIG should not constrain expenditure on public health, education, or infrastructure, increases in which are critical to India’s structural transformation.

Mehrotra is Professor, JNU, Ranjan and Rajagopalan are economics PhDs from JNU

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