Is India ready for universal basic income? Benefit would lie in rationalising existing subsidies

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Published: March 16, 2017 4:11:26 AM

Is the country ready to provide a universal basic income to all its citizens? While the government is yet make its mind on this issue; it feels this is an idea whose time has come and needs to be widely debated.

UBI is a substantial improvement on the earlier concept of a negative income-tax. (PTI)

Is the country ready to provide a universal basic income (UBI) to all its citizens? While the government is yet make its mind on this issue; it feels this is an idea whose time has come and needs to be widely debated.

UBI is a substantial improvement on the earlier concept of a negative income-tax (NIT). The latter is envisaged to take effect when a citizen’s income falls below the exemption limit. The state then steps in, and instead of taxing her income supplements it. Both concepts—UBI as well as NIT—are premised on the proposition that a citizen can truly become free only when she has control over decisions that affect her life. To do this, she must, in the words of Amartya Sen, have basic capabilities—health, education and a minimum income. NIT, UBI and indeed all welfare and developmental programmes are directed towards these ends. UBI in addition seeks to satisfy another important need. In modern times, both in modern western societies as well as our own, people are finding it difficult to find jobs, because of over-capacity, automation, and lack of demand. A citizen, it is argued, must be assured of a basic minimum income and be able to lead a life of dignity regardless of whether she finds employment or not.

In India, seventy years after independence, these ideals are nowhere being realised. Currently, it is extremely difficult to afford such a scheme. In fact, globally, hardly any government has ventured to accept it. Recently, in a referendum the Swiss people rejected it because of its enormous fiscal implications.

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Pranab Bardhan, an economist at Berkley, has estimated that at the rate of Rs 10,000 per capita per annum, UBI in India would cost the exchequer 10% of GDP or about R14 lakh crore. At present, all the 950 welfare schemes of the central government cost 5.2% of GDP or about R7 lakh crore.

These schemes suffer from serious flaws. Although there is some evidence to suggest that efficiency has improved, the programmes are generally mired in data manipulation, red-tape, corruption and unacceptably high implementation costs. Many poor people stand excluded; and non-poor, included (These are technically referred to as errors of inclusion and exclusion). As a consequence, the Economic Survey calculates, 40% of the bottom 40% of the population are deprived of the benefits of PDS, the flagship scheme of the central government for distribution of rations. Bihar, MP, Rajasthan, Orissa and UP, account for half the poor population of the country but due to the poor administrative capacity, these states spend only a third of the resources the central government allocates to MNREGA, the flagship rural employment guarantee scheme.

The government could perhaps ill afford to launch another grandiose universal scheme that covers all citizens, in addition to the existing schemes which it is struggling to make more efficient. Nonetheless, a good case exists for providing an income to 22% of Indians who live below the poverty line, in lieu of all the other subsidies. This may be offered as an alternative to the existing entitlements the poor currently enjoy. The fear that they would utilise this income on conspicuous consumption or sin goods was found to be unjustified in an experiment which was carried out in Madhya Pradesh. The families covered by the experiment actually invested their incomes to develop additional sources of revenue. This validates an intuition which some social scientists have had for a long time: when it comes to the crunch, poor people will act responsibly when they are given an opportunity to build their future. To make doubly sure that they do so, the income could be provided with help of JAM (Jan-Dhan accounts, mobile phones and Aadhaar) directly to the female head of the family. This would reduce administrative costs and remove possibilities of corruption by unscrupulous intermediaries.

The benefit of the new regime, however, would lie in rationalisation of the existing subsidies. Those who designed the latter forgot that prices play an important role in a market-driven economy. They signal changes in the forces of demand and supply. When government attempt to influence prices, as in PDS, producers and consumers often get confused about what and how much to produce or consume. This results in either unintended or less than optimal outcomes: subsidies on fertilisers, for example, have resulted in excessive use which in turn has led to soil contamination. Poorly directed subsidies for the supply of water and electricity in Punjab have led in some parts to water-logging; and in others, to a fall in the level of the water table.

UBI will ensure that such results are avoided. As a professor of ours explained many years ago, “We can, if we want, subsidise the university canteen. But then many of you will go there only because the food is cheap, not because you are hungry. We prefer to price all goods at their economic cost and ensure that you realise only the value that you pay. Our local governments help poor students obtain scholarships that cover the cost of their stay here at the university. This way the price structure does not get distorted. The students know they have to live within a budget; and they must buy only what they can afford.”

In life as in economics, with individuals as with nations, there are no free lunches. Sooner or later every benefit has to be paid for. The sooner politicians realise this the better.

The author was chief commissioner, income-tax, and Ombudsman to the Income-Tax Department, Mumbai.
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