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September 2nd, 2016

Is India ready for a universal basic income scheme?

1 comment

Estimated reading time: 5 minutes


September 2nd, 2016

Is India ready for a universal basic income scheme?

1 comment

Estimated reading time: 5 minutes

Academics and policymakers have long debated how to alleviate poverty in India. Recent proposals have gone as far as to advocate an unconditional and uniform government cash transfer to every adult citizen. Maitreesh Ghatak weighs up the potential pros and pitfalls of such a scheme.

There are hundreds of poverty alleviation programmes in India, from housing to food, from maternity benefits and child-welfare to old-age support. Name a need, add a politician’s name or a government title before it and the word Yojana after, and you could very well be naming a real government scheme aimed at the poor.

While their performances across the country vary, it is impossible to deny that these schemes are beset with problems that limit their effectiveness. First, there is the problem of eligibility. Often, those who should not be getting a benefit, get it (inclusion errors), while those who should be getting it, don’t get it (exclusion errors). Second, there is the problem of leakage, wastage, and corruption in the delivery process. Third, even if the implementation process were faultless so that the first two problems were absent, administering these programmes uses up considerable manpower and resources. Fourth, some of these schemes involve subsidies that benefit the non-poor relatively more, since they consume more of the relevant good or the service. For example, power subsidies favour those who have access to electricity and among them, those who consume more power.

No wonder then that policymakers and academics have been debating how to reform the existing policy architecture to enhance the effectiveness of resources devoted to poverty-alleviation. For example, in the recent Economic Surveys of the government, the idea of direct cash transfers has been floated, under the acronym JAM (Jan Dhan Yojana, Aadhaar cards, mobile money platforms). This involves rolling all subsidies supposedly aimed at the poor into a single lump-sum cash transfer to target households.

Some recent proposals have gone further than this and advocate universal basic income (UBI) which is an unconditional and uniform cash transfer from the government to every adult, rich or poor. Even the JAM proposal continues to talk about transfers only to the poor. However, this leaves open the question of how to solve the targeting problem. Use the BPL card? The inclusion and exclusion errors are large – a recent study in Karnataka shows that more than two-thirds of ineligible individuals held a BPL card, while around one-sixth of eligible individuals did not have it.

The main attraction of the UBI is that it bypasses the selection problem altogether by making the transfer universal. What is the catch?

First, any universal programme is expensive. For example, if we were to give every adult exactly the amount of income that defines the poverty line, which would ensure that everyone would be brought above the poverty line,calculations suggest the bill would amount to 11% of the GDP. This is just a hypothetical example. One can, of course, offer a lower amount per person that would be more affordable.

However, in this context, a sense of perspective is needed in discussing expenditures on programmes aimed at the poor, who by official estimates, constitute 30% of the population. Yet non-universal programmes targeted to the non-poor are being doled out without much controversy on a regular basis. The total bill from implementing the recommendation of the seventh pay commission that will benefit 47 lakh employees and 52 lakh pensioners (only 0.8% of the population), is 1% of the GDP. Bad loans in public sector banks (90% of which is attributed to large borrowers) constitute 5% of GDP by conservative estimates.

Second, for such a programme not to add to the fiscal burden and create inflationary pressure, it has to be funded either by spending cuts or by increased taxes.

The scope for spending cuts certainly exists. Explicit subsidies cost the government 4.2% of GDP. Revenues foregone by the government on various exemptions and concessions given to tax payers constitute another 6.7% of the GDP. That adds up to almost 11%. A different exercise calculates the percentage of all central and state subsidies taken together that go to the non-poor, and finds this to be 9% of the GDP. There is no question that potential resources exist that could fund a UBI scheme, but the real issue is whether there will be political support for the subsidy cuts, about which one cannot be very optimistic.

How about raising taxes? Given that only 1% of the population pays income tax, while 2.3% file tax returns, the fiscal instruments to claw back the transfer from the rich are limited. Once again, even adjusting for India’s low per capita income, the startlingly low fraction of income-tax payers reflects the fact that the agricultural and informal sectors’ incomes do not fall under its net.

None of these are insurmountable problems. Cutting wasteful expenditure and raising the tax base are both essential steps in fiscal reforms to raise resources for development, whatever may be one’s priorities, whether it is investing in infrastructure or fostering human capital or alleviating extreme poverty. It just underlines the importance of serious fiscal reforms, without which all these discussions are like deciding on what kind of cuisine to have without any money in the pocket.

Similarly, it is true that the experience with implementing cash transfers in several states has been sobering, causing disruptions and hardships to the poor. While this is a valid concern, any change leads to some disruptions in the short-run, and these logistical problems are not impossible to overcome. One might also worry that the poor may not make the best use of the money in a cash transfer scheme but existing evidence does not provide support to this view.

In discussing the merits and demerits of the UBI or any other development policy, it is important to avoid some standard pitfalls.

First, all policies have some pros and cons, and so just picking a problem with or highlighting a nice feature of a particular policy is not good enough. That traps us in an elusive search for “win-win” policies. The focus should be on relative costs and benefits of different policies.

Second, one size does not fit all. We should be open to the possibility that different policies could work well in different contexts. Cash transfers only make sense if you have ready access to markets, which is not true if you live in remote rural areas in which we have to rely on in-kind transfers. In a study of the bicycle scheme for school children in Bihar, we found that those living in remote areas do in fact prefer in-kind to cash transfers, with the opposite holding for those who live in urban areas.

Third, there is no magic pill that will cure all problems. Different policies are needed to address different problems. So yes, a UBI or a cash transfer as envisaged by JAM or the MGNREGA will provide some relief to the poor, but will not provide a long-term solution to the problem of poverty. For that one needs investment in health, education, and skill-formation to enable the poor to take advantage of growth opportunities, and investing in infrastructure and regulatory conditions to facilitate private investment for employment generation. To give an analogy, giving certain nutritional supplements may help a person who is ill to gain some strength, but it will not cure any disease, nor will it make the person an athlete.

My sense is that a lot of opposition to schemes like the UBI reflects the worry that they will displace other anti-poverty policies. To the extent that is not the case, why not try it out, at least on a scale that is affordable?

This article originally appeared on 26 August 2016 on NDTV Opinion. It is reposted with the author’s permission.

Cover image credit: Gopal Vijayaraghavan CC BY 2.0

Note:  This article gives the views of the author, and not the position of the South Asia @ LSE blog, nor of the London School of Economics. Please read our comments policy before posting.

About the Author


Maitreesh Ghatak is Professor of Economics at the LSE. He is Lead Academic on the IGC India-Bihar country team and Economic Organisation and Public Policy Programme Director at STICERD.

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