Travesty of basic income

It would be wonderful to have a genuine basic income scheme for the country. Thus far, all we have are populist gestures

Universal basic income (UBI) has entered India’s public lexicon and political debate. The term has been used to describe various schemes: Rythu Bandhu in Telangana, the Modi government’s handout to small farmers in its recent interim budget, and Rahul Gandhi’s promise of a handout to all poor people. Since I presented a detailed proposal for a UBI in my recent book ( India’s Long Road, Penguin India, 2016), and in my article in Indian Journal of Human Development [2017, Vol. 11(2)], I could be forgiven for feeling a sense of satisfaction. However, that is not my reaction; I am disappointed, even appalled, by the schemes that have appeared on the scene under the name of ‘basic income’.

The pure concept of basic income envisages an unconditional and universal cash transfer set at a level that would enable every citizen to live a decent life. Since quantification of ‘decent income’ is highly elastic, this ideal is fiscally unachievable in practice and some dilution of the concept is inevitable.

In my version, the cash transfer for a UBI in India was set at a level equal to the difference between the Tendulkar poverty line (TPL) and the average income of India’s poor population, indexed to the cost of living. This difference is about 25 per cent of TPL, roughly equal to ~3,500 per head per year (~17,500 per household per year). This would be equivalent to say ~4,000 per head and ~20,000 per household at 2019-20 prices. This transfer would not be princely but meaningful enough to make a difference to people’s lives. I advocated raising the resources for such a ‘UBI Supplement’ (UBIS) mainly by abolishing non-merit price subsidies, e.g. fertiliser subsidies, which have been recognised to be dysfunctional on grounds of efficiency as well as equity.

I showed that a UBIS set at this level would cost no more than 3.5 per cent of GDP. Note that abolition of non-merit subsidies (5.5 per cent of GDP) is only one possible source of creating fiscal space. Resources could also be raised in other ways that are desirable on independent grounds, for example, privatising some grossly inefficient public sector enterprises (say 1 per cent of GDP annually for a few years), weeding out unnecessary tax exemptions (say 1.5 per cent of GDP), taxing agricultural incomes above a threshold level (say 0.5 per cent of GDP), and winding up badly targeted welfare programmes while retaining those of proven worth (say 1.5 per cent of GDP). This potential fiscal space of 10 per cent of GDP could be used to implement a basic income programme (3.5 per cent of GDP), as well as to ramp up public investment (by 2 per cent of GDP), increase opportunity-enhancing social expenditures such as education and health care (by 2.5 per cent of GDP) and reduce the consolidated fiscal deficit (by 2 per cent of GDP). Thus, a UBIS could fit into a coherent reform programme to be achieved over a few years, financed partly by the Centre and partly by the states.

A universal and unconditional basic income supplement, as part of a coherent reform strategy, would thus be feasible; and the oft-repeated objection that it could be implemented only by sacrificing other valuable goals is false. The fiscal cost could be reduced further by sacrificing universality and restricting coverage to say two-thirds of the population, leaving out the third that are judged to be relatively well-off. This would of course raise the problem of identification but it may be just about feasible to do so on the basis of exclusion criteria such as eligibility for income tax, ownership of land above five acres, and possession of relatively expensive consumer durables such as a car or a motorised two-wheeler. The cost of such a quasi-UBIS (QUBIS) would be about (3.5 times 0.67 =) 2.3 per cent of GDP. Any further reduction in coverage should be resisted because it would a) create large problems of identification and b) defeat the main object of UBIS.

Alas, the ‘basic income’ schemes that have hit the headlines in the recent past are a far cry from the genuine article in terms of coverage and fiscal implications. The Ryuthu Bandhu and Kalia schemes are restrictive in coverage and exclude many rural poor and/or the urban poor. The same applies to the Modi government’s scheme. Moreover, its income supplement is set at too low a level to make a meaningful difference. On the fiscal side, the Modi scheme does not attack subsidies or make any other new moves to raise resources in a growth-promoting way, so it is not part of a coherent strategy. I conclude that the recent schemes in India are not fit for purpose. They are just populist gestures.

Rahul Gandhi’s announcement lacked any details. Unfortunately, it was combined with a proposal to write off rural debts, which would cause huge moral hazard apart from being extremely regressive. It would be nice if the forthcoming Congress manifesto ditched the idea of debt cancellation and put forward a road map for a UBIS scheme that covers two-thirds of the population in a meaningful way, financed by extra revenue raised in a manner that promotes efficiency, growth, and equity.

It would be wonderful to have a genuine basic income scheme for the country. Alas, thus far, all we have are travesties of the idea.