Redistribution schemes via UBI a radical change

The Economic Survey has become an exceptional analytical treatise. This year, the value adds was even higher, with the treatment of demonetisation impact, internal dynamics of people and goods moving inter- and intra-states, and much more. Remarkably, even in times of a growth slowdown, the fiscal stance remains conservative with a clear warning against unwarranted counter-cyclical debt build-up.

The redistribution narrative is strong. Of particular interest were the analysis and recommendations on the proposed changes in redistributive strategy and income transfers, which have gained support under the rubric of Universal Basic Income (UBI). A start has already been made with Direct Benefit Transfer, progressive deregulation of market prices (diesel, etc), but this is radical. However, the Survey correctly flags the need for a systemic assessment of the costs and benefits, given the real concern that UBI would become an adjunct of, not a replacement for, the current subvention schemes. The principles of “Universality, Unconditionality and Agency” underlie UBI. Theory suggests (demonstrated in some real world initiatives like Brazil’s Bolsa Familia) that lump sum cash transfers might yield better outcomes than providing income support through price subsidies that distort market prices. These, in turn, foster incentives for misuse and gaming, and depending on the nature of the commodity consumed, entail a significant share of the consumption garnered by upper and middle income segments. Even otherwise, significant leakages are reported from the allocations for the programmes, only a small residual reaching final beneficiaries. “Agency” empowers low-income target families to decide how best to spend the lump sum transfer allows choice depending on preference. However, there is an active debate on whether these transfers should be conditional on desired behaviour or unconditional.

Consolidation of the approximately 950 central sector and centrally sponsored schemes — five per cent of the gross domestic product (GDP) — has become a necessity, whether through UBI or otherwise. The Survey has an excellent section on the actual implementation of the six largest support schemes across districts, showing the districts where the needs are greatest are the ones where state capacity is weakest. The fiscal maths is also quite convincing. A transfer of ~8,500 per capita per year to bring down the poverty rate from 17 per cent (as of 2011-12) to 0.5 per cent of the population will cost 5.4 per cent of GDP. The income support provided by such transfers is expected to boost productivity, especially in farms, by incentivising greater effort.

One of the prerequisites mooted for successful implementation of UBI is a functional Jan Dhan, Aadhaar & Mobile (JAM) system. One of the government’s current priorities is to accelerate a transition away from cash to digital transactions. More needs to be done through significant incentives and support. Data on trends from November to January suggest that in selected channels, both institutional and small retail, after an initial rise in transaction volumes and amounts, a plateauing and even reversal. This is important to increase not just transactional efficiency and consequent productivity, but also as a lever to increase tax compliance, which will largely offset the large resources required for an effective UBI.

The principles of “Universality, Unconditionality and Agency” underlie UBI