Universal income may aid India’s economic recovery
The lockdown to slow the spread of Covid-19 has inflicted a heavy cost on India’spoor.mosthave seen their incomes fall; many have seen their families uprooted; some have even lost their lives. On moral grounds alone, there is a strong case for augmenting spending on social protection for the poor, and the Government of India has taken some important first steps in this regard. However, more can and should be done, because spending on social protection is not only ethically desirable but also critical for driving the broader economic recovery.
A core theme in economics is that there is a trade-off between welfare programmes and efficiency. Yet, a growing body of research suggests that when people are very poor, there may be no such trade-off. Thus, a well-designed social protection architecture should not be seen as charity, but a key engine for economic growth. Schemes such as the National Rural Employment Guarantee Scheme (NREGS), publicdistributionsystem(pds), and a modest universal income transfer can drive growth by boosting demand, correcting market failures, improving credit access, and providing the insurance needed for people to undertake risky investments to improve productivity. not a good use of public funds. In addition to concerns about corruption and leakage, many economists were worried about the prospect of NREGS driving up wages without increasing productivity, thereby reducing market employment.
However, high-quality evidence using a large-scale randomised evaluation has found that improving NREGS implementation (by reducing leakage, payment delays and uncertainty) led to a substantial reduction in rural poverty. Importantly, only 10% of the income gains were from additionalnregsincome.themajority of the impact came through an increaseinbothmarketwagesand employmentoftheruralpoor.one reason is that when employers have high market power (which we find evidence of), programmes such as the NREGS can correct pre-existing market failures and increase both wages and employment. We also find longer-term benefits including increases in credit,assets,numberofnon-agricultural enterprises, and employment in these enterprises. Thus, improving wages and incomes of the poor, through social protection,canhavelargepositivemultiplier effects on the economy.
Similarly, recent research has found that PDS can insulate the poor from price fluctuations of food-grains, and increase the proportion of the population that can reach minimum nutrition standards. Given the link between nutrition and productivity for labor-intensive tasks, PDS likely contributes not only to food security but also to boosting the productivity of the poor.
Thus, the government’s decision to increase the budgets for NREGS and PDS make a lot of sense since the benefits likely exceed the costs. Crucially, the existence of these two pillars provided by the government with a rapidly implementable option for expanding social protection to mitigate the costs of the lockdown. For instance, phone-surveys in the last two months indicate that increased PDS allowances have been an important lifeline for those who have lost their jobs and income. But economic recovery andindia’sdevelopmentwillneed more. The time is right to add a third social protection pillar, based on modest but near-universal income transfers that will promote both public welfare and an economic recovery.
There has been growing support for the idea of direct benefit transfers (DBT) of income into beneficiary bank accounts, including a prominent call for a Universal Basic Income (UBI) in the 2016-17 Economic Survey. These calls have been amplified during the current crisis. A Ubi-type approach will minimise targeting costs and exclusion error, reduce administrative cost of implementation, and offer flexible benefits. Importantly, several studies have shown that income transfers help the poor greatly and that they spend the money productively (and not on alcohol or temptation goods).
Yet, the idea of UBI has not gained policy traction in India, in part because the amounts suggested have been prohibitively expensive (ranging from 3.5% to 10% of GDP). To make a povertyeliminating UBI fiscally feasible, many proponents suggest replacing existing welfare schemes (including NREGS and PDS) with UBI. However, this is politically difficult and may not even be desirable given the benefits documented above. A more feasible option to deliver the social protection benefits of income transfers is to decrease the value of the transfer and implement it as a supplement rather than a substitute to existing programmes.
One concrete implementable idea that I have proposed in an essay with Paul Niehaus and Sandip Sukhtankar, and in a more detailed paper with Maitreesh Ghatak, is an “Inclusive Growth Dividend (IGD)” pegged at 1% of GDP (₹ 120/month at current levels). The amount will be paid as a monthly supplement to every Indian, with allowances for children paid into mother’s accounts. While this will take some administrative work, the investments in Aadhaar and Jan Dhan accounts in recent years make it feasible to implement IGD in the near future.
An IGD will not just strengthen India’s social protection architecture but, as I’ll argue in the second part tomorrow, it will also drive economic recovery and establish the foundations for broad-based prosperity.
Madhya Pradesh
9,638 20
Goa
330 1
Telangana
Karnataka
237 6,536
Dadar & Nagar Haveli
1,157 88
Maharashtra
3,742 92 30 2
Chhattisgarh
307 88,528 2,553 5,760 308 2,519