Experts Divided Over Implementing Universal Basic Income in India

At the core of the debate is the question – are cash transfers better or worse than in-kind transfers? (Photo: Reuters)

It is now widely expected that Economic Survey 2016-17 will discuss the idea of a Universal Basic Income (UBI) for India. Chatter around the issue has been picking up in recent months with economists on both sides of the debate weighing in.

Long time proponents of the concept, like Guy Standing who co-founded the Basic Income Earth Network in the 1980s, argue that existing subsidies should be withdrawn to create fiscal space for cash transfers. A slew of other economists have also supported the idea in recent writings, arguing that it is time for India to move in the direction of a universal basic income.

Others, like development economist Jean Dreze, support the concept of a universal income but term it as “futuristic” in the Indian context.

Reetika Khera, of the Humanities and Social Sciences Division at IIT Delhi, has argued in favour of a phased approach where existing schemes likes pension for the elderly can be thought of as universal basic income for that segment.

Cash Transfers vs In-Kind Transfers

At the core of the debate is the question – are cash transfers better or worse than in-kind transfers?

India has a myriad schemes and subsidies targeted at the poor. Prominent among these are the employment providing Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGA), the Public Distribution System (PDS), which provides subsidised foodgrain, along with the fertiliser and fuel subsidy schemes. But many of them have been plagued by poor targeting and leakages.

In an interview with BloombergQuint, Standing cited pilot projects conducted in Madhya Pradesh and West Delhi back in 2010. The pilot projects involved unconditional monthly payments to 6,000 people over a period of 18 months. 

According to Standing, the impact of the transfers was “transformative.”

It was a modest amount but it liberated people’s views and spending patterns. The second thing is that the equity effects were very positive because the disabled received the same amount as everybody else, scheduled cast households benefited more than others, women benefited more than others. The third effect, which confounds critics of the basic income, is that work and labour increased.

Guy Standing, Honorary Co-President, Basic Income Earth Network

The results, however, may not be seen as conclusive as the pilot project was conducted in just three pockets. Also, the project was not intended to test whether grants could substitute other welfare and subsidy schemes.

About the same time as Standing’s experiment, in 2011, Khera conducted a survey across 1,200 rural households in nine states. One of the objectives of the survey was to gauge whether cash transfers are preferred over in-kind transfers.

The survey found:

• Nearly 67 percent of those surveyed prefer food transfers over cash transfers
• Only about 18 percent had a clear preference for cash transfers
• The rest were either undecided or had conditional preferences

“Mid-day meals and free cycles for school-going girls should not be replaced with cash,” says economist Jean Dreze. (Photo: Reuters)

Striking a middle note, Dreze says, in an email exchange with BloombergQuint, that the success of cash transfer or the lack of it, is “context specific”.

It is all context-specific. For instance, mid-day meals and free cycles for school-going girls are good in-kind transfers that should not be replaced with cash. Even food rations under the Public Distribution System are better than cash transfers in many areas, especially those with high levels of poverty, unreliable food markets and a poor banking system. Some cash transfers, of course, do quite well too, for instance social security pensions for widows and the elderly. But then others don’t, like the recent cash transfer pilots in Puducherry and Chandigarh.

Jean Dreze, Development Economist 

While there has been no conclusive study done in India to show that cash-transfers will work better than the current system of subsidies, one global example often cited is that from Brazil.

The Bolsa Família Example

In 2003, the then Brazilian president Luiz Inácio Lula da Silva launched the Bolsa Família programme. The programme was based on the concept of cash transfers that came with certain conditions such as keeping children in school and preventive healthcare. The scheme went on to become a pillar of Brazil’s social welfare strategy and was widely credited with reducing poverty in the county.

In 2013, when the scheme completed a decade, World Bank, in a paper, noted that Bolsa Família had been key in halving Brazil’s poverty rate from 9.7 percent to 4.3 percent. It also said that the scheme had led to an impressive fall in income inequality in the country.

Bolsa Família now reaches nearly 14 million households – 50 million people or around 1/4 of the population, and is widely seen as a global success story, a reference point for social policy around the world

World Bank paper

Brazil’s Bolsa Família programme. (Photo: BloombergQuint)

Khera, however, argues that extrapolating the Brazilian example to India would not be correct. In a phone conversation with BloombergQuint she noted that levels of literacy and urban infrastructure development would be key in determining the success of such a programme.

The evidence that is often cited from Brazil is slightly misplaced. Brazil is a slightly different country. Their poverty rate was less than 10 percent when ours was 30 percent. Their literacy rates for females was near universal when ours was close to 50 percent. And a large part of their population lives in urban areas which means that banking infrastructure and urban transport etc are better developed.

Reetika Khera, Humanities and Social Sciences Division, IIT Delhi 

Creating Fiscal Space For Basic Income

The next obvious question that arises is how a universal basic income scheme would be funded.

The Indian government has struggled to stick to a path of fiscal prudence and is mandated to bring down the fiscal deficit to 3 percent of GDP by next fiscal. While there could be some relaxation in this target by a newly appointed committee on the fiscal roadmap, the government will need to balance out a number of spending priorities.

It is, then, fair to expect that a basic income concept, if ever implemented, would need to come at the cost of existing social programmes. Proponents like Standing argue that many existing schemes are inefficient can be done away with.

Others say that so-called “non-merit” subsidies can be taken out to make space for a basic income programme.

In an October article published on the Ideas For India website, Vijay Joshi of the University of Oxford wrote that “non-merit” subsidies which may be as large as 8 percent of GDP could be axed to create fiscal space.

The estimate for non-merit subsidies, which includes the sale of items such as kerosene, LPG and even train tickets at below market prices, is based on projections made by the National Institute of Public Finance and Policy which are currently under review.

Joshi further writes that even expenditure on direct poverty programmes, which accounts for 2.5 percent of GDP, can be pruned. He also suggests that tax-exemptions be done away with and agricultural income above a certain level be taxed. “The total fiscal potential of all the above measures put together is at least 10 percent of GDP annually,” wrote Joshi.

Dreze says that while some fiscal room can be created, whether that space should be used for a basic income scheme is debatable.

Some fiscal space can be created by reducing regressive subsidies and raising the tax-GDP ratio. But that space cannot be claimed by UBI alone. There are many other urgent claims to public expenditure, relating for instance to health care, elementary education, environmental protection, essential infrastructure, and so on. The resources that might be available for cash transfers are likely to be quite limited in the near future. And these resources would be better used for well-tested transfer schemes like universal maternity entitlements and social security pensions than to kick-start UBI at a very low level of transfer.

Jean Dreze, Development Economist 

Is There A Middle Path?

Khera suggests taking a middle path.

She says that India could work towards a universal basic income for certain segments of the population. According to her, pensions for the elderly and maternity benefits can be seen as a universal basic income for those segments of the population which are among the most vulnerable.

Under the existing schemes, the central government provides a small amount of Rs 200 for social security pensions and state governments add to this amount. Maternity benefits of Rs 6,000 were legislated by the central government in 2013 but never implemented.

There are other suggestions out there too.

Debray Ray of New York University, while supporting the concept of a universal grant, says that this should be thought of in the context of a “universal basic share” of national income. In an article in Ideas For India, Ray proposed that countries commit a fixed fraction of GDP to the provision of a universal income for all.

“In the Indian example, the numbers do not have to be at Rs 10,000 to begin with. But over time, they will get there. In this sense, the proposal takes (some) care of the debate that we cannot afford it,” wrote Ray.

With different ideas pouring in on the issue, the economic survey, to be released on 31 January, may give some indication of which way the government is leaning, although a near term implementation of such a scheme appears unlikely.

The principle of UBI is appealing, but as far as India is concerned, I see it as a futuristic idea. In the short-term, there are much better things to do with the limited resources available. Universal maternity entitlements and social security pensions would be a good start.

Jean Dreze, Development Economist 

(The article has been published in an arrangement with BloombergQuint)