Background – The government is coming up with a report which is likely to endorse giving all Indian citizens a guaranteed Universal Basic Income (UBI). The said report will be released this month. Business Insider talked to Prof Guy Standing, one of the leading advocates of UBI, and he says the report by the government will term the idea as feasible and “basically the way forward.”

Is the Indian government really serious about implementing UBI? We don’t know for sure but it seems to be weighing the pros and cons of the idea. In an interview to Rediff in September last year, the chief economic advisor (CEA) to the government of India, Arvind Subramanian, had said that UBI would be one of the exciting themes of the next Economic Survey. This is due on 31 January. So, we will know the Finance Ministry’s assessment of the proposal by the end of the month.

Subramanian has said that “this is an idea that has a lot of promise, but also challenges. It will be an extension of JAM (Jan Dhan, Aadhar, Mobile Money) in that it will be based on cash transfers.” What the CEA is saying is that universal basic income is essentially a form of cash transfer. It doesn’t matter what you name it, but it is an alternative to providing subsidies in kind, are subject to leakages and corruption. In the Indian version of UBI, basic income may be a migration of subsidies to cash in the first instance. Between major subsidies and payments for the MGNREGA employment guarantee scheme, the government spends nearly Rs 3,00,000 crore per annum – roughly two percent of GDP.

Many people oppose UBI because they are against the idea of government giving doles. But the choice is not between giving subsidies and not giving. It is about picking between efficient cash transfers and an inefficient subsidy regime. UBI should be seen as redistribution of currently paid subsidies to enable people to eliminate market distortions and giving citizens a choice on what they will spend their subsidy money on.

With the JAM trio – Jan Dhan, Aadhaar and Mobile money – we have the system in place for providing everyone with a universal basic cash transfer.

The Pilot Project:-

A pilot project in eight villages of Madhya Pradesh that Standing was closely associated with provided every person with a guaranteed basic income for 18 months. “The most striking thing which we hadn’t actually anticipated is that the emancipatory effect was greater than the monetary effect. It enabled people to have a sense of control. They pooled some of the money to pay down their debts, (and) they increased decisions on escaping from debt bondage. The women developed their own capacity to make their own decisions about their own lives,” BI quoted Standing saying.

How do we finance UBI?

If we accept a ceiling of two percent of GDP on central subsidies, in 2016-17 some Rs 3,00,000 crore will be available for cash transfers. Assuming around 25 crore households (there is a similar number of Jan Dhan accounts) in the country, this money is enough to deliver an annual income of Rs 12,000 per household, or Rs 1,000 per month.

The government’s Economic Survey for 2014-15 estimates that subsidies for the following items amount to 4.2 percent of GDP (Gross Domestic Product): cereals, pulses, sugar, oil-related products, iron ore, fertilisers, electricity, water, and rail services. Now, if we increase the ceiling to say four percent of GDP, every household will get Rs 2,000 per month. If we halve the number of households to be targeted, the figure rises to Rs 4,000 per month. This is a very substantial amount for people living in abject poverty and can greatly impact their lives in a way that a leaky subsidy system can never do.

Apart from this there are government subsidy schemes too. A desirable thing for them to do would be to divert most of the spending from inefficient subsidies to areas like education and healthcare. While the latter is a state subject, the former is in the concurrent list and hence the joint responsibility of centre and states. In this way, both can complement each other in social spending.

A UBI – or an Indian variant of it – the universal subsidy cash transfer – is an idea whose time has come. All the necessary ingredients (JAM) to implement it are in place. However, a lot of groundwork is required before implementation. And once implemented,, it may take years before it can be made near perfect. But a start needs to be made.

The case for a universal basic income (UBI) in India is best approached indirectly by noting that one of the main requirements of inclusive growth is ‘deep fiscal adjustment’, in other words, a radical re-orientation of government expenditure and taxation. India spends far too much on dysfunctional price subsidies in the name of helping the poor. Some of the subsidies, for example those on food, fertilisers and oil-related products, are explicitly in the budget. Others, such as the subsidies on electricity, water, and rail travel, are implicit, and take the form of losses or low profits by government departments and enterprises.

There are many reasons why these subsidies are counterproductive. They raise fiscal deficits and crowd-out essential public spending. They distort resource allocation by cutting the link between prices and costs. They discourage investment in supply capacity for producing the subsidised items, and encourage over-consumption of them.

At the same time, the subsidies do not achieve their putative goal of poverty alleviation. They are badly targeted and regressive: though a small part of the benefits does percolate down to the poor, most of it goes to the well-off. (This is not surprising, since a price subsidy per unit consumed gives a larger benefit to those who consume more.) Moreover, they are accompanied by leakages and corruption on a large scale.

Setting the level of basic income

The primary purpose of UBI would be to provide an unconditional income floor/safety net that would prevent any citizen sinking below a basic minimum standard of living, irrespective of his or her earning capacity. To prevent possible untoward effects ,the minimum should be set at a relatively austere level, says the Tendulkar Poverty Line (TPL) . In 2011, 269 million people were below TPL, that is in extreme poverty. It is known that the average income of these people is about 80 per cent of TPL.

So an income supplement equal to 20 per cent of TPL, adjusted upwards suitably to compensate poor people for the subsidy elimination that would finance the programme, would go a long way towards abolishing ‘Tendulkar poverty’ . The requisite cash grant would amount to Rs. 3,500 per head per year (Rs. 17,500 per family per year) at 2014-15 prices, indexed to a relevant cost of living index.

If the ‘Tendulkar poor’ could be identified and accurately targeted, the fiscal cost of bringing them up to the poverty line would, on this basis, be less than one per cent of GDP. But perfect targeting is impossible. In practice, the basic income would have to be given to at least half the population, perhaps to two-thirds of the population, to be sure of reaching all poor people. (This would have to be done on the basis of rough justice, using criteria such as eligibility for income tax, ownership of land above five acres, ownership of houses with more than three rooms, and possession of relatively expensive consumer durables, bearing in mind that these categories overlap to an undetermined extent.)

However, there are several good reasons for going further and making the transfer a universal basic income that is paid to every citizen. Such a UBI would cost 3.5 per cent of GDP .As seen above, this would certainly be affordable, given ‘deep fiscal adjustment’. Note also that the technological means to make a universal income transfer are now available, or will be soon, because of the progress made in spreading Aadhaar and Aadhaar-seeded bank accounts.

Why should basic income be made universal?

Firstly, there is a huge bunching of people around the poverty line, with several hundred million people who are very poor (though not in extreme poverty) and continually in danger of falling below the poverty line due to misfortunes of one kind or another, such as ill health. A UBI would supplement their incomes. (But the income supplement would be a flat sum, so the proportionate benefit would fall progressively at higher incomes.)

Secondly, ‘deep fiscal adjustment’, especially abolition of ‘non-merit’ subsidies, is essential to improve economic efficiency as well as create the fiscal savings to pursue various desirable goals, as explained above. But this programme will imply real income losses for most of the population, at least for a time. UBI would cushion them wholly or partially against this damage, and thereby also prevent or dilute their resistance to both deep fiscal adjustment and the provision of a basic income for the poor. Importantly, it would also compensate people, wholly or partially, for adjustments that may be imposed on them by other desirable reforms (for example, liberalisation of the labour market, privatisation, and opening up agriculture to international trade.) UBI has been criticised as wasteful because it would give money to many people who are not poor. For the reason just given, this is a mistaken view. UBI would, instead, provide an essential underpinning for the acceptability of radical economic reform.

Thirdly, only a small proportion of the population is so well off as to make the above considerations irrelevant.

It is not worth the administrative trouble and expense to identify them and exclude them from the coverage of ‘basic income’. (Some of their basic incomes would in any case come back to the state in the form of income tax; and some well-off recipients would surely forego UBI voluntarily, if nudged by the government to do so.) Experience has shown that selection of deserving recipients brings a host of problems such as cheating and concealment to qualify for benefits, resentment on the part of those who are excluded, administrative high-handedness, and rampant politicisation. UBI would bypass these difficulties altogether.

Arguments against UBI

The arguments against a UBI are not convincing.

(i) ‘UBI would reduce the incentive to work and create dependence on doles’: Such an outcome is extremely unlikely given the modest level of the proposed income supplement. (Since UBI is a uniform, lump-sum income transfer, the substitution effect against work will be zero. And since the transfer is small, the income effect against work is likely to be negligible). Rather, UBI is likely to liberate poor people to achieve more than mere survival. A related argument is that UBI would lower the female labour force participation rate. But progress in this area depends mainly on advances in female education; and, in any case, would it be right to forego an opportunity to make a large dent in extreme poverty, and provide a robust safety net for all, in order to push more women into work outside the home, faster than otherwise?

(ii) ‘UBI would be frittered away on alcohol and gambling’: There is plenty of evidence from trials internationally, and in India (for example, see Davala et al. 2016), that this would not happen. Recipients of an income supplement tend to spend it on things such as food, clothing and footwear, education of children, healthcare, toilets, walls and roofs for houses, better seeds, and even investment of a rudimentary variety. Incidentally, a cash grant would also enable the poor to choose their consumption baskets (including spending on a more balanced diet than the cereals of inferior quality provided by the public distribution system (PDS)), which is surely a good thing.

(iii) ‘UBI would divert State spending from critical items such as infrastructure, education, and healthcare, which are essential requisites of long-run inclusive growth’: UBI is meant to complement desirable social spending, not replace it. The available fiscal potential is large enough to ensure that this kind of ‘crowding out’ is avoided. In practice, a programme of ‘deep fiscal adjustment’ would require careful sequencing and close Centre-state coordination (‘cooperative federalism’), and take several years to implement.

As extra resources become available, they could be divided between fiscal consolidation, extra public investment and enabling social expenditures, and UBI (which could be increased gradually in size until it reached the target level). The desirability of pursuing such a package requires only a weak value judgement that providing a safety net for the whole population quickly, and compensating them (at least partially) for real income losses imposed on them by liberalisation and reform, is as important as other social objectives. This principle would surely command wide support.

(iv) ‘UBI assumes that all benefits are best delivered in the form of unconditional cash grants that people are free to spend as they wish’: This is not so. It is true that paternalism may sometimes be justified, for example, it may be necessary to compel people to send children to school. In other cases, conditional cash transfers (CCTs) or conditional in-kind transfers may make sense. India has some good conditional programmes, for example, midday meals for schoolchildren, cash grants for pregnant women, conditional on attending health clinics and provision of income opportunities under the MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act), conditional on work. As discussed in Joshi (2016), other areas where unconditional cash transfers may not be suitable are education and secondary healthcare.

UBI may not be a magic solution to all problems. But it is an essential component of a robust social protection framework. It does not in any way imply that the State should renege on its responsibility to finance, and where appropriate, produce and deliver, goods and services that the market would, for well-known reasons, fail to provide. It is true that while UBI will put purchasing power in the hands of people, it cannot guarantee that supplies will be forthcoming. But it is hard to see why supply would not respond, except in pockets of the country where markets are thin or non-existent. (For such areas, more conventional arrangements would have to continue for the time being.) For most of the country and for command over many ordinary goods and services, a UBI in cash would work well for poor people.

(v) The final argument against UBI is that ‘India’s political economy makes it infeasible or ruinous. Powerful lobbies and pressure groups will prevent dysfunctional subsidies being wound up. If UBI were introduced somehow, it would in practice be additional to existing subsidies. There would also be unstoppable demands to increase UBI year after year, a recipe for fiscal disaster’: This is a defeatist position that would negate any attempt at bold reform. Deep fiscal adjustment, in combination with UBI, has the potential to make a huge positive difference to people’s lives, present and future. It should not be taken for granted that India’s democracy is irremediably irresponsible. UBI could serve as a unifying and inspiring idea round which reformers, and the majority of the population, could coalesce to overcome vested interests .

In conclusion , UBI is politically rewarding, fiscally responsible and economically sensible.