Insights into Issues: Basic Income Guarantee Scheme
- November 30, 2016
- Posted by: INSIGHTS
- Category: Insights into Issues
Insights into Issues: Basic Income Guarantee Scheme
While the world pondered the fallout of Brexit, another referendum took place in Europe, which was no less significant. In Switzerland, a proposal for adults to be paid an unconditional monthly income (1.75l pm), whether they worked or not, was up for a vote. It was defeated by a big margin – 77% opposed the plan, with only 23 per cent backing it. If successful it would have led to a radically new model of the welfare state, where all forms of transfers from the state to the poorer sections — housing, food, child support, and unemployment benefits — would have been replaced by a single cash transfer.
The Swiss setback aside, the idea of a Basic Income Guarantee (BIG) has gained traction in the debate on reforming the welfare state in major market economies on both sides of the Atlantic. The idea also resonates with a recent policy shift in India towards direct cash transfers, under the acronym JAM (Jan Dhan Yojana, Aadhaar cards, Mobile money platforms), which involves rolling all subsidies into a single lump-sum cash transfer to households.
- Y Combinator, of Silicon Valley fame, is testing out a new business model: handing out money, without any strings, in an unnamed U.S. community in an attempt to replace safety net welfare policies that often fail to help those with the greatest need.
- Finland is considering a plan to give 100,000 citizens $1,000 a month, while four cities in Netherlands are starting trial programmes.
- Canadian province of Ontario is planning a trial run of Basic Income Guarantee programme
A pilot in eight villages in Madhya Pradesh provided over 6,000 individuals a monthly payment (Rs.100 for a child, Rs.200 for an adult; later raised to Rs.150 and Rs.300, respectively). The money was initially paid out as cash, while transitioning to bank accounts three months later. The transfer was unconditional, save the prevention of substitution of food subsidies for cash grants.
- Most villagers used the money on household improvements (latrines, walls, roofs) while taking precautions against malaria — 24.3 per cent of the households changed their main source of energy for cooking or lighting; 16 per cent had made changes to their toilet.
- There was a seeming shift towards markets, instead of ration shops, given better financial liquidity, leading to improved nutrition, particularly among SC and ST households, and better school attendance and performance.
- There was an increase in small-scale investments (better seeds, sewing machines, equipment repairs etc).
- Bonded labour decreased, along with casual wage labour, while self-employed farming and business activity increased.
- Financial inclusion was rapid – within four months of the pilot, 95.6 per cent of the individuals had bank accounts. Within a year, 73 per cent of the households reported a reduction in their debt.
- There was no evidence of any increase in spending on alcohol.
- Instead of having many different forms of welfare programmes targeted at the poor, and administered through government bureaucracy, just make a simple unconditional regular cash transfer to every adult. This would help in downsizing bureaucracy and doing away with cumbersome procedures associated with bureaucracy.
- Universal cash transfer has 3 basic characteristics:
- First, it is universal and not targeted at the poor alone, thereby removing the numerous problems associated with means-testing. In the Indian context, this makes sense because of the less-than-satisfactory experience with targeting welfare services. Apart from the standard arguments against targeting—that it often excludes a lot of the deserving households from receiving subsidies, people often fall in and out of poverty and therefore it becomes difficult to ascertain who are rightfully entitled to receive such benefits.
- It is a simple cash transfer, so there is no need to provide in-kind transfers (for example food stamps) or subsidies for certain goods and services (for example housing support), both of which come with standard inefficiencies associated with interfering with market forces
- It is unconditional, so that it is not contingent on the recipients conforming to stipulated norms of behaviour, such as looking for jobs or having children enrolled in schools, and the problems of monitoring that this entails. This takes care of the problem of inefficient targetting
- Individuals retain any additional income earned over the basic income, subject to paying a fraction in taxes. So only those with zero income will receive the full basic income in net terms. For others, the net benefits will taper off and so even though the basic income is universal, the benefits of the non-poor are clawed back through taxation and only the poor are net recipients of support. Moreover, it has work incentives built in since the net incomes of individuals will increase with extra earnings.
- It is one of the few policies where there is support from both the left and the right end of the political spectrum. The right likes it as it is non-paternalistic, leaving the decision to the recipient as to how to spend the money. It also trims down the need to have a large bureaucracy, and it is less prone to corruption and exclusion and inclusion errors. The left likes it since it is a smart redistribution policy where the redistributed income directly reaches the poorer section, avoiding the leaky bucket problem.
- It also empowers workers in the labour market by separating their subsistence needs from finding jobs that are a good match for them.
- Proponents also argue that in the years to come, jobs will be taken up, due to advancement in technology, by robots. In such a scenario the idea of a basic income guarantee makes economic sense
- It is mighty expensive with 11,600 bn rupees required which is equivalent to 11% of GDP. Compared to MGNREGA where 0.3% of GDP is used. If only given to BPL, cost comes down which can be met by eliminating leakages. Economic Survey of India notes, that fiscal resources could be released if we get rid of some subsidies. If we just take a few major items that the government subsidises, the direct fiscal cost of this subset of subsidies is about Rs 3,780 bn. It is still only about 4 per cent of the GDP, well short of the 11 per cent needed for a universal transfer.
- The idea of a basic minimum income guarantee is inevitably linked with government withdrawal from other channels of public service delivery, which in effect would provide the fiscal space to carry on with this scheme. However withdrawal of government support from public goods and necessities like health, education, caring for the disadvantaged section is not justifies as the weaker section have varied needs which can not be met simply by transferring money. For instance, even if tribal population is provided with a basic income they would still be dependent on state for provision of health and employment services.
- Transition to cash transfers could easily be used by the government as an opportunity to dilute people’s entitlements, e.g. by imposing conditionalities, restricting eligibility, or going slow on the indexation of cash transfers to the price level. It could also become a stepping stone towards state withdrawal from many essential services
- Tax base of the country very poor. Tax avoidance common. Difficult to generate resources. Only 1 per cent of Indians actually pay income tax, while a mere 2.3 per cent file tax returns
- The other major problem of basic income guarantee is that it may adversely affect work incentives. Any welfare programme will affect work incentives to some degree, and given the unconditional nature of cash transfers, one would expect distortions to be minimum. Still, the fact that a section of the population is earning an income without having to work is likely to create resentment.
India could move towards a basic income, replacing “some egregiously dysfunctional welfare spending” but leaving untouched “public education and healthcare, pre-school nutrition programmes, or employment guarantees in public works”. The required budgetary resources could be raised by trimming the implicit and explicit subsidies to the rich (often in the form of tax breaks or subsidies given to goods largely consumed by the relatively well-off), or by raising additional taxes by “improving property tax collections. A regular unconditional basic income, scaled up through pilots, and rolled out slowly and carefully, seems ideal for India.
However this idea has been debated ad nauseam by libertarians and conservatives alike and a consensus on it seems elusive. In the meanwhile, the government is steadily moving towards Conditional Cash Transfers as the mode of subsidy delivery. The experience of implementation of the scheme would suggest whether India is ready in the future to have a Basic Income Guarantee.