Insights into Editorial : Let’s talk about a supplemental income

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Insights into Editorial : Let’s talk about a supplemental income


 

income

 

Summary:

A lot has been discussed about the Universal Basic Income (UBI) and its applicability to India. The primary objective is to enable every citizen to have a certain minimum income. The term ‘universal’ is meant to connote that the minimum or basic income will be provided to everyone irrespective of whatever their current income is.

In discussing the applicability of the concept of basic income to India, three questions arise. The first is whether it should be ‘universal’ or ‘restricted’; the second is what the level of minimum income is and how this is to be determined; and the third is about the financing mechanism for implementing such a scheme.

 

Why the idea of UBI is good in the Indian context?

The idea of the UBI is more relevant for India than for the advanced economies which have been considering it so far since governments in India tend to ‘mess up’ when it comes to distinguishing the poor from the non-poor. As a result, the poor get very little of what is spent in their name. Also, it is argued that many of the subsidies benefit the rich more than the poor.

 

Whether support to vulnerable sections should be in the form of goods and services or as cash?

Cash gives the discretion to beneficiaries to spend it any way they like. But it is assumed they would be wise in their discretion. On the other hand, the provision of services or goods directly to beneficiaries may be directed to achieve certain objectives in terms of nutrition or health or education. In the provision of services, the concern is about leakages and quality of service. Some countries have adopted a middle path of conditional transfers, which means that transfers in the form of cash are subject to the condition that they are spent on meeting defined needs.

As far as India is concerned, there are a whole lot of services provided by the state, and it would be impossible to knock them off and substitute them with general income support. Therefore, income support should be thought as a supplement to services already provided even though a hard look at some of the provisions is absolutely essential. Poor quality of services from government-run institutions has become a matter of concern.

 

Should UBI be universal or restricted?

Coming to the concept of the UBI, it is necessary to first decide whether income supplements should be ‘universal’ or limited to certain easily identifiable groups. Most calculations involving the provision of income to one and all are beyond the capabilities of the present Central government Budget unless the basic income is fixed at too low a level. It is extremely difficult to cut so-called implied subsidies or hidden subsidies in order to fund resources, as some proponents argue. These supports range from subsidised bus fares to subsidised power tariff. The attempt must be to think in terms of reducing the number of beneficiaries using easily definable criteria. Elaborate exercises for identification will defeat the purpose. It is true that a universal scheme is easy to implement. Feasibility is the critical question. There is also the consideration of fairness. But strict targeting will run into complex problems of identification.

 

What should be the minimum increase?

Whether the scheme should be universal or restricted depends on the level of basic income that is proposed to be provided. If we were to treat the cut-off used to define poverty as the minimum income, then the total fiscal burden would be enormous. This apart, there is no consensus regarding what that cut-off should be.

More than 60% of the total poor lies between 75% of the poverty line and the poverty line. Therefore, what is needed is a supplement to fill the poverty gap. One alternative would be to determine the required income supplement from the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). The total annual income supplement can be equivalent to 100 days of the wages prescribed under the MGNREGS. This is equivalent to ₹20,000 per year. This amount can be treated as the income supplement.

 

Who the beneficiaries should be?

It is difficult to cover the entire population. Even providing one person per household with this income will mean ₹5 lakh crore per annum, which is 3.3% of GDP. What is feasible is a scheme which limits the total expenditure to around 1.5 to 2% of GDP, which is between ₹2 lakh crore and ₹3 lakh crore. A criterion needs to be evolved which can restrict the total cost to this amount. One way of doing it will be to limit it to all women above the age of 45. This is an easily identifiable criterion because Aadhaar cards feature the age of the person. However, this is only one alternative.

 

How to finance the scheme?

Some analysts have suggested that we can remove all exemptions in our tax system which would give us enough money. Apart from the difficulties in removing all exemptions, tax experts advocate removing exemptions so that the basic tax rate can be reduced. It is estimated that out of the ₹2 lakh crore which is needed, ₹1 lakh crore can come from the phasing out of some of the expenditures while the remainder must come from raising additional revenue.

 

Following steps may be considered by the government:

  • Phase out the MGNREGS, which will realise close to ₹40,000 crore.
  • Fertilizer subsidies are another item of expenditure which can be eliminated.
  • Higher income groups can be requested to forego supplemental income. This will reduce the expenditure, as has been done successfully in the case of cooking gas.

 

Several challenges involved in implementing such a radical plan are as follows:

  • One big challenge relates to the phasing out of food-related subsidies. Any plan to replace food related subsidies has to contend with the implications of such a move on food security of the country. Also, whether farmers will continue to produce enough foodgrains in the absence of price incentives remains a big question.
  • UBI is also inevitably linked with government withdrawal from other channels of public service delivery. However, withdrawal of government support from public goods and necessities like health, education is not justifiable as the weaker section have varied needs which cannot be met simply by transferring money.
  • It is also argued that unconditional cash transfers might raise wages due to the decline in the supply of casual labourers. There is also question of whether a shift towards it should be a substitute for all existing subsidies or whether it should complement the existing ones.
  • The other big challenge relates to co-ordination between state and central governments. Any plan to phase out subsidies and tax exemptions (relating to the GST) will require an extraordinary degree of co-operation between the states and the Centre.
  • Also, any pre-specified commitment by the government such as an inflation-indexed UBI worth Rs450 per person could generate fiscal stress during an economic downturn.

 

Way ahead:

UBI alone is not sufficient for the overall upliftment of poor. Two distinct sets of reforms are needed:

  • Broad-based economic reforms that would strengthen entrepreneurship, remove barriers to job creation, and increase the returns to human capital investments by the poor.
  • Specific reforms to allow the poor to gain better education and health.

 

Conclusion:

To conclude, introducing the UBI is unrealistic. In fact, the concept of a basic income must be turned essentially into a supplemental income. Such a scheme will be feasible provided we restrict the beneficiaries to groups which can be easily identified. This restriction essentially comes from fiscal compulsions. Regarding finances, it is not easy to remove all implicit subsidies. The design for financing the scheme has to be viewed in a more pragmatic way. Restricting the fiscal burden to 1.5 to 2% of GDP seems desirable and feasible. Half of this can come from phasing out some of the existing expenditures while the other half can come by raising fresh revenue. Lastly, the proposal here refers only to the income supplement that can be provided by the Central government. Similar efforts can be made by the respective State governments, if they so desire.