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Tuesday, 27 September 2016 00:51
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Universal Basic Income is a bad idea, tweak it

 

When even the very rich Swiss have rejected the idea of a Universal Basic Income (UBI), it is unclear why the idea is gaining ground amongst Indian academics and policy wonks. Apart from the issue of whether UBI will distort incentives to work – it won’t if the amount is small – it costs too much and, more important, when India is putting together an Aadhaar-based direct-benefits-transfer scheme which can target the poor, why look at a scheme which wants to give even the rich Rs 10,000-12,000 per year by way of UBI? This will certainly pull the poor out of poverty – they required a little over Rs 10,000 per year to be pulled out of poverty based on the Tendulkar poverty line in 2011-12, but since they had a certain income/consumption, they required just around a seventh of that amount to become non-poor according to economist Surjit Bhalla. So while a Rs 12,000 UBI will ensure the poor a decent standard of living, there is the question of whether they are better served by using that money to build better rural roads, provide electricity to villages, build irrigation canals and provide better education and health services for them.

 

A UBI of Rs 12,000, just to do the maths, works out to around 9-10% of India’s GDP. While that is often juxtaposed with the 9-10% of GDP that the central government spends on non-merit subsidies – like on LPG that is mostly consumed by the middle classes – in order to argue UBI doesn’t imply any additional expenditure by the government, since removing subsidies is not going to be easy, a UBI will in all probability be an add-on over this subsidy expenditure. In which case, UBI is even worse than Sonia Gandhi’s Food Security Act that sought to give 5 kg of heavily subsidized wheat/rice to two thirds of the country – since the subsidy was roughly Rs 15-20 per kg, that worked out to Rs 75-100 per person per month; UBI is several times larger and aims to cover the entire population.

 

Cash transfers, which is what UBI boils down to, it is true, can fix many of India’s distorted policies. Giving food subsidies by way of cash transfers can ensure, for example, that the inefficient FCI operations are shut down; similarly, giving farmers cash can help trim inefficient fertilizer subsidies that are used only by rich farmers. Now that Aadhaar has been rolled out for a very significant share of the population and there has been progress in linking bank accounts of the poor with Aadhaar numbers, the government should focus on trying to move from physical rations/fertilizers and move towards cash transfers – even for education, giving cash/vouchers to parents tilts the balance in their favour and allows them to demand better services from government schools. The money saved in this manner can be transferred to people but, instead of doing it through a UBI, it can be directed at only the poor or for facilities that primarily benefit them.

 

 

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