Forget UBI’s costs, we waste a lot more in subsidies PDF Print E-mail
Saturday, 02 February 2019 00:00
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While economists worry about whether the costs of a Universal Basic Income (UBI) or a modified version of it will be crippling, what is more important is the large waste that takes place in most subsidies even today; fix the latter, and the UBI will finance itself.


Former chief economic advisor Arvind Subramanian who wrote about a modified UBI in the Economic Survey two years ago estimated the cost of a UBI covering 75% of Indians – and giving each person Rs 7,620 per annum – at 4.2% of GDP. Another piece authored by him a few days ago (https://goo.gl/WtR8rh) reduced this to 1.3% of GDP using more modest assumptions, but covering 75% of the rural population with a per household UBI of Rs 18,000 per annum.


Contrast this with, in 2014-15, explicit subsidies of 2.07% of GDP – the corresponding figures for state governments is around 6.9% of GDP – and various centrally sponsored schemes that cost 3.7% of GDP but don’t go to just the poor. In addition, there is what Subramanian calls ‘middle class subsidies’ that add up to 2.03% of GDP; as these go to the middle class, by definition, they are a waste since, ideally, subsidies should only go to the poor.


In the case of six central schemes like the mid-day meal, NREGA and the village roads programme, the Economic Survey found that districts that accounted for half of the country’s poor accessed just 38% of the resources. These are not just leakages in the sense of fake beneficiaries cornering the benefits; these are design flaws.


In the case of the PDS, the Survey estimated that as much as 72% of the expenditure was a waste since only 28% was accessed by the bottom 40% of the population; the waste was 63% in the case of NREGA.


While the number looks unusually high, a good way to appreciate this is to look at the National Food Security Act that covers the ration shops. Under the NFSA, 66% of all Indians are to get an 80-85% subsidy on their purchase of wheat/rice; considering that just 10-15% of Indians are actually poor using the traditional Tendulkar definition, it is easy to see how large the waste is.


And then there is the waste in administering the scheme. Since the difference in wheat/rice price in the ration shop and open market is around Rs 20-25 per kg, let’s give each person Rs 25 per kg of her entitlement of 5 kg per month under NFSA. For 80 crore persons that are entitled to the subsidy – two thirds of the population – that works out to Rs 120,000 crore as compared to the annual food subsidy bill of around Rs 170,000 crore.


A large part of this cost comes from the fact that the Food Corporation of India (FCI) whose procurement of wheat and rice is use to run the ration shop system is very inefficient. And while the government justifies FCI procurement on the ground that farmers benefit from it, just 5-10% of farmers sell their produce to FCI and other government agencies.


Similar wastage is seen in the case of fertilizer subsides, interest on subsidized farm loans, free electricity and water, etc. According to calculations made by Josh Felman and Subramanian recently (https://goo.gl/ZQmVfW), while the central government pays out around Rs 15,000 crore each year as interest subvention on crop loans, less than 15% of the landless borrow from banks and the number is 30% for small and marginal farmers. Indeed, apply this to the Rs 102,000 crore of farm loan waivers in 2018 and it gets worse since a rich farmers borrows around four times as much as a poor one.


Indeed, if a Telangana-style Rythu Bandhu (RB) was to be implemented in Bihar, Felman/Subramanian found nearly 98% of the asset-poor households would be left out; it found that while their UBI would exclude around 70% of Bihar’s richest quintile (20%), RB would exclude just 30%.


Analysis by Icrier professor Ashok Gulati found that while only XX % of subsidies reached the poor farmers and it was obvious that government money was better spent on investment such as in creating roads and irrigation, expenditure on subsidies is 3-4 times higher than that on investment.


And Surjit Bhalla, a long-time proponent of giving cash to the poor to remove poverty which the Congress party is now talking about, has recently estimated that India needs to spend just 0.5% of GDP (https://goo.gl/vYcVYC) to eliminate poverty every year – if the poverty line is X and a person earns Y, he should be given X-Y. In contrast, in FY18, India spent over ten times this amount in various subsidies, and around half of this was ‘bad’ subsidies like those on food, fertilizer and NREGA where, because of bad design primarily – once Aadhar is used for identification, fake beneficiaries will reduce – there are large leakages.


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