Universal basic income: Definitely seductive, but is it fiscally feasible?

Under this welfare mechanism, all existing subsidies would give way to a single unconditional cash transfer to all citizens; but there are some nagging issues about its implementation

Following the drubbing in the recently concluded state assembly elections, there is intense speculation over what the Narendra Modi-led government might announce in order to sway the electorate in the upcoming general elections. 

Several possibilities, such as a farm loan waiver or an income transfer along the lines of Telangana’s Rythu Bandhu, are being talked about. Another possibility is that the government may announce a universal or quasi-universal basic income transfer.

Former chief economic advisor Arvind Subramanian, who had earlier elaborated on the concept in the economic survey, is reported to have said that universal basic income (UBI) is likely to find space in the election manifestos of various parties next year. 

Theoretically, UBI is a seductive proposition, especially in a country with a leaky welfare system. Under this welfare architecture, all existing subsidies would be replaced by a single unconditional cash transfer that would be given to all individuals. Given its universal approach, such a mechanism could end the well-known problems of both exclusion and inclusion that have plagued the Indian welfare system.

Three pressing questions

However, shifting to such an architecture requires answering three principle questions. First, what section of the population should be ideally covered by the scheme. Second, what is the appropriate amount to be transferred and third does the government have the necessary fiscal space to make such a transition. 

In the Indian context, there have been three proposals on UBI by economists Vijay Joshi, Pronab Bardhan and Arvind Subramanian. 

In his book, India's Long Road - The Search For Prosperity, Joshi, who is at Oxford University, had proposed a cash transfer of Rs 3,500 per person. This translates to Rs 17,500 per household (at 2014-15 prices). Joshi had proposed extending this cash transfer to everyone at a cost of 3.5 per cent of GDP. 

This estimate is on the lower side. Berkley-based economist Bardhan had recommended a UBI of Rs 10,000 (roughly three-quarters of the poverty line that year) at 2014-15 prices. Transferring this to the entire population works to around 10 per cent of GDP. This, Bardhan argued, could be funded by replacing regressive government subsidies (which account for nine per cent of GDP) and getting part of the revenue foregone by the central government (which accounts for six per cent of GDP).  

The third proposal by former chief economic advisor Arvind Subramanian lies in the middle of these two estimates. In the economic survey, Subramanian had proposed a UBI of Rs 7,620 in 2016-17. This, he estimated, was the amount needed to lift the poor above the Tendulkar Committee poverty line of Rs 833 per person per month. Subramanian had proposed extending this to 75 per cent of the population, which would cost the exchequer roughly 4.9 per cent of GDP.  

While each of these proposals is based on certain assumptions that can be debated to arrive at a consensus on the amount and the population to be targeted, the fundamental question is whether the central government has the necessary fiscal space? Can it cut down existing subsidies to provide for a UBI?

Now, government subsidies can be typically divided into merit and non-merit subsidies. The former are those on account of food, education, health, water supply and sanitation, while the latter includes subsidies on account of fertiliser, petroleum, power etc.  

Over the past decades, merit subsidies have risen while non-merit ones have fallen from 9.2 per cent of GDP in 1987-88 to five per cent in 2011-12, according to economists Sudipto Mundle and Satadru Sikdar at the National Institute of Public Finance and Policy (NIPFP). One could argue that by eliminating all non-merit subsidies (five per cent of GDP), the government could provide a cash transfer in line with that estimated by Subramanian (4.9 per cent of GDP). 

But the sticking point is that while non-merit subsidies are around five per cent of GDP, 3.7 per cent is on account of states, while only 1.3 per cent is the centre. This implies that for the centre to propose a UBI it will need a buy-in from states.