No free lunch

Universal basic income must be planned well

Policy circles in New Delhi are abuzz with the possibility of the government implementing a universal basic income (UBI) in India in the near future. Some reports suggest that initially it could be introduced as a pilot scheme and this could be announced as early as in the forthcoming Union Budget. Another speculation is that instead of a “universal” model, the government could opt for a targeted version wherein it could use some metric to choose the most deserving people in the country. The UBI idea — in which the government provides a basic income to all citizens regardless of whether they work or not, or how much they earn — is a century old, but initially it was largely ignored by most. Yet, it was one of those remarkable ideas which drew support from people belonging to diverse ideological quarters.

The current surge in its favour the world over is deeply linked to the failures of the modern welfare state as well as the global economy’s inability to create enough well-paying jobs. Several governments have come up short when it comes to providing efficient and effective social security to citizens who need it most. With the advent of modern technology, a UBI holds the promise for politicians to circumvent the messy business of running complex welfare schemes such as price subsidies, which are known to distort the market, and product subsidies, which too often end up with the undeserving people. A UBI, in contrast, is a simple yet efficient way for the state to ensure those who need some support receive it at all times. Many right-wing economists support it because a UBI reduces the ever-growing dependence on government bureaucracies. Many left-wingers view it as a way to cut out the exploitation and corruption that has become endemic in government-run schemes. So, on the face of it, implementing a UBI is a great idea and especially for India, which is infamous for its leaky and ineffective subsidy regime as well as widespread poverty and unemployment. 

But there are several pitfalls in implementing a UBI. For one, a UBI is not supposed to be in addition to existing subsidies, rather in place of them. As such, a concurrent requirement would be for the government of India to roll back all varieties of welfare schemes – subsidies on fuel, food, fertilisers, electricity, water, and railway tickets, to name a few – that it runs at present. Removing all subsidies overnight is unlikely to be politically feasible, even if such a move comes with a UBI. Then, there is the question of cost, which explains why even a financially well-off country such as Switzerland, with a GDP per capita of over $75,500 (as against India’s $1,800) overwhelmingly rejected a proposal to have a monthly UBI of 2,500 Swiss francs (annually amounting to over $30,000) for each adult last year. In India’s case, existing subsidies account for about 4.2 per cent of the gross domestic product, while a UBI, based on existing definition of the poverty line, as calculated by Maitreesh Ghatak, could cost upwards of 10 per cent of the GDP. Meeting such an allocation would require a massive increase in tax rates and revenues. If the government chooses a “targeted” approach to contain costs, it would be back to square one with all that ails targeting in existing schemes. Given the realities of India’s political economy, it is more likely that any such direct income transfer scheme will only add to the overall subsidy burden instead of reducing it.