Let's be done with subsidies already

There is a simple way to go about it: a universal basic income

Over and above the provision of different public goods like roads, or a police force, or the judicial system, the government uses the tax revenues it collects to provide essential commodities like foodgrains, fertilisers and Kerosene at subsidised prices. It does this by fixing market prices of these commodities at an affordable level and paying the producers of these commodities the difference which they couldn’t recover because of fixed lower prices. This redistribution mechanism of the government is aimed towards reducing income inequality, and increasing access, equity and growth, especially for those at the bottom of the pyramid. However, here in lies the problem. 

Free-markets, which essentially exist when the prices of commodities are left to fluctuate based on their demand and supply dynamics, are inherently better and more efficient. In such a market, low price of any commodity would signal the producers to produce less of it, whereas a high price would signal them to produce more. It is thus easy to see that when the government fixes prices of certain commodities, in the absence of price movements and signals, the producers won’t know how much produce is optimum. 

Moreover, in India’s context, the current method of providing the abovementioned essential commodities has additional problems. The government not only bears the burden of providing foodgrains at discounted prices, but also gets involved in various supply chain operations like packaging, transportation and distribution. As is the case, in the absence of an efficient monitoring process in place, the entire Public Distribution System (PDS) machinery becomes marred with corruption. 

The government’s way of providing these essential items through its Public Distribution System (PDS) is much like grabbing your ear but the other way around. Is there a way to make the entire process more efficient? Yes, and a much simpler one at that. 

Many countries around the world are talking about introducing an unconditional basic income; every citizen will be entitled to receive a fixed amount of income from the government irrespective of his employment status. The Swiss, for example, are going to hold a referendum in 2016 on this; if passed, every Swiss citizen will be entitled to 2,500 Swiss Francs per month.

In India’s case, if such an idea were to be implemented, the most important question would be - where will the money come from? If the government was to give every household of 5 members a sum of, say, Rs. 5,000 per year, given India’s population of 1.25 billion, it would incur a total expenditure of Rs. 1,250 billion. This is roughly equal to half of India’s expenditure on fertilizers, foodgrains and energy subsidies. 

The total expenditure incurred by the government when one includes other programmes like MGNREGA far exceeds our calculated amount. Just to drive the point home, if this total expenditure, which comes to Rs. 3,040 billion, were to be transferred as basic income instead of the myriad programmes of the government, it would amount to every individual receiving Rs. 200 per month per year. You’d perhaps be inclined to think that Rs. 200 per month is pointless. But as per the NSS figures of 2011-12 on the consumption patterns in India, a basic income of Rs. 200 will cover half of the monthly expenditure of an individual at the bottom of the pyramid; given the variability in their sources of income, a cushion of this kind could really help the extremely poor. 

The next logical question: won’t providing a basic income decrease the incentive of people to work? A study was conducted by UNICEF in 2013 in rural Madhya Pradesh to study the effects of providing basic income. The most important finding was that provision of basic income increased economic activity and work. There was a significant increase in secondary economic activities, as well as a shift from casual wage labour to own-account farming and small-scale business. Basic income also had emancipatory effects: it resulted in some families buying themselves out of debt bondage, others paying down exorbitant debts; overall, it provided liquidity with which to respond to shocks and hazards. 

The above mentioned study is specifically relevant to India; however, there is plenty of research on various positive effects of providing a basic income. Some proponents even claim that basic income is inevitable; in the future, technology will have eaten up most of the labour requirement, leaving many people unemployed in the conventional sense of the term. A universal basic income, then, is a solution to the issue of technological unemployment discussed in a previous article on this blog. 

It can be conceded that there is a difference between back-of-the-book calculations and pilot studies, and implementing such a transformational programme throughout the country. This is especially true given our failure to implement the Aadhar based digitalisation of the economy. But the fact remains that an idea like Aadhar, which is akin to the social security number in the US, is central to bring any reforms which involve direct targeting of beneficiaries. If successfully implemented, basic income could drastically reduce government intervention in markets. It would also increase the efficiency of government spending: every penny disbursed will have a higher chance of reaching the beneficiary instead of getting lost in the corrupted machinery in between. 

And to top it all, perhaps the best part of a universal basic income is its propensity for political popularity. Which contesting political leader wouldn’t like to promise such a brilliant freebie to his prospective voters? 

Saahil Parekh is an economist writing about the changing face of India’s economy on his blog, Arthashastra, a part of Business Standard’s platform Punditry. He works in areas of sustainability and climate change at The Energy & Resources Institute in New Delhi. 

He tweets as @saahilparekh.

Email: saahil.parekh@gmail.com