Explained: Can Rahul Gandhi’s basic income scheme be a game changer?
Congress has announced Rs 72,000 a year for poorest 20 per cent. What are the arguments for and against such schemes, and what will it take to implement it? A look at the economics, precedents and challenges ahead.
Congress President Rahul Gandhi in Purnia, Saturday, March 23, 2019. (PTI File Photo)
On Monday, the Congress announced a minimum basic income guarantee scheme, which envisages providing Rs 72,000 annually to the 20% most poor of the country’s families. That would mean five crore families and 25 crore people will benefit directly, the Congress said.
This one-of-its-kind scheme in the world, announced by party president Rahul Gandhi as a key step towards the eradication of poverty, could come under attack for the fiscal costs involved for ensuring its rollout. But can it be a game-changer? The idea recalls a key precedent in welfare politics.
Midday meal
In 1982, the Budget of the M.G. Ramachandran government in Tamil Nadu announced a midday meal programme for all children, named the Chief Minister’s Nutritional Meal Programme. Bureaucrats initially dug their heels in when it came to taking its implementation forward. At a meeting in the state secretariat in Madras, now Chennai, MGR sensed the resistance of bureaucrats. He asked them whether any of them knew what it felt to go without meals, and told them he had experienced it personally in his family, and was determined to introduce a scheme which would ensure that children would not go hungry. The message was that the programme would have to be implemented, irrespective of the costs involved. The scheme was also much criticised by the central government then. Years later, the Centre, the World Bank, economists and governments have showcased the midday meal scheme as a classic study of successful welfare politics.
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UBI & minimum income
A minimum guaranteed income scheme is one where a set of the population — in this case the poorest 20% — get an assured amount in their bank accounts, which could help them meet their basic needs. Such schemes can be unconditional, meaning that the beneficiary is free to spend the cash without any strings attached, but that is not yet clear in the one announced by the Congress.
The income support scheme is being spoken of in the same breath as a universal basic income (UBI) scheme, an idea that is gaining popularity in many parts of the world. At best, the kind of income support schemes proposed, such as the one by the Congress in India Wednesday, is a quasi-UBI. That is because a UBI by its very definition reaches out to all citizens of a country or territory, irrespective of income levels.
What the proposal envisages is a minimum monthly income of Rs 6,000 for poor households, with the scheme being capped for those with an monthly income of Rs 12,000. Schemes like these hold the potential of boosting farm gate prices and also consumption.
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How it helps
Primarily, it address the issue of income inequality or poverty. According to those who make a strong case for such schemes, these are the best form of social justice for those left behind in an economy, as they offer a safety net to the poor against shocks such as income fluctuations, lack of employment and health issues.
Additionally, the scheme comes with the promise of easing the burden on the government, which implements multiple social welfare schemes that have not quite helped in reducing poverty. What that means is that if the government were to eliminate some of the current subsidised schemes (for food, fertiliser and fuel) and allow the beneficiaries to exercise their own choices on how to spend the minimum guaranteed income, then it would be able to focus on providing other public goods and better delivery. Other benefits being cited are greater financial inclusion, with more among the poor accessing banking services, which can lead to greater penetration of financial services.
The downside
The primary resistance to such schemes is about the costs involved. Some economists, such as Vijay Joshi, a distinguished professor of Oxford University who has worked with both the government and the RBI, especially during the early part of liberalisation in 1991-92, believe that a UBI will work in India. Other fiscal experts fear that this is feasible only when other subsidies are eliminated. Politically, that is not easy as India’s experience in cutting subsidies for fertiliser or fuel has shown.
There is also the challenge of identifying the beneficiaries, targeting, leakages or misallocation. The Tendulkar Committee identified 269 million as below the poverty line, or 21.9% of the population in 2011. The committee headed by C Rangarajan estimated this at 363 million. There has been debate as to how much of a decline there has been in these numbers since then. There is concern about whether the government has the capacity to implement these programmes. Economists also cite the issue of “moral hazard” — assured income leading to reduced incentives to work, or failure to build or create durable assets. Such criticism had been directed at MNREGA, introduced by the previous government.
Fiscal costs
In his book India’s Long Road — The Search for Prosperity, Vijay Doshi estimated the cost of providing a basic income for 2014-15. To raise the average income of the poor to the poverty line, the uniform transfer of funds required would be Rs 17,505 for each household annually. This meant that the cost of underwriting that for 21.9% of the population would be 0.76% of GDP; for 100% of the population, 3it would .49 % of GDP.
Former Chief Economic Adviser Arvind Subramanian, who fuelled a debate on UBI in the 2016-17 Economic Survey, reckoned that a quasi-UBI for 75% would work out to 4.9 % of GDP.
Assuming full coverage, the tab for the government could be Rs 3.6 lakh crore. That can impact the fisc, especially in a slowing economy and when revenues aren’t buoyant, and lead to macro-instability.
Experiments elsewhere
Other countries are experimenting with such schemes. Finland, one of the world’s richest countries, kicked off a trial programme targeting 2000 of its unemployed. Scotland has started a basic income pilot scheme spread over the next two years, in a few areas, to look at different options. So have the Netherlands, Spain and Kenya.
Challenges ahead
In many ways, these guaranteed income schemes are an implicit recognition that generating jobs is becoming progressively difficult. India too is finding it difficult, given its resource constraints and with private investments yet to revive. Such schemes can be financed either by fresh taxes, which is virtually impossible, or by raising resources — by monetising assets such as land, selling state—owned firms, eliminating major subsidies, or withdrawing tax giveaways.
One argument, made by the Pune International Centre in a policy paper for the upcoming polls, is that rather than spend money on a UBI, the state should focus on supplying public goods and using resources better for ensuring delivery of quality primary education, health and law & order.
Where a proposal such as a guaranteed minimum income scheme could score, however, is on grounds of equalisation. Empirical evidence gathered by the 14th Finance Commission showed that in terms of share of Plan outlay, government investments and exemptions, it was the country’s richer states that gained. That imbalance may be addressed this time.
The big issue, however, is the potential for another imbalance — on the macroeconomic front; in other words, the cost of underwriting or implementing the scheme efficiently on a pan-India basis over a five-year horizon. That will count politically. Or it could run the risk of backfiring. Identifying the beneficiaries with an income of below Rs 12,000, and the benchmark for that in terms of assets or income streams or metrics, could be a stiff test. On these challenges will depend whether the scheme can be a game-changer like MGR’s midday meal scheme.
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