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The price of basic income

Providing basic income guarantee to all citizens makes a lot of sense intuitively. But the implementation cost in any country, including India, would be prohibitive.

Written by Maitreesh Ghatak |
Updated: July 1, 2016 11:37:24 pm
basic income in India, Basic Income Guarantee, Jan Dhan Yojana, Aadhaar cards, cash transfer, India GDP, Brexit, Brexit referendum, Switzerland basic income, guarantee employment, guarantee employment programme, MGNREGA, india news A universal cash transfer scheme is not feasible without raising additional taxes.

While the world ponders the fallout of Brexit, another referendum took place in Europe this month, which was no less significant. In Switzerland, a proposal for adults to be paid an unconditional monthly income, whether they worked or not, was up for a vote. It was defeated by a big margin – 77 opposed the plan, with only 23 per cent backing it. If successful it would have led to a radically new model of the welfare state, where all forms of transfers from the state to the poorer sections — housing, food, child support, and unemployment benefits — would have been replaced by a single cash transfer.

The Swiss setback aside, the idea of a Basic Income Guarantee (BIG) has gained traction in the debate on reforming the welfare state in major market economies on both sides of the Atlantic. Soon it is going to be tried out on an experimental basis in Finland, the Netherlands, and the Canadian province of Ontario, and rolled out nationally if the experiments prove effective. The Finnish experiment even has the support of the right-of-centre ruling government.

The idea also resonates with a recent policy shift in India towards direct cash transfers, under the acronym JAM (Jan Dhan Yojana, Aadhaar cards, Mobile money platforms), which involves rolling all subsidies into a single lump-sum cash transfer to households.

The core idea is simple: Instead of having many different forms of welfare programmes targeted at the poor, and administered through government bureaucracy, just make a simple unconditional regular cash transfer to every adult.

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There are three features of a universal cash transfer that are worth noting. First, it is universal and not targeted at the poor alone, thereby removing the numerous problems associated with means-testing. Second, it is a cash transfer, so that there is no need to provide in-kind transfers (for example food stamps) or subsidies for certain goods and services (for example housing support), both of which come with standard inefficiencies associated with interfering with market forces. Third, it is unconditional, so that it is not contingent on the recipients conforming to stipulated norms of behaviour, such as looking for jobs or having children enrolled in schools, and the problems of monitoring that this entails.

Individuals retain any additional income earned over the basic income, subject to paying a fraction in taxes. So only those with zero income will receive the full basic income in net terms. For others, the net benefits will taper off and so even though the basic income is universal, the benefits of the non-poor are clawed back through taxation and only the poor are net recipients of support. Moreover, it has work incentives built in since the net incomes of individuals will increase with extra earnings.

It is one of the few policies where there is support from both the left and the right end of the political spectrum. The right likes it as it is non-paternalistic, leaving the decision to the recipient as to how to spend the money. It also trims down the need to have a large bureaucracy, and it is less prone to corruption and exclusion and inclusion errors. The left likes it since it is a smart redistribution policy where the redistributed income directly reaches the poorer section, avoiding the leaky bucket problem.

It also empowers workers in the labour market by separating their subsistence needs from finding jobs that are a good match for them. Given such broad support, the natural question to ask is why is it not being adopted extensively? The main reason is that a universal cash transfer scheme is expensive.

If we take the case of India, given the current poverty lines of Rs 32 a day in rural areas and Rs 47 a day in urban areas, a basic income of Rs 13,432 per adult person per year would be needed just to ensure that everyone’s income is at least above the poverty line.  Assuming we give this sum to every adult (0.69 of the population), this would require a total expenditure of Rs 11,600 billion, which is 11 per cent of the GDP. To get a comparative sense, the total budgetary cost of the much-maligned employment guarantee programme, MGNREGA is Rs 340 bn, which is only 0.3 per cent of the GDP.

It is true, as the Economic Survey of India notes, that fiscal resources could be released if we get rid of some subsidies. If we just take a few major items that the government subsidises, the direct fiscal cost of this subset of subsidies is about Rs 3,780 bn. It is still only about 4 per cent of the GDP, well short of the 11 per cent needed for a universal transfer.

A universal cash transfer scheme is therefore not feasible without raising additional taxes. Not just that, given that only 1 per cent of Indians actually pay income tax, while a mere 2.3 per cent file tax returns, the fiscal instruments to claw back the transfer from the rich do not exist. If we were to scale down our ambitions and opt for a cash transfer scheme to only the poor, taking the poor to be roughly 30 per cent of the population, the savings out of cutting subsidies mentioned above should be able to fund it.

But then we are back to the problem of targeting. The BPL (Below Poverty Line) list excludes many poor people, while many of the non-poor bribe their way in. The Aadhaar card cannot solve this problem as it does not say whether a person is rich or poor. To assume somehow that in-kind transfers and subsidies are ridden with corruption, while a cash transfer system using mobile banking to a largely poor and uneducated population will be corruption-free involves a leap of faith.

The other major problem of basic income guarantee is that it may adversely affect work incentives. Any welfare programme will affect work incentives to some degree, and given the unconditional nature of cash transfers, one would expect distortions to be minimum. Still, the fact that a section of the population is earning an income without having to work is likely to create resentment. Interestingly, when targeting the poor is also a concern, having a work requirement also creates a self-selection advantage for workfare programmes (you receive welfare only if you work), since only the neediest are willing to do hard manual work. Given this, the much-maligned MGNREGA appears to look a lot more appealing, especially given the fact how a cash transfer system will identify the poor is glossed over. On the other hand, as we saw, if cash transfers are to be universal, the budgetary costs will be quite high.

Therefore, rather than looking for magic bullets like a universal basic income guarantee, we need to have a menu of options on the table, and these include both JAM and MGNREGA. The government’s enthusiasm for JAM is understandable, but the lack of it for MGNREGA is not.

(Corrections have been made to the copy on July 7, 2016. An earlier version with old data was published on June 29)

The writer is professor of economics at the London School of Economics

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