Economists and policymakers all over the world are discussing the idea of Universal Basic Income (UBI). UBI is informationally the least demanding of all the policies one can think of to attack the problems of poverty, inequality and joblessness. The reason is that it does not require knowing who is poor or how much one is earning. It also has no adverse incentive effects, as, even after receiving the government’s uniform transfer, one is able to additionally earn as much income as possible through one’s labour. The big problem is its financial feasibility. At the moment, I believe UBI is fiscally unfeasible for India. For example, giving every family of five a basic income of Rs 6,000 a month (and scaling appropriately for family size) would cost 70-80 per cent of the current tax revenues.
A couple of months ago, the Congress party floated the idea of a Minimum Income Guarantee (MIG). The idea was that everyone would be guaranteed a certain minimum income level. Let’s say that the minimum income level to be guaranteed is Rs 12,000 for a family of five (Rs 2,400 per person) per month. Guaranteeing that income means that, for any family whose income is below that threshold, the difference will be covered by a cash transfer from the government. The informational demands on the government to implement such a scheme are huge. Not only does the government have to know which households are below the threshold, it will also have to accurately find out how much below that threshold each household falls. This is impossible to ascertain. One can anticipate serious levels of misreporting as most people who want to be and can be eligible for this scheme are most likely to be working in the informal sector. Moving away from the issue of misreporting to incentive problems, it is easy to see that any family that could have earned a total of Rs 12,000 through employment would rather withdraw from work altogether and receive the entire sum of Rs 12,000 as a government transfer. If that transfer is capped at, say, Rs 6,000, the family would just halve its work effort and earn Rs 6,000 and get the remaining Rs 6,000 as government transfer they are eligible for.
When this idea of MIG was first floated, some commentators pointed out many of the shortcomings mentioned above. The most recent iteration of MIG, named Nyuntam Aay Yojana (NYAY), addresses, to a certain extent, many of those criticisms. NYAY, as recently clarified by Congress spokesperson Randeep Surjewala, will be a lump sum, flat transfer of Rs 6,000 per month to any five-member family lying in the bottom 20 per cent of India’s income distribution.
This scheme is certainly informationally less demanding as the government only needs to know whether the family earns below the 20th percentile income threshold. It does not need to know how much below the threshold this family’s income lies. For any family below that income threshold, there are no incentive problems. The incentive problems will arise for families lying between the threshold income and Rs 6,000 above that threshold (or even higher, if the work effort is viewed as costly). These families could claim the lump sum of Rs 6,000 by reducing their work effort to earn just below the threshold income and get the extra Rs 6,000. Misreporting, however, can theoretically be at any level of income above the threshold. However, this sum of Rs 6,000 per family of five or Rs 1,200 (less than US$20) per person per month is not a large enough amount for monetarily secure individuals to commit fraud, for which, one hopes, there will be an enforceable penalty written into the scheme. So, my guess is that misreporting will take place at fairly low family incomes, though above the NYAY threshold. Another way of looking at it is that the effective threshold will end up being higher than the official one.
Let me now analyse NYAY’s financial feasibility. Quick calculations suggest that, with the currently estimated beneficiaries being about 50 million families, NYAY will cost about 14 per cent of current annual tax revenues or slightly over 2 per cent of GDP. According to economist Maitreesh Ghatak, for comparison, the Mahatma Gandhi National Employment Guarantee Scheme (MGNREGA) today is only 2.2 per cent of tax revenues, while all subsidies combined are currently about 12 per cent of revenues. And subsidies that mainly benefit the middle class are about 4 per cent of the revenue or so. While cutting such subsidies will help, it won’t even come close to financing NYAY. Also, there would be severe political constraints in removing middle-class subsidies. In other words, more revenues will have to be raised, say, through a tax rate increase on the super-rich. Additionally, with India’s current rate of growth, tax revenues double every seven to eight years. Taking this growth into account, the full implementation of NYAY can be feasible after some time if other subsidies do not grow with tax revenues, or, at least, grow very slowly. At the start of the scheme, the implementation will have to be partial.
There is also a concern by those conversant with the National Sample Survey data that the estimate of the bottom 50 million families or 250 million people to target in order to achieve a minimum family income of Rs 12,000 might be wrong. The actual number of families currently below the monthly income of Rs 12,000 could be close to 80 million. In that case, achieving a minimum income of Rs 12,000 is going to be even costlier. Therefore, the scheme should start with a lower target minimum income, for example, Rs 9,000, and a transfer of Rs 4,000, to make it viable.
At this point, the policy, that has been presented, is bare bones. The details have to be worked out by taking a very hard look at the numbers. For those who might totally dismiss such a scheme, by saying that it amounts to socialism, let me remind them that many believers in the power of markets, including myself, have throughout been in support of cash transfers as the least distortionary method of redistribution and fighting poverty. Among the advanced countries, the welfare state, relative to the size of the economy, is perhaps the smallest in the United States. Yet a family of five in the US below their generous poverty line of $2,500 per month receives food stamps on average worth over $500 every month, in addition to subsidised housing as well as heating in the winter.
The writer is professor of economics and Cramer professor of global affairs at the Maxwell School of Citizenship and Public Affairs, Syracuse University, NY, USA