However, even restricting attention to anti-poverty schemes, one could worry whether replacing some existing programmes that are working relatively well with an UBI may be risky. Even here, capping total benefits to some maximum amount would give beneficiaries the choice of holding on to benefits from programmes that work well, and giving up those that don’t. Consider a relatively remote rural area where cash is less useful than in urban areas as markets are not well developed. It is possible that the poor in some of these areas may prefer to continue with some existing in-kind transfer programme to the extent they work well (e.g., food from ration shops).
Of course, the main issue concerning adopting a UBI scheme is affordability. Any universal programme is expensive. My calculations suggest that if every adult was given exactly the amount of income that defines the poverty level, which is on average Rs 40 per day (Rs 32 in rural areas and Rs 47 in urban areas), every person would be assured of an income of around Rs 14,000 per year or Rs 1,200 per month. 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. One can, of course, offer a lower amount per person that would be more affordable but there is clearly a trade-off between such a scheme being effective and affordable.
For such a programme not to add to the fiscal burden and create inflationary pressure, it must be funded either by spending cuts or by increased taxes.
Given that only 1 per cent of Indians pay income tax, while a mere 2.3 per cent file tax returns, the fiscal instruments to claw back the transfer from the rich are limited. However, the increased push for digitisation by the present government will reduce the space for informal transactions raise the possibility using instruments other than income tax (e.g., tax on bank transactions), it also make it feasible to make electronic transfers to the poor.
The scope for spending cuts certainly exists. The budgetary subsidies in 1987-88 amounted to 12.9% of GDP (based on the 2004-05 GDP series. In 2011-12 it amounted to 10.6% of GDP (also based on the 2004-05 series). Some recent estimates suggest that non-merit subsidies are about a third of this, making up about 3.5% of GDP. This is a far cry from the 11% figure.
However, it is a conservative estimate as administrative services are not included in it, nor are other subsidy like components such as direct transfers, concessional interest rates, concessional prices of land or other assets and tax concessions or exemptions.
So long as the UBI is not posed as the only instrument of poverty alleviation, there is no reason not to try it out at least on a scale that is affordable. No policy is without costs and those who only highlight problems with the UBI should recognize that whatever is their own favourite policy also has some advantages and disadvantages.
The focus should be on the relative costs and benefits of different policies and which one works better where and for whom. As we already noted, one size does not fit all, and we should be open to the possibility that different policies could work well in different settings. So long as we cap the overall benefits, there is no reason not to adopt such a flexible approach.
Finally, we should be clear-eyed about recognizing that UBI is only a temporary relief measure for the poor, and does not provide a long-term solution to the problem of poverty. For that one needs investment in health, education, and skill formation to enable the poor to take advantage of growth opportunities, and investing in infrastructure and regulatory conditions to facilitate private investment for employment generation. Growth is the best long-term anti-poverty programme.
The article is written by Prof. Maitreesh Ghatak, Professor of Economics, London School of Economics for FICCI’s Economy Watch.