By Vijay Joshi

India spends far too much on dysfunctional price subsidies in the name of helping the poor. Some of the subsidies — on food, fertilisers, oil-related products, etc — are explicitly in the Budget. Others — on electricity, water and rail travel — are implicit, and take the form of losses or low profits by the government.

Subsidies are counterproductive. They raise fiscal deficits and crowd out essential public spending, damage resource allocation by cutting the link between prices and costs. They discourage investment in supply capacity for producing the subsidised items, and encourage their overconsumption. But they do not achieve their goal of poverty alleviation as they are badly targeted. Most of the benefit goes to the well-off. They are also accompanied by leakages and large-scale corruption.

Winding up these subsidies will be highly beneficial — provided the real incomes of the poor are protected. This could be done with a fraction of the fiscal savings that would ensue. National Institute of Public Finance and Policy studies have shown that the fiscal savings from eliminating ‘non-merit’ subsidies would be around 8 per cent of GDP.

But apart from cutting subsidies, there are many revenue-raising possibilities that have no economic downsides: pruning unnecessary tax exemptions, taxing agricultural incomes above a threshold level, and pursuing a more vigorous privatisation programme for several years. The total fiscal potential of all these measures together is at least 10 per cent of GDP annually.

Of this, central and state governments could use, say, 2.5 per cent of GDP for reducing the consolidated fiscal deficit and, say, 4 per cent of GDP for raising public investment and social expenditures. These measures would have a strong, positive effect on inclusive growth, over and above the boost to growth accruing from the closer alignment of prices and costs. This would still leave a residue of 3.5 per cent of GDP for other purposes, such as a universal basic income (UBI).

Family Floater Plan

The primary purpose of UBI would be to provide a safety net preventing any citizen from sinking below a basic minimum standard of living, irrespective of his or her earning capacity. This minimum should be set at a relatively austere level, say, the Tendulkar Poverty Line (TPL). At present, the average income of the population below the poverty line is about 80 per cent of TPL. So, an income supplement equal to 20 per cent of TPL, adjusted upwards suitably to compensate poor people for the subsidy elimination that would finance the programme, would go a long way towards abolishing extreme poverty.

The requisite cash grant would amount to Rs 3,500 per head per year (Rs 17,500 per family per year) at 2014/15 prices. If the ‘Tendulkar poor’ could be perfectly targeted, the fiscal cost of bringing them up to the poverty line would be less than 1 per cent of GDP. In practice, this basic income would have to be given to half the population, or more, to reach all poor people. But there are several good reasons to make the transfer a universal basic income paid to every citizen. As I show in India’s Long Road: The Search to Prosperity, such a UBI would cost 3.5 per cent of GDP, which would be affordable, given ‘deep fiscal adjustment’.

Why should basic income be made universal? First, there is a huge bunching of people around the poverty line, with several hundred million people who are very poor though not in extreme poverty. Second, ‘deep fiscal adjustment’, including abolition of ‘non-merit’ subsidies, is essential to create fiscal savings for many desirable purposes. But this will imply some short-run real income losses for a large majority of the population.

UBI would cushion them wholly or partially against this damage, thereby also averting their opposition to the scheme as a whole. Third, only a small proportion of the population are so well off as to make the above considerations irrelevant. It is not worth the administrative trouble and expense to identify them and exclude them from the coverage of ‘basic income’. Some of their basic incomes would, in any case, come back to the state in the form of income tax.

In a recent column (‘Don’t Hand Out Handouts’, August 31, goo.gl/kaNfxk), Swaminathan S Anklesaria Aiyar attacked the idea of UBI for India. There is a fear that unconditional UBI would reduce the incentive to work and create dependence on doles. But this is extremely unlikely given the modest level at which the basic income would be pitched. A related argument is that UBI would lower the female labour force participation rate. But progress here depends mainly on female education. And would it be right to forego an opportunity to abolish extreme poverty to push more women into work?

Add-On Benefit

Another argument is that its pursuit would divert state spending from infrastructure, education and healthcare. But UBI is meant to complement desirable social spending, not replace it. As extra resources become available via ‘deep fiscal adjustment’, they could be divided between fiscal adjustment, extra public investment and social expenditures, and UBI.

The final argument against UBI is that India’s political economy makes it infeasible. Powerful lobbies would prevent dysfunctional subsidies being wound up, thereby adding to existing subsidies. This is a defeatist position. UBI is worth fighting for even against long odds.



(The writer is Emeritus Fellow, Merton College, Oxford)

