Today's Editorial

22 May 2018

Time for a trial run

Source: By Bhaskar Dutta: The Telegraph

The system of universal basic income, a scheme designed to give unconditional cash transfers to all citizens, is back in the limelight. Given the track record of Scandinavian countries in so far as social welfare schemes are concerned, it was not surprising that tiny Finland became one of the first countries to implement a form of universal basic income. (Somewhat surprisingly, a form of UBI was first implemented in the state of Alaska in the United States of America — a country not known for its sympathy towards the poor.) Actually, the Finnish plan fell quite a bit short of a universal scheme since there were only 2,000 beneficiaries selected from the list of the unemployed.

However, the scheme has suddenly hit the headlines because funding for its continuation beyond 2018 has been denied. This caused people to speculate that the scheme was being discontinued because it was deemed a failure. However, the initial plan was that it would end in December this year, although the Finnish welfare board was hoping to continue the scheme beyond the original deadline. While Finland has been an initial mover, various schemes that are conceptually similar in that they are based on unconditional cash transfers are being rolled out in several countries, and not necessarily financed through public funding.

A Silicon Valley start- up is actually planning to start a scheme in the US funded entirely through private means. Since all these experiments with the UBI scheme have started only recently, it has not been possible to carry out any serious evaluation about the effects. Fortunately, the scheme being implemented by the Silicon Valley start- up is a randomized control trial. So we will soon have some tentative empirical results.

However, there have been extensive discussions, both in academia as well as in policy circles, about the conceptual pros and cons of such schemes. Of course, any such discussion has to be context- dependent — in other words, country- specific. For instance, how rich is the country and how unequal is the distribution of income there? Does the country already have an adequate and well functioning system of social safety nets? The answers to these questions determine both the desirability as well as the feasibility of such schemes.

India has an impressive list of poverty alleviation programmes, and every budget of the Central government seems to add to the number of such schemes. But how effective have these schemes been in achieving their principal objective? The debate about the effectiveness of the Indian government’s various poverty alleviation schemes is about as old as the schemes themselves. Practically everyone agrees that the expenditures incurred on these schemes have been disproportionately large relative to the benefits. The experience with the public distribution system illustrates the problems with most of the schemes. There is ample evidence that the PDS is poorly targeted, with both errors of exclusion and inclusion.

That is a large number of the poor who are entitled to the benefits are excluded for one reason or another, while many people above the threshold level of income reap benefits of subsidized food. The inability to ensure proper targeting is one of the main reasons why UBI has been advanced as a suitable option to the array of poverty alleviation programmes. Its supporters — and this list must now include the Central government since the Economic Survey also talks favourably about UBI — contend that the rapid expansion of direct cash transfers linked to the national biometric database implies that targeted transfers are now possible.

But of course this is only one component of feasibility. Perhaps the more important component of feasibility is the cost of administering such a scheme. The Economic Survey estimates that a sum of Rs 7,620 — an amount that will ensure that absolute poverty is almost eliminated — given to 75 per cent of India's population would cost the exchequer just under 5 per cent of the gross domestic product. While this suggestion lacks universality since it excludes the top 25 per cent of income earners, it does make eminent sense. For instance, why should readers of this newspaper receive transfers? This exclusion should also not be difficult to ensure.

However, this still leaves open the question of how the government can lay its hands on about 5 per cent of GDP. Some supporters of UBI quote an earlier estimate of implicit and explicit non- merit subsidies doled out by state and Central governments — calculated by the National Institute of Public Finance and Policy — to the extent of 14 per cent of GDP. But the NIPFP has now drastically revised its estimate downwards. Moreover, it is also not clear whether any government will find the political courage to eliminate all non- merit subsidies since many of these are received by the politically vocal middle class.

So the fear is that any attempt to implement UBI in India in the foreseeable future must be at the cost of existing welfare schemes. The Economic Survey mentions some schemes, such as mid- day meals, as being ineffective. Unfortunately, the criterion for 'effectiveness ' has not really been spelt out. Apart from providing much- needed nutrition, an important potential side benefit is the increase in school attendance. Clearly, a blanket cash transfer cannot achieve such specific goals. It would, of course, be extremely myopic to reduce expenditure on education, health, sanitation. In fact, a strong case can be made for increasing expenditure in these sectors. The combined expenditure of the state and Central governments in these sectors falls a good deal short of required levels, at least partly because primary education and health- related expenditures generate strong positive externalities.

The two really big- ticket items amongst the package of welfare schemes are the PDS and the National Rural Employment Guarantee Act. Both schemes have their detractors, almost solely because they are so badly targeted. Of the two, it is easier to argue that NREGA should be scrapped if UBI is implemented. The NREGA also provides direct cash transfers. So arguments against the desirability of cash transfers — sometimes used as an argument against UBI — apply equally well to the NREGA. It is debatable whether the rural infrastructure supposed to be created during the operation of NREGA is particularly durable — by its very design, NREGA is supposed to be labour intensive. Finally, the objective of women's empowerment, which is also touted in support of NREGA, can be met by UBI by ensuring that payments are made into the bank account of the female member of the household.

The replacement of the PDS is more contentious. One argument against cash transfers is that male members of the household can spend the money received on alcohol, depriving the household of the means to buy much needed food. This clearly cannot happen in the case of in- kind transfers. Another, perhaps more serious, issue is that once the PDS is withdrawn; there may not be any adequate provision of retail outlets in remote villages.

Even if there are shops, prices may be exorbitant. Against all this is the huge leakage associated with the PDS. Clearly, there are important trade- offs and it is difficult to assert the unambiguous supremacy of UBI over the prevailing system. Perhaps the way forward is to give UBI a trial run in specific regions.

 

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