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The Chief Economic Adviser has promised a detailed analysis of the subject in the Economic Survey that will be presented to Parliament on the eve of the Budget. However, there is no word yet from the government.

Written by P Chidambaram |
January 22, 2017 12:16:25 am



It is the Budget season. The good, bad and ugly (ideas) will be on display. One idea that is in the realm of speculation is Universal Basic Income (UBI). The Chief Economic Adviser has promised a detailed analysis of the subject in the Economic Survey that will be presented to Parliament on the eve of the Budget. However, there is no word yet from the government. Usually voluble ministers have been careful not to utter a word on the subject.

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UBI is not a novel idea. Countries that have a comprehensive social security scheme provide a cash payment as well as food coupons to persons entitled to receive social security benefits (too poor, unemployed, disabled, aged). In India, there is no comprehensive social security scheme. We have the MGNREGA scheme that bears a similarity to UBI. MGNREGA guarantees work on demand and pays a wage per day that is equivalent to the prevailing wage of a farm labourer.

If MGNREGA is implemented in letter and spirit, it will provide work and wages for 100 days in a year at the currently notified wage that, on average, is Rs 195 per day. A working person can receive up to Rs 19,500 per year. That amount will supplement any other income of the person.

Antidote to poverty

Under UBI, the State will transfer a certain amount to every person to supplement his/her income so that the total income of the person reaches a certain threshold. Not many countries have UBI. Recently, Switzerland, with a per capita income of USD 79,578, rejected a proposal in a referendum to grant UBI. Finland with a per capita income of USD 45,133 has announced a pilot project where a small number of people will receive a modest amount of USD 595 per month. Switzerland and Finland are among the richest countries in the world.

We may presume that UBI is meant to address the problem of poverty. The idea is that an income transfer will help improve outcomes by assuring poor people, or those at the edge of poverty, a certain level of basic consumption, so that they may focus on improving their economic status. As a principle of equity, it is unexceptionable and I support the idea.

However, I must reiterate my firm belief that the best antidote to poverty is economic growth. Thanks to the higher rate of growth since 1991, India’s poverty headcount ratio has halved and the number of poor people in the country has fallen by about a third. Between 2004 and 2014 (the UPA period), 140 million people were lifted out of poverty. Even the welfare schemes became feasible because tax revenues increased in the years of high economic growth.

The design is crucial

The UBI idea raises a set of interrelated questions:


* Will UBI replace other schemes where benefits are gradually being converted into direct cash transfers?

* Will the coverage be ‘universal’ as the name suggests or will there be a target population?

* Will the transfer be unconditional or will conditions apply?

* What is the level of income that can be considered ‘basic’?

* How will the resources for the scheme be raised?


The most challenging questions are, what is the level of income that can be considered as ‘basic’ to enable a person to meet his basic consumption requirements and what will UBI cost? Suppose we take the measure of the poverty line which is, on average, Rs 40 per day (Rs 32 in rural areas and Rs 47 in urban areas). Every person should be assured of an income of about Rs 14,000 per year or

Rs 1,200 per month. That is a modest and reasonable amount. Assume that 25 per cent of the population (330 million) would need a transfer of Rs 14,000, another 25 per cent (330 million) would need a transfer of Rs 7,000 and the remaining would require nothing, the cost would be Rs 693,000 crore per year or 35 per cent of the expenditure budget for 2016-17 — obviously beyond the present capacity of the government. Even if we halve the UBI amount or halve the number of beneficiaries, it will cost Rs 346,500 crore per year.

Funding UBI

To find the resources, assume that we can eliminate all the current subsidies to the non-poor. The Economic Survey 2015-16 estimated that about Rs 100,000 crore worth of subsidies were accruing to the non-poor. Even if we can free up this fiscal space, it would not be sufficient to meet the UBI bill. Can more fiscal space be created? There is talk about revenues foregone, but once you look below the surface, you will realise that most of these are difficult to dismantle. Many of the ‘revenues foregone’ are meant to achieve specific policy objectives and withdrawing them would mean discarding the policy objectives such as Special Economic Zones, accelerated depreciation, investments in specified infrastructure, etc. We cannot assume that getting rid of them to pay for UBI would be more beneficial to the economy or the people.

Sadly, it appears that there is an intent to push through the idea without adequate thought or discussion. The buzz is that UBI is desperately needed as an antidote to the misery caused by demonetisation.

If there is not a carefully designed UBI and if it is not feasible to create enough fiscal space to fund UBI, what we may get is another feel-good jumla that will have negligible impact on the problem of poverty while making the fiscal situation precarious. The irony is that the idea, if accepted, will be implemented by a party-government that came to power promising development and jobs, but which seems to have given up on that agenda.

Website: @Pchidambaram_IN

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First published on: 22-01-2017 at 12:16:25 am
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