DisFact #20: India and Universal Basic Income, explained

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Imagine that the government of India sends you a fixed amount of money every month. No questions asked, no strings attached. And not just to you, to every Indian—from Mukesh Ambani to a slum dweller in Dharavi. Everyone. The money just appears in people’s bank account.

This simple-sounding albeit radical idea is called a “Universal Basic Income” (UBI), the focus of today’s newsletter. Globally, there are several ongoing experiments to figure out whether UBI is the future of social welfare. The world is looking towards India as recent policy announcements reveal Indian politician’s growing interest in the idea—or so it seems.

Last week, I finished reading Give People Money, an excellent book on UBI written by Annie Lowrey, an economic policy writer at the Atlantic magazine. Lowrey explores how UBI would change “the social contract, the safety net and the nature of work”. Lowrey wrote:

A UBI is an ethos as much as it is a technocratic policy proposal. It contains within it the principles of universality, unconditionality, inclusion, and simplicity, and it insists that every person is deserving of participation in the economy, freedom of choice, and a life without deprivation. Our governments can and should choose to provide those things.

If you go by that view, despite all the excitement, India is far away from any UBI-ish scheme. I strongly recommend that book if you are interested in the idea of UBI.

Today: A deep-dive to understand the UBI debate. I list the existing social protection policies in India to explore where UBI fits into that framework, followed by a brief look at the new policies that have been announced in the run-up to the election and the questions one needs to ask to analyse those. I end the India section with insights from the experimental evidence and lament the lack of it. Finally, why globally, 2018 was a bad year for UBI advocates.

Background: India’s social protection framework

In the book India’s Long Road, economist Vijay Joshi provides a good framework to think about India’s social protection architecture.

Purpose: “Social protection is concerned with guaranteeing every individual or family an acceptable minimum standard of living regardless of earning capacity,” Joshi wrote.

How to achieve it: Either directly (social protection policies) or indirectly (growth-promoting and labour-demanding policies), Joshi explained. Governments need to strike balance between the two and make a choice between “enablement” and “protection”.

UBI is a social protection policy. By giving people money, it aims to reduce poverty directly. Think about this: if we give every Indian a sum of money that amounts to India’s poverty line, poverty in India (at least statistically) would vanish in one go.

So why don’t we do it? In development economics, there is a long-standing debate on the two modes of welfare delivery: cash transfers and in-kind benefits.

  • Cash transfers are exactly what they sound like: give people cash, and they can use it to buy good and services to meet their requirements.

  • In an in-kind arrangement, schemes are meant to provide specific goods and services; food, for example.

Recent policy announcements (details below) reveal Indian politicians’ preference for cash transfers.

Existing policies: Currently, there are two major social protection policies in place:

  • First, food security: it operates through the Targeted Public Distribution System (TPDS). The Food Corporation of India procures food grains (mainly rice and wheat) from farmers at pre-decided Minimum Support Prices (MSPs) and supplies them to more than six lakh fair price shops across the country, where people with a Below Poverty Line (BPL) card can cheaply buy specified quantities of food.

  • Second, rural employment guarantee: Under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), the government guarantees 100 days of employment a year to rural households.

Other schemes and subsidies: Apart from these two, India has more than 900 federally funded welfare schemes—old age pensions, life insurance, health insurance etc—that cost around 5% of GDP. Both central and state governments subsidise a wide range of products and services to make things affordable for the poor: water, electricity, kerosene, and many more.

There is an intense debate on the pros and the cons of each of these schemes. Generally speaking, two issues are flagged for Indian welfare schemes:

  • Large leakages and corruption: Consider this - According to Arvind Subramanian, former Chief Economic Advisor (CEA) of India, 41% of subsidised kerosene is lost to the black market. Power subsidies generally favour the wealthier.

  • Targeting: We do not have adequate infrastructure to identify the poor. This leads to the exclusion of genuine beneficiaries (people who deserve the benefit are unable to) and the inclusion of the undeserving (fake BPL cards, for instance).

Enter cash transfers: Given these implementation issues, why not replace a number of these schemes and bundle them together to fund a direct cash transfer programme? Advocates of cash transfers argue that this will make the process more efficient. Critics say giving people cash would make people lazy and might lead to wasteful expenditure.

Read more: This Mint essay has all the details on the cash transfer debate.

What’s new: cash-transfer policies

We have had a few major cash-transfer policy announcements. Among the schemes for which money has been allocated, none of them is UBI-ish: they are just cash transfers. Only the Sikkim proposal—and it is still a proposal—is a true UBI.

Most are agricultural policies: Under the three policies announced by state governments of Telangana, Odisha and Jharkhand, farmers get a flat payment from the government and the amount is decided based on land size.

  • Rythu Bandhu, Telangana: Rs 8,000/acre annually (already in place)

  • KALIA scheme, Odisha: Rs 10,000/acre for three years (2019-2021)

  • Mukhya Mantri Krishi Yojana, Jharkhand: Rs 5,000/acre every year

  • PM-KISAN, announced by the BJP in the Union Budget: this scheme targets small farmers. Annual grant of Rs 6,000 to farmers owning land less than two hectares (approx 5 acres). Everyone gets the same amount.

Minimum Income Guarantee by the Congress: In this scheme, “the government would determine a certain threshold marked as a minimum income level” and “families falling below this threshold would be compensated an amount up to a pre-determined level through direct transfer”. (BloombergQuint)

Example: Congress MP Rajeev Gowda explains:

If your income is Rs 10,000 in the family and we believe that your income should be Rs 25,000 then you will get a bank transfer of Rs 15,000. If we say your income should be Rs 25,000 and you are at Rs 22,000, you will only get Rs 3,000. These are, of course, hypothetical numbers and I am giving them as examples. (HuffPost)

The proposed scheme has many similarities with the “Negative Income Tax” idea proposed by economist Milton Friedman, a strong advocate of free-market capitalism. This blog post compares the two.

The devil lies in the details and the Congress hasn’t shared specifics yet (soon, they say). And note that the Congress has also promised farm loan waivers. It’s not clear how the party is thinking, if at all, on funding the two big announcements.

Full UBI in Sikkim:

Sikkim will be the first state to roll out Universal Basic Income (UBI) and has started the process to introduce the unconditional direct cash transfer scheme. Sikkim’s ruling party, the Sikkim Democratic Front (SDF), has decided to include UBI in its manifesto ahead of the Assembly election in 2019 and aims to implement the scheme by 2022. (Indian Express)

Barring Telangana’s Rythu Bandhu scheme, which has been in place for a while—and was cited as a key reason for Telangana Rashtra Samithi’s grand victory in the recent state polls—all other schemes were announced in the last few months.

That’s why there is excitement in the policy circle about India getting closer to a UBI. But it’s not that simple. Here are four key considerations:

First: What is the purpose

“UBI is hardly a silver bullet, and that policy design matters,” Annie Lowrey wrote in her book. And policy design is dictated by the purpose of the scheme.

In the developed world, Silicon Valley is most enthusiastic for implementing a UBI. The tech elites believe that UBI is the solution for the impending fear of technological unemployment (job losses caused by automation).

In India, we don’t need to wait for a futuristic jobs crisis. We are already in the middle of one (as discussed in the previous issue of DisFact). Add to that the rural distress and farm crisis and the picture appears bleak. Given the existing conditions, new policies announced in India aim to reduce deprivation and provide relief. While that may be the primary purpose, there are more nuanced reasons on top of it:

  1. Do we want to make India’s welfare architecture more efficient?

  2. Do we want to reduce deprivation and poverty?

  3. Do we want to reduce inequality?

In my view, it is important to define the purpose clearly as that will have implications for the funding source.

Second: Where will the money come from

The single most important question for any welfare policy—and more so for an ambitious UBI policy—is fiscal resource: where will we get the money to fund it? Will we divert funds from existing schemes or generate additional fiscal resources?

  1. If the argument is that cash transfers will enhance the efficiency of welfare policies: the government will stop some of the ongoing schemes and bundle the saved money to fund a direct income transfer policy. Additional funds can be generated by eliminating wasteful expenditure.

  2. If the aim is to reduce inequality: the government can (a) raise taxes for the rich and redistribute the additional revenue to the poor as an income transfer (b) raise the minimum wage: that will shift the burden from public exchequer to the private sector—in a way, another form of a tax.

  3. If the aim is to reduce poverty urgently: the government can consider expanding the safety net massively, which possible means breaching the fiscal deficit targets.

The third way raises the fear of fiscal profligacy: what if the government can neither rationalised expenditure nor generate additional resources and just spends more? What will the unintended consequences of this spending mean for the Indian economy as a whole?

The debate on the funding source also breaks the myth of UBI’s bipartisan support: UBI advocates argue that the idea enjoys support from both the left (who consider it an egalitarian policy) and the right (who favour the efficiency of cash transfers). But that’s not entirely correct. As Annie Lowrey explained in her book:

UBI, despite its reputation, is not really a bipartisan policy solution. The idea of a UBI might be bipartisan, but the ends and means would never end up pleasing both sides of the aisle. A UBI could be used to shrink the safety net or to expand it massively.

Third: The implementation challenge

Former CEA Arvind Subramanian said:

We will never see a strict UBI in India because the notion that the rich would ever get a paycheque from the government would be fatally flawed as a political proposition.

As I mentioned before, none of the newly announced policies is universal, which is actually one of the appeals of a UBI. All of them are targeted to a specific section, leading to the same targeting challenge of the existing welfare programmes. So the efficiency argument in favour of these schemes is weak. The implementation capacity will continue to be a hurdle.

In fact, some argue that many public programmes based that are based on “alternate principles of universalism with self-selection” have done comparatively well. For example, consider MGNREGA: obviously, someone who has a well-to-job won’t turn up to reap the benefit of the employment guarantee scheme. It is an automatic filter.

Fourth: What is the experimental evidence in hand

Very little, and that is a big concern. There is not enough India-specific data to convince that a basic income would work better than existing safety-net programs or vice-versa. Here is what we know:

Study #1: Supports UBI

In 2010-2013, three basic income pilots were conducted in West Delhi and Madhya Pradesh. Over “6,000 men, women and children were provided with modest basic incomes, paid in cash, monthly, without conditions,” Guy Standing, one of the researchers, wrote in The Hindu.

The outcomes exceeded expectations, partly because everybody in the community, and not just select people, received their own individual transfer. Nutrition improved, sanitation improved, health and health care improved, school attendance and performance improved, women’s status and well-being improved, the position of the disabled and vulnerable groups improved by more than others. And the amount and quality of work improved.

Study #2: Makes the case for direct cash transfers weak

As part of an official study, cash transfers were introduced in Chandigarh, Puducherry, and Dadra and Nagar Haveli as a substitute for the Public Distribution System (PDS) on a pilot basis in 2015. From the Hindustan Times:

  • Weak implementation: “Less than 60% cash is getting into the hands of beneficiaries. This difference between disbursement and in-hand receipt represents weak implementation.”

  • What people want: “The majority of beneficiaries in Chandigarh and Puducherry continue to prefer the PDS over cash transfer. The opposite was the case in Dadra and Nagar Haveli.”

We need more evidence! And in absence of that, it is worth considering the argument of Jean Dreze, a development economist and activist. He argues that India is making good progress on building a social safety net via MGNREGA, PDS, pensions, maternity benefits, etc. So why not just follow through on these initiatives and make them better, instead of getting distracted by a new scheme?

Globally, 2018 was a bad year for basic income

From the MIT Technology Review:

Getting people on board with basic income requires data, which is what numerous tests have been trying to obtain. But this year, a number of experiments were cut short, delayed, or ended after a short time. That also means the possible data supply got cut off.

Back in June we declared, “Basic income could work—if you do it Canada style.” We talked to the people on the ground getting the checks in Ontario’s 4,000-person test and saw how it was changing the community. Then, just two months later, it was announced that the program is ending in the new year rather than running for three years. The last checks will be delivered to participants in March 2019.

We’ve been waiting for basic-income data for a while. In 2016, MIT Technology Review predicted that “in 2017, we will find out if basic income makes sense.” There were two main tests we were waiting on. First there was Finland’s promising basic-income program, which received a lot of hype when it was launched in 2017. Then, in 2018, it was revealed that the program would not yet be extended beyond its original trial period. Another experiment, from tech incubator Y Combinator, has also faced more delays, pushing the experiment into 2019.

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