Context
At this stage of development, there is no reason why the government should transfer cash to the entire population
Issue: Universal Basic Income (UBI)
Why UBI is the hot topic now-a-days in developed countries?
- Increasing automation: One of the reasons why the idea is gaining more attention in the developed world these days is the increasing use of robots in the industrial sector
- Fear of job loss: As automation increases, the fear is that more people will find it difficult to get jobs
- A dignified living: The thought is to give all citizens a basic income that will allow them to live with dignity, irrespective of their learning capability
A divided opinion on UBI
Author states that the opinion on UBI still remains divided and voters in a rich country like Switzerland rejected the idea by an overwhelming majority in 2016
Note: Arguments for UBI have been discussed in the article on UBI in the brief dated 27th Jan 17
UBI in India: Not a new concept
A number of economists have argued that universal basic income (UBI) can be implemented in India as a significant proportion of the population is still in poverty and anti-poverty spending is marred by leakages
- Planning Commission’s work: The Perspective Planning Division of the erstwhile Planning Commission worked on the idea of providing minimum income in the early 1960s
Welfare leakages: A major argument for implementing UBI in India
Author states that a major reason and justification given for implementing UBI in India is the leakages in the funds dedicated for welfare schemes due to prevalent corruption. The benefits of such targeted programmes often go to the non-targeted and better-off people
Views and calculations of various Indian economists
- Economist PranabBardhan showed that if a UBI of Rs10,000—indexed to 2014-15 prices (three-fourths of the poverty line that year)—is given to all citizens, it will cost about 10% of the gross domestic product (GDP), which can be funded by ending regressive subsidies and revenue forgone
What is Revenue Forgone?
The government levies taxes to raise revenue to fund its expenditure. To give relief to certain sections which includes industries and taxpayers, or to promote certain activities, the government also provides tax breaks and incentives. The revenue forgone is also referred to as tax expenditure or indirect subsidy to taxpayers
- Statement of revenue forgone: Along with the other budget documents, the government of India also presents the Statement of Revenue Forgone, which shows the revenue impact of tax incentives. This was first presented with the budget 2006-07 as an annexure to the receipts budget. In subsequent years, the government started presenting it as a separate document with the budget
- Examples:
- Tax rebate on savings under Section 80C fall under revenue forgone
- Lower excise rates: Section 5A (1) of the Central Excise Act, 1944, empowers the Union government to lower tariff rates below levels prescribed in the schedules. These lower excise rates are applicable to mass-consumption goods such as medicines, toothpowder, candles, postcards, sewing needles, kerosene stoves, etc.
- Economist Vijay Joshi, with the Suresh Tendulkar committee poverty line and using the poverty gap index, at 2014-15 prices, has arrived at a figure of Rs17505 per household per year. This will cost about 3.5% of the GDP for the entire population
- Economist Debraj Ray has proposed an interesting variant where instead of a fixed sum a fraction of the GDP is committed as universal income
Author’s contention: UBI is not feasible in India
Author states that there are a number of reasons why UBI is not feasible for India. He further states that all the arguments in the favor of UBI are based on few inherent assumptions.
- Assumption number 1: The amount of money being spent on various kinds of subsidies is justified, and the only issue is of targeting, which can be addressed by the transfer of basic income to every citizen
Author’s view: Boost capital spending instead of an efficient allocation
- Author states that as per 2003 National Institute of Public Finance and Policy study both Centre and state government subsidies amount to about 14% of GDP. The idea should be to reduce expenditure on non-merit subsidies and use the savings to boost capital spending that India badly needs
- Assumption number 2: Roll back of all non-merit subsidies is easy
Author’s view:It will not be easy for the government to roll back subsidies such as food, fertilizer, fuel, electricity and water. Also, if removed, it will be even more difficult for the government to decide the amount to be transferred under UBI
- Assumption number 3: Reduction in revenue forgone can augment resources for UBI
Author’s view: Author states that revenue augmentation from reduction in revenue forgone may not happen. Moreover, Revenue loss or revenue forgone on account of lower excise duties on mass-consumption goods like toothpaste, kerosene stoves etc, which are essential components in any poor family’s consumption basket, are certainly not tax sops to big private companies and should not be eliminated
Unintended consequences of UBI
Author states that government should also consider some unintended consequences of UBI, like,
- Reduced motivation to work: It may reduce the motivation for work and might encourage people to live off assured cash transfers
- Rise in wages: It is also argued that unconditional cash transfers might raise wages due to the decline in the supply of casual laborers, thus hitting India’s reputation as a low cost manufacturing destination
Author suggests
- Build productive capacity: Author suggests that instead of just doling out free cash, government should put efforts into building productive capacity in the economy
- Better targeting of cash transfers: The government should focus on increasing the use of conditional cash transfers with better targeting, which will not only help the poor but will also plug leakages.
Read More: UBI: An Idea whose time has come
