Fiscal space for Universal Basic Income?

UBI proposed in Economic Survey can be financed by eliminating non-merit subsidies, suggest data

Much of the debate over shifting to a Universal Basic Income (UBI) platform has tended to focus on its fiscal implications. Where would the money come from? Would it be at the cost of existing schemes or would it be over and above those? 

Economists have argued that cash-strapped governments, already committed to various subsides which are difficult to roll back, simply do not have the fiscal space for guaranteeing an adequate level of basic income.  

But data presented in a new study suggests governments can continue to provide merit subsidies and at the same time finance UBI. Provided, they eliminate the so-called non-merit subsidies. 

The study, carried out by economists Sudipto Mundle and Satadru Sikdar at the National Institute of Public Finance and Policy (published in ideasforindia.com), defines merit subsidies as those spent on food, elementary education, secondary education, health, and water supply and sanitation. All other subsidies such as fertiliser, petroleum etc. are considered as non-merit.

Data presented in the study show that at the aggregate level, the combined subsidies of the general government, comprising central and state governments, have gone down to 10.6 per cent of GDP in 2011-12, from 12.9 per cent in 1987-88 

This decline has been accompanied by a marked shift in favour of merit subsidies. Merit subsides have seen their relative share rise from 3.8 per cent of GDP in 1987-88 to 5.6 per cent in 2011-12, driven by higher central government spending. 

On the other hand, non-merit subsidies have declined to five per cent of GDP in 2011-12, from 9.2 per cent in 1987-88. This decline is largely due to the central government whose spending on non-merit subsidies has declined from 4.7 per cent of GDP in 1987-88 to 1.3 per cent in 2011-12. 

While the study is till 2011-12, it is conceivable that non-merit subsidies would have fallen further since then because of the falling petroleum subsidy. 

But despite this decline in non-merit subsidies, it appears to be in line with the fiscal space that the Economic Survey estimated would be required to fund UBI. 

Based on National Sample Survey Office (NSSO) consumption expenditure data for 2011-12, the Economic Survey 2016-17 had estimated a UBI of Rs 7,620 per person for 2016-17. Now, extending this to 75 per cent of the population, as the Survey proposed, would cost roughly 4.9 per cent of GDP — remarkably close to the non-merit subsidies estimated in the study. 

But is this as straightforward as it seems? 

“If you cut all non-merit subsidies there is fiscal space for UBI,” said Sudipto Mundle, emeritus professor at NIPFP. “But this would require a buy-in from both the Centre and the states,” he cautioned. 

This is because bulk of the non-merit subsidies are spent by the states. Of the five per cent of GDP spent on non-merit subsidies, 3.7 per cent is spent by the states, while the balance 1.3 per cent is spent by the Centre.

Thus any move to cut non-merit subsidies in favour of shifting to UBI would require a buy-in from states. 

“Such a move would require a sharing agreement between the Centre and the states like in the goods and service tax,” said Pronab Sen, former chief statistician of India.  

But, cutting non-merit subsidies is easier said than done because of their intended beneficiaries. 

At the central level, these subsidies include the contentious fertiliser subsidy while at the state level, power subsidies account for a large portion of these non-merit subsidies. 

“The gorilla in the room is power subsidies” said Sen. “The issue is that both fertiliser and power subsidies affect the farm sector,” he said. Cutting these required political will.

What are merit subsidies?

The study defines merit subsidies as those spent on food, elementary education, secondary education, health, and water supply and sanitation. 

What are non-merit subsidies?

All other subsidies such as fertiliser, petroleum etc. are considered as non-merit, the study says.