Time for true universal basic income

Prime Minister Narendra Modi accepted that loan waivers or market interventions are not likely to relieve rural distress in his interview on January 1, as argued earlier in this space. Why is that so? And more importantly, what should be done to deal with this burning issue? The answer lies in understanding what causes the malaise in the first place.

I have previously posited an income-deficit syndrome as the defining trait of rural India. The income from the main economic activity, agriculture, is often not sufficient to meet even the family consumption needs. Low incomes caused by poor productivity and prices do not allow their recipients to lead a life they consider worthwhile. Unpredictability due to both nature’s vagaries and price fluctuations worsens the situation.

Individual landholdings have grown smaller due to repeated divisions. The added population finds virtually no occupation other than tilling the family plot. The limited land ends up supporting ever larger numbers, perpetuating low income. Most of it is spent on essentials, leaving hardly any surplus to invest in income enhancement measures. This vicious circle is exacerbated when crop failures or market crashes occur with increasing frequency. Debts from usurious moneylenders and diversion of crop loans for consumption are both rather common.

That leads to another basic problem for rural India seldom articulated or appreciated: Income shortfalls are cumulative, adding to the debt burden, but surpluses are not. In boom times, deferred expenses — weddings, treatment of illness, adding to the meagre dwelling — take priority. The loan backlog is rarely wiped out in such periods. When the burden becomes unbearable, waivers are demanded. And seekers of quick political rewards fan these fires to crisis points, as has been happening now.

Agriculture is the occupation of the last resort, hiding armies of the unemployed (and sometimes, the unemployables). Migration to cities just shifts the locale of the problem, but does not solve it. The only solution is a shift of the population away from farming to a large, low-cost labour-intensive rural production base feeding industry everywhere. That needs substantial investment in job-creation through infrastructure construction. This will take years, possibly a generation or longer, to come about, far beyond the five-year electoral horizon. Using up available resources for loan waivers would surely preclude such permanent remedies.

But the rural populace or at least its most vulnerable sections cannot wait until this transformation occurs. Their needs of a living, regular and predictable income are urgent and must be met. As there are precious few alternatives available, direct transfers become attractive interventions.

Illustration by Binay Sinha

The Telangana Rythu Bandhu Scheme involving grants of Rs 10,000 per hectare per season (now Rs 12,500) has received much favourable attention in this context. The recent landslide victory of the incumbent state government is rightly construed as the electorate’s approval. But this scheme has a major flaw: It goes against the tenets of egalitarian development. Larger farmers, many of whom may not need any relief, will get higher benefits linked to the holding size. It also excludes tenant farmers, and more importantly, the landless, the lowest on the economic pyramid.

Dire situations warrant drastic remedies. In this writer’s view, it is time to consider seriously a modified version of universal basic income (UBI). The original idea, which has been around for centuries, is that the state pays all its citizens a basic income. The Oxford economist Vijay Joshi elaborated it in the Indian context in his recent book, India’s Long Road (2016). The former chief economic adviser, Arvind Subramanian, devoted an entire chapter to it in Economic Survey 2016-17.

Joshi calculates the cost of paying every Indian Rs 17,500 (2014-15 prices) a year as UBI (which will lift the lowest income tier above the Tendulkar poverty line) to be 3.5 per cent of the GDP. Subramaniam’s estimate is a comparable 4 to 5 per cent of the GDP.

This is where some caveats are needed. These calculations sidestep the difficult question of selecting recipients by making payments to all citizens. In our present situation, that would be an unaffordable proposition. Hard, arbitrary-sounding, choices must be made regarding the beneficiaries to make the programme both affordable and targetted. The right to food and the Mahatma Gandhi National Rural Guaranteed Employment Scheme (MNREGS) both use predetermined cut-offs for beneficiaries.

If the new basic income programme is restricted to the bottom 50 per cent of the population both urban and rural, it would cover the most vulnerable groups. That would mean an annual cost of about 2 per cent of the GDP. This need not all be an additionality. Joshi proposes that if the government thoroughly revamps all subsidies, it will have a “wiggle room” of about 6 per cent of the GDP.

That may not be politically feasible, in view of the entrenched interests. But a couple of areas could still be explored. The first is MNREGS. Since the basic income transferred would be higher than the MNREGS wages earned and entails no back-breaking labour, there would be no justification or need for it. That would offer a saving of about Rs 50,000 crore. The FY 2018 Budget had proposed a food subsidy of Rs 1.7 trillion. With income transfers, around Rs 1 trillion from this and some other minor subsidies could be avoided. These savings would make the cost of the income scheme just about 1 per cent of the GDP, eminently affordable. Farmers would no longer face heartburn of unenforceable MSPs or demand loan waivers repeatedly.  

This logic appears to be appealing to the central government as well, since the obvious electoral gain is a substantial collateral benefit. When reports last came in, it was supposed to be considering a transfer of Rs 2,500 per person per month for 100 million people. The time for this is just ripe (The first part of the article appeared on December 28).

The author is an economist