As policy-makers in New Delhi debate the concept of the Universal Basic Income (UBI) that would do away with current government benefits, the International Monetary Fund has come out in support of such a move on the grounds that it would perform better than current fuel and food subsidies.

“A UBI would outperform the PDS and energy subsidies along three key dimensions of coverage, progress and generosity,” said the IMF in its Fiscal Monitor that was released on Wednesday.

“A UBI would actually benefit the poor more for the same Budgetary costs... India may want to ponder this option but it depends on the assessment today policymakers base on current facts and political and economic situation,” said Vitor Gaspar, Director Fiscal Affairs Department, India.

Concern over inequality

The report has also highlighted the growing inequality in the global economy as well as within countries and has also discussed how fiscal policies can help achieve redistributive objectives.

Apart from UBI, it has focussed on two other policy debates — tax rates at the top of the income distribution and the role of public spending on education and health.

The IMF’s observations for India, which are based on the results of a microsimulation of replacing food and fuel subsidies with UBI, found that lower income groups would see a substantial increase in benefits through a UBI.

The report has said that there is still “significant under coverage” and nearly 20 per cent of the lower income groups are not included in the public distribution system.

Similarly, in terms of progress, the higher income deciles receive a larger share of PDS spending and implicit energy subsidies are also highly regressive (with the top two income quintiles receiving 69 per cent of implicit subsidies compared with 17 per cent for the bottom two quintiles).

IMF also said that the fiscal revenue yield from eliminating energy “tax subsidies ” through a UBI could potentially be larger than the fuel subsidies typically reported on budget, which are based on a narrower definition of subsidies that ignores the negative externalities associated with fuel consumption.

It, however, cautioned that, “Reaping the potential gains from the introduction of a UBI would need careful planning to overcome political, social, and administrative challenges, especially when subsidy reforms involve such large price increases as in the simulation above,” it said.

Earlier this year, Arvind Subramanian, Chief Economic Adviser to the Finance Ministry, had thrown up the idea of a UBI in the first volume of the Economic Survey.

The IMF study is based on National Sample Survey data from 2011-12 and assesses the welfare impact of replacing the subsidies that existed in that year with a UBI in a fiscally neutral manner.

Providing an annual UBI of ₹2,600 per person in 2011-12 would use up about three per cent of the GDP.

The IMF, however, noted that since then there have been significant reforms in both fuel and food subsidies including freeing up prices of petrol and diesel and direct benefit transfers through Aadhaar authentication.

(The writer is in Washington DC as part of the IMF Journalism Fellowship 2017 to cover the Annual Meetings of the IMF and World Bank.)