Pros and cons of the Minimum Income Guarantee Scheme

Alok Ray | Updated on April 16, 2019

MIGS is a good idea with the proverbial ‘devil in the details’. Hopefully, the problem areas would be tackled at the pilot stage

India is taking baby steps towards some variant of Universal Basic Income (UBI). First, in response to widespread farmers’ agitation, the PM-KISAN scheme was announced by the Central government to provide ₹6,000 a year to farmers holding less than two hectares of land. Several State governments (like Telangana, Odisha and West Bengal) have also announced their own farmer cash transfer schemes. Next comes the Minimum Income Guarantee Scheme (MIGS or NYAY) announced by the Congress party just a few weeks before the general elections, which promises to pay ₹6,000 per month to the poorest 20 per cent households.

The basic logic behind all these schemes of unconditional cash transfer (though at the moment targeted only at farmers or households below some landholding or income threshold; unlike UBI which should include all people, including Mukesh Ambani) is to provide a minimum guaranteed income to the economically most vulnerable groups.

Though this is a laudable objective, the implications need to be analysed clearly.

First, any targeted cash transfer scheme (unlike UBI) suffers from the so-called inclusion and exclusion errors. For example, given the incomplete and faulty land records, identifying farmers with landholdings below two hectares would be subject to errors. In doubtful cases, the local officials would have to accept the certification by the elected village sarpanch who, in turn, would be guided by electoral compulsions to include as many voters as possible (even if ineligible), with possible exclusion of his known political opponents as a way of ‘punishing’ or ‘converting’ them.

The same problem will be there for determining the eligible ‘poor’ households under the proposed NYAY. Using any household survey or census data for determining income of households is defective to the extent people naturally under-report their incomes when they know that in future their eligibility for government subsidies/transfers depends on this information. In the past, in some States the number of BPL cards issued exceeded the population of the State! A full-fledged UBI is free from these errors.

Next is fiscal feasibility. If any such scheme is an add-on, it would involve additional government expenditure. So, the choice boils down to running a bigger fiscal deficit or imposing new taxes (like agricultural income tax, wealth tax, inheritance tax, capital gains tax or removing existing tax concessions to business) or cutting down supply of subsidised goods/services like food, fertiliser, water, education, health services or development spending. The final choice in this trade-off would be decided by the coalition of political forces.

Work effort

Will there be adverse consequences for work effort by the beneficiaries? If it were a true UBI, then the recipient would retain the cash, even if he has a high paying job and hence there would be no adverse impact on work effort. But, in the proposed targeted cash transfer scheme for the ‘poor’, the beneficiary would lose the benefit if his income goes above the threshold. That may induce some ‘poor’ people accustomed to a very low standard of living to take it easy by living on the free cash without taking up any job which would take him above the threshold. Of course, one may argue that if a person decides to do that, this is his choice and we should not complain.

Possible hike in inflation is a concern expressed by some commentators. Any additional cash transfer would add to demand but in an excess capacity situation, it may also bring about a rise in supply, moderating the price increase. Even if prices rise to some extent, this is a consequence of a better income distribution which we should welcome. Even after the price rise, the people receiving the cash transfer would be better off in the net sense while others would be worse off.

‘Sin’ goods

Some worry that the free cash would encourage poor people to increase their spending on ‘sin’ goods like alcohol and tobacco. In Latin America, Africa and also in some States in India, randomised control studies do not show any such impact to any significant extent. Also, if the cash is sent directly in the bank account of a female member of the family, it would mean some financial empowerment for the woman and greater likelihood of extra money being spent on food, clothing, education and health for the household.

To sum up, MGIS is a good idea with the proverbial ‘devil in the details’. Hopefully, the problem areas would surface at the pilot stage and would make the administration better equipped to tackle the issues as the scheme is gradually rolled over the entire country. A hypothetical ‘ideal’ solution should not be the enemy of an initiative which would improve lives of a large number of people.

The author is a former Professor of Economics, IIM Calcutta.

Published on April 16, 2019

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