The UBI’s time may have come

The Economic Survey has traditionally been a document which gives us the latest on the state of the economy and provides some idea on the prospects for the year.

Two things have changed in the last few years. Firstly, we get relatively better data on a regular basis on almost all economic indicators which denude to an extent the novelty of this document. Secondly, some high profile economists occupying the post of chief economic advisor have tended to re-orient the document towards being academic and theoretical. In fact, this trend has also been noticed in the RBI reports which are no longer meant for the common man but are for the academician, as it is hard to understand the cobwebs strewn all over the place with scenario analyses and a lot of jargon thrown in. This is the new phase of economic reporting from the official side. The Economic Survey this year has also done away with the detailed tables which were extremely useful.

This year, the Economic Survey has focused on the concept of universal basic income. The UBI is part of the acronym lexicon that has been in vogue with the NDA government — take the case of a programme being called INDRADHANUSH, and a campaign named JAM. It is felt that acronyms make it easier to remember what they stand for.

Now, the UBI has been presented in the usual style of a two-handed economist, with the pros and cons of the scheme listed and open to debate. There is a view that it is good for the nation but it can be implemented only after studying the effects and working of such a venture.

Assuring a basic income for each and every individual or family is laudable as this should be the goal of any government in a developing country. This is normally measured by success in the areas of unemployment and poverty. The UBI also talks about actually moving away from all kinds of direct and indirect subsidies and passing them on to individuals through cash transfers so that they have the freedom to choose their living standard.

This programme on the face of it sounds jumbled because we are talking of a socialist doctrine of providing basic income to all but mixing it with the capitalist mode of doing away with subsidies.

To better understand the dilemma we need to ask a broader question as to what is the role of the state? The government is required in any country for addressing three economic objectives: bring about redistributive justice, enter areas where the private sector will not find attractive and creation of social infrastructure. Presently the government attempts to perform all the three roles with different levels of efficiency and success.

Now, UBI can be debated from two angles. The first is whether governments should be giving an income without getting anything in return — an unconditional transfer. In most countries, these transfers are linked to an objective. Taking up some employment or sending children to school can be a requirement, which is how most conditional cash transfers work. In our case MGNREGS is a good example of conditional transfer where one takes up a job card and gets paid a daily wage. It is a different issue that there frauds occur and the work done is rudimentary to the extent of being meaningless. But this can always be tackled through better delivery and linkages with productive work such as, say, construction of rural infrastructure.

Providing free money is detrimental to society as it creates a moral hazard (which has been acknowledged in the Survey discourse) and is not connected with the use of money by the household. Poor households in particular have different priorities and may not be spending the money the way an economist would assume.

The second issue pertains to which services need to be discontinued with the amount involved getting into the transfer scheme. The present direct schemes pertain to food, fuel, fertilisers and interest. Fuel subsidy has been reduced to a large extent, but we also remain very vulnerable to global crude oil prices movement which can make inflation nasty and affect the conduct of monetary policy.

The last time there was a crude price shock, inflation would have risen more prodigiously had the subsidies not been in place. Food subsidy creates a problem because prices vary by almost 75-100 per cent across the country. For instance, rice can cost anywhere between ₹15 and ₹30 a kg; so too wheat. How do we ensure that households get enough to spend on food? The PDS ensures that there is a fixed price for these essentials; by doing away with we can again see pressure on inflation as food prices increase once the market is open. Today, the PDS forms a benchmark for dealers as they know that by charging a higher premium the poor would move to PDS.

Now the argument for UBI also meanders into the indirect subsidies that are provided by the Government, such as health and schooling. Can the Government actually abandon these responsibilities? Even in developed countries healthcare, education, and urban infrastructure are provided by the government and subsidised though the quality of services would be very different, say, between the US and India. Governments have to create social infrastructure; they cannot say the private sector can provide the same as the latter caters to only the elite classes with several entry barriers being erected for those who do not have minimum spending power.

One conclusion is that while providing a minimum basic income to all is essential, the state cannot do away with the indirect subsidy involved in the creation of social infrastructure. Also, plain vanilla transfers not linked to conditions leads to a mismatch of priorities between the Government and the individual and must be avoided. The system of linking an income with an activity is necessary to make the schemes viable.

The task ahead is to ensure that these ‘conditions’ are well defined in terms of being acceptable from the economic standpoint. In the case of direct subsidies, even as we revel in the success of cash transfers and limiting the same on some products, crude oil touching $150 a barrel in future will seriously impact inflation and can come in the way of monetary policy. Clearly, the Government needs to think through these contingencies before they occur so that the country is better prepared.

The writer is chief economist at CARE Ratings. The views are personal

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