Getting the basics wrong

The Economic Survey 2016-17 tabled in Parliament last month has proposed introducing a universal basic income in India, and has devoted an entire chapter to this new idea. A universal and unconditional income transfer to all citizens in order to address the twin problems of poverty and unemployment is undoubtedly a proposal that merits serious consideration. The Economic Survey, however, gets it all wrong. It gets it wrong in terms of the alternative welfare measures available to a government, in terms of the purpose of such a measure, and in terms of the redistributive intent of such a measure (and correspondingly, of the role of taxation).

The experiment in Europe

In recent years, the strongest proponent of the idea of basic income has been the left-liberal political philosopher Philippe Van Parijs. In his book, Real Freedom for All, Mr. Parijs argues that the basis for universal basic income is the “fair distribution of real freedom to pursue the realization of one’s conception of the good life”. The main features of universal basic income are that it is provided by the state to all citizens on an individual basis, without a means test and without a work requirement.

An example of universal basic income is the Finnish proposal to provide unemployed citizens between the ages of 25 and 58 a monthly income of €560. In the experiment currently under way, the monthly income is being provided to 2,000 randomly selected unemployed persons irrespective of other income and whether that falls below a certain minimum (that is, the “means test”) and irrespective of whether they are seeking work, in job-related training, or even find part-time employment (that is, the “work requirement”).

In other words, universal basic income, as proposed and discussed in Europe, is a substitute for means-tested income benefits, with certain work requirements (such as undergoing job training). Existing guaranteed incomes schemes are usually targeted or means-tested, that is, dependent on level of income and only available to those below a threshold level of income. It is often linked to employment status. The core of the concept of basic income is the “absence of the means test and the absence of the work test”, that is, it separates the income benefit from eligibility based on current levels of income and from employment status.

The most commonly discussed alternative to universal basic income is a negative income tax. This is a scheme in which, for individuals below a certain income threshold, not only is the income of a household not taxed, but the household receives a tax credit that is the difference between the basic income or guaranteed income and tax liability. Mr. Parijs and other scholars suggest that universal basic income may be cheaper to operate than a negative income tax. The negative income tax, of course, assumes a country where all citizens file tax returns.

Distortions in Indian proposal

The first wrong committed by the Economic Survey is that its proposal constitutes an attack on welfare schemes. Witness the statement that “a number of implementation challenges lie ahead, especially the risk that universal basic income would become an add-on to, rather than a replacement of, current anti-poverty and social programmes (Chapter 9).” In other words, the Economic Survey wants universal basic income not to supplement, but to replace, all existing anti-poverty and social welfare programmes.

As I have explained, in its original conception, universal basic income was meant to replace only income guarantee programmes. “A basic income is provided in cash”, and as Mr. Parijs notes, “it supplements, rather than substitutes, existing in-kind transfers such as free education or basic health insurance (“Basic Income: A simple and powerful idea for the twenty-first century”, in B. Ackerman, A. Alstott and P. Van Parijs (eds.), Redesigning Distribution, The Real Utopias Project, vol V, 2005).” In the Indian context, one would obviously add in-kind food transfers. Mr. Parijs writes, “fighting… towards greater income security should of course not make one neglect the prior importance of providing every child with quality basic education and every person with quality basic health care (Parijs, 2005).”

It is thus technically and ethically wrong to compare the costs and benefits of universal basic income with those from a range of subsidies relating to food and nutrition (public distribution, school meals, Integrated Child Development Services), education, and sanitation, as is done in the Economic Survey. The second wrong is thus the argument that the universal basic income should replace all current in-kind and cash transfers.

The third wrong, and one that goes against the core philosophy of universal basic income, is the Economic Survey’s assertion that “universal basic income is not framed as a transfer payment from the rich to the poor.”

A basic income needs resources. As Mr. Parijs shows, if a basic income is added to existing tax-benefit schemes, “the comparatively rich would need to pay both for their own basic income and for much of the basic income of the comparatively poor (Parijs, 2005).” The literature discusses different ways that funds for the universal basic income could be raised, such as through progressive taxation or a specific earmarked tax, or even a consumption tax. The bottom line, whichever way, is that the rich have to pay for this universal provision.

In terms of the level of basic income, the higher it is, the “higher the average rate of income tax, and, therefore the greater the redistribution from the comparatively rich to the comparatively poor (Parijs, 2005).” While the basic income is given to all, the manner in which the basic income is funded has to ensure that society transfers resources from the rich to the poor.

The philosophy behind universal basic income is clearly one of redistribution. It is not one of taking existing benefits, whether in the form of in-kind (such as food subsidies) or in cash transfers (such as maternity benefit), and dividing it up among all individuals as cash.

No resource road map

The Economic Survey, however, does not propose any new resource mobilisation or taxation to meet the goal of universal basic income. On the contrary, it talks of universal basic income replacing other schemes at various places. It also — ominously — states that “any government will have to decide on what programmes/expenditure to prioritize in order to finance a universal basic income”. In short, existing programmes will have to be cut to fund the universal basic income. There is no intention of making the rich pay for the basic income.

To sum up, the main features of universal basic income are that it should be universal and not targeted, it should be unconditional and not tied to work or employment, and it should be in cash. Universal basic income has been proposed internationally in lieu of employment or income guarantee schemes. It is envisaged as a method of redistribution of resources from the rich to the poor. It is envisaged as providing all persons (the poor, in particular) with an income to lead a dignified life, after basic needs such as education, health, and basic food consumption are taken care of. The universal basic income proposed in the Economic Survey is hostile to each of these objectives.

Let me end with an illustration of what a genuine universal basic income would entail. As a rough approximation, let us assume the universal basic income provides an income equivalent to 100 days of MGNREGA employment. Assuming a daily wage rate of ₹170, a basic income would comprise ₹17,000 per household. With a simple assumption of four members per household, universal coverage requires the basic income to be provided to 300 million households. In other words, universal basic income equivalent to the expected income transfer under MGNREGA would cost ₹510,000 crore. This is more than 10 times the allocation in the current Budget for MGNREGA (₹48,000 crore).

Resource mobilisation has to increase ten-fold for India to afford the universal basic income without cutting back on other social welfare programmes. India has one of the lowest tax-to-GDP ratios in the world. Unless the government seriously increases tax resources, the proposal for a universal basic income is at best a diversion from our current economic and social problems and at worst a means of reducing and ending funding for a host of welfare programmes. The current proposal needs to be rejected in toto.

Madhura Swaminathan is Professor at the Economic Analysis Unit, Indian Statistical Institute, Bengaluru

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