UBI | Pockets to fill, mouths to feed

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Subsidies come with the risk of inefficiency. Putting money directly in the hands of the needy would be the natural solution, right? Think more.

Arvind Subramanian and Arun Jaitley have a many-mouthed country to feed with the national wealth. They must work out how to ensure that along with putting money in people's pockets, food is also put in their mouths. | PTI

Intelligent men make us think. Arvind Subramaniam has given us much food for thought with his ideas on Universal Basic Income.

In essence, he argues that instead of convoluted subsidies, freebies and handouts, it is far more efficient to just give poor people money in the form of guaranteed basic income — to the tune of anywhere between Rs.10,000 and Rs.15,000 a year.

Like most intelligent men, Arvind Subramaniam acknowledges that there are two sides to this issue, and that there is much to be said on either side. He chose to highlight the issue to kick off a discussion.

 

As a citizen of Tamil Nadu, I have watched State and Central Governments give away free stoves, free laptops, free television sets, free mixers/grinders, heavily subsidised meals in government canteens, heavily subsidised cement, subsidised kerosene, foodgrains, subsidised medical care and free medical insurance, to name just a few forms of subsidy.

In practice, all of these subsidies have some form of inbuilt inefficiency. Free laptops, stoves, mixers, etc., are often procured by the government with some inefficiency — there are several allegations of improper procurement, kickbacks, etc. Sometimes there are ‘evaporative losses’ in distribution — ‘damaged’ pieces as well as needless distribution and warehousing costs. There is no guarantee that the freebie even reaches the intended beneficiary — the delivery mechanisms have serious loopholes which can be and often are exploited to the fullest. And even after the freebie has reached its intended destination, the beneficiary very often sells it at any price for quick and easy cash.

This process is plagued by inefficiency, wastage and pilferage. It would be far more efficient to transfer money directly into the bank accounts of the intended recipients. Money would be properly spent, because individual spending is far less wasteful than government expenditure. People wouldn't be stuck with stoves that they didn't really need, when their most pressing needs are for more basic necessities.

 

 

Of course, there is a genuine concern, that notwithstanding all that has been said and written about Jan Dhan, not every Indian has a bank account, and that those who haven’t are the ones who need the cash handout the most. Also, connectivity is far from ideal in many parts of the country and needs to be improved tremendously for any real percolation and mass adoption of any of these concepts. And there are those who view the Aadhaar card with some suspicion, as some sort of Big-Brother tool of control. But those are arguments for another debate.

Lets assume, for the purpose of this discussion that everyone has a bank account and a suitable means of identification which is linked to that bank account, and that the government can transfer money to those who need it the most. In this ‘ideal’ scenario, money is transferred with efficiency, transparency and speed to the neediest, without exception.

How would our lives be impacted?

When the poorest people in this country have access to extra cash, they will spend it on their most basic needs. More than a third of the world’s malnourished children live in India. So, when the poorest people in India get their handout from the government, it's reasonable to assume that they would spend a large chunk of it on food and — more specifically — on lentils, pulses, eggs, milk and meat — sources of superior nourishment. Studies have shown that the demand for these items is more sensitive to increases in income than is the case with basic cereals like rice and wheat. And therein lies another problem.

India’s lentil production has been struggling to cope with the ever-growing demand. The price of Arhar or Toor Dal (pigeon pea) has skyrocketed over the last few years (for a while in 2016, it was being sold at prices in excess of Rs. 200/kg), because of poor monsoons, poor soil management and insufficient support and thrust from the government. India's efficiency in terms of pulse production per hectare is among the worst in the world. The mismatch between supply and demand was so adverse that the government had to source large quantities from countries like Canada and Mozambique, to meet the demand and keep the prices from soaring even further. It hasn't helped our currency, but it has ensured that in the short term at least, there is some modicum of relief.

Those who live below the poverty line will find that even though their bank statements tell them they are ‘richer’, food has become far less affordable and they remain as undernourished and hungry as before.

Milk prices have been growing alarmingly — GCMMF (Gujarat Cooperative Milk Marketing Federation) procurement price of milk has almost tripled from Rs.184 per kg of fat in 2002 to Rs.480 per kg of fat in 2012. During the same period, the supply has increased by a measly 5%, and this growth looks like slowing down to around 4%. The gulf between a rapid rise in demand and sluggish increase in supply has led to depletion of buffer stock, leading to spikes in price in the months where supply is low (the milk industry has a strong seasonality factor).

Egg prices have been rising too. NECC (National Egg Coordination Committee) data would suggest that egg prices have almost doubled over the last decade, and yet poultry farmers are struggling to cope with high input costs. Maize, a major bird-feed input has seen a spike in price and, consequently, many small poultry farmers are heavily dependant on government subsidies to make ends meet.

There are many more examples to illustrate that food production, particularly of those foods which provide a higher quality of nutrition, is struggling to meet the demands of an ever-growing hungry malnourished population. There is no question that Indian agriculture as a whole is not in the best of health. Poor rains and inefficient management, delivery and distribution have seen farmers committing suicide even as others struggle to generate enough output to eke out a living.

Given all these facts, lets look at what could happen when the poorest sections of society suddenly have access to cash. They will spend a large chunk of it on their most basic necessity, namely food. The demand for better forms of nourishment will increase dramatically and, given the constraints of supply, the prices of lentils, eggs, meat and vegetables will soar astronomically. Much to their dismay, those who live below the poverty line will find that even though their bank statements tell them that they are ‘richer’, food has become far less affordable and they remain as undernourished and hungry as before.

There is some historical evidence to suggest that this could be a fairly accurate prediction. When the National Rural Employment Guarantee Act was passed in 2005, it guaranteed employment to all. The work wasn't very productive or useful; its main thrust was to financially empower India’s rural masses by giving India’s villages a surge of cash. The next ten years saw food prices spiral out of control, even as India’s villages suddenly had a surge of cash to spend. Food Price Inflation was one of the factors that cost the UPA the 2014 Lok Sabha elections, a brutally costly lesson in the perils of ‘arming’ demand without first ‘priming’ the supply.

Unless something significant is done to improve the supply of foodgrains, lentils, pulses, dairy and poultry products, the Universal Basic Income scheme could well be the rocket fuel that pushes the prices of several food items even further out of the orbit of affordability. The quantum of money to be spent on the UBI would be an astronomical figure — between 4% and 5% of India’s GDP. If subsidies must be given and money must be spent, perhaps we would all be better served if a fraction of that money were spent on making nutritious and nourishing food more easily available and consequently, cheaper and more accessible to all.

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