By Jatin Bavishi
Universal Basic Income (UBI) has been gaining traction in the past few years and has now even made inroads into the highest corridors of power in India. The Chief Economic Advisor, Arvind Subramanian and the Finance Minister, Arun Jaitley have both backed the idea. Now, even the International Monetary Fund (IMF) has made a strong case for India adopting a fiscally neutral UBI in its fiscal monitor that was released on Wednesday. A fiscally neutral policy is such that it does not change the earning and spending profile of the economy as a whole. In other words, doling out money in the form of UBI should imply an end of certain other subsidies.
Riding the giant Indian elephant
Policymaking in India involves a complex balancing of the interest of various groups and stakeholders and as a result, most of our policy outcomes are at great deviance from what standard textbooks would prescribe. We are already seeing how an otherwise Good and Simple Tax (GST) is creating compliance nightmares on ordinary citizens. We can expect a similar treatment to UBI.
In the IMF document, it was suggested that India can give an income of Rs. 2600 a year to all Indians sans food and fuel sops, translating to roughly Rs. 200 per month. Undoubtedly, the amount is too low for ensuring decent necessities of life. Our policymakers would then be bound to go for a targeted programme by introducing commissions and omissions criteria into the distribution protocol. An implementation of such is in itself adequate to introduce red-tapism, which runs contrary to the conceiving UBI in the first place.
In particular, we should expect the UBI to be neither universal (it wont cover everyone), nor basic (inadequate to procure basic necessities) nor income (one would still have to work to make ends meet).
The IMF calculus
IMF said the fiscally neutral UBI would outperform public distribution system (PDS) and energy subsidies by increasing the coverage of lower income groups by 20% who are not covered at present. It will also be progressive in nature as a lions share of energy subsidies, at present, are garnered by the higher income groups. IMF said eliminating energy tax subsidies would require a substantial increase in fuel taxes and retail fuel prices such as petrol (67%), diesel (69%), kerosene (10%), LPG (94%), and coal (455%).
The data used by IMF was till 2011-12 after which there have been significant changes in the global commodities market. Fuel prices have almost halved from its peak in 2014 and Indian government has decontrolled its petroleum pricing policy. Alternative fuels have received greater emphasis. What is more interesting in the simulations run by IMF was that they were not merely based on budgetary allocations on subsidies, but after internalising the negative externalities (consequences of activities which are not reflected in market prices) associated with fossil fuel consumption (like pollution).
Subsidies and role of the State
The pattern of subsidies (and taxes) implicitly gives an insight into what the Indian state thinks is best for its people. When it subsidises, say, food crops and not alcohol, it is essentially making a value judgement in directing the consumption bundles of citizens. For the orthodox liberals, such state control on choices is unacceptable, but in reality, one cannot do without it. Richard Thaler, who was recently conferred with the Sveriges Riksbank Prize in Economics (often incorrectly referred to as Nobel Prize in Economics) has shown how nudging, by providing positive reinforcement and indirect suggestions, are important tools for democracies.
Moreover, any debate on UBI should talk about whether it would give any positive impact on the lives of ordinary people. In particular, our subsidies have cascaded, especially in essential items. If these are removed, one can expect a sharp rise in prices which might not be adequately covered by transfers from the State. One should not expect any form of UBI being implemented in the near future, but nonetheless, policies must be made from the point of view of the most vulnerable.
Featured Image Source: Ted’s photos – Returns 07 Oct via Visual hunt / CC BY-NC-SA