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Sunday, February 12, 2017

Universal basic income in India: An idea whose time has not come

by Ajay Shah.

Cash transfers to poor people


For many years, economists have advocated cash transfers to poor people as the best tool for poverty elimination. This avoids the inefficiency of in-kind transfers such as those undertaken by the Indian `Public Distribution System' which is beset by operational difficulties, and transfers to the non-poor.

The basic arithmetic works out as follows:

If we deliver \$0.5/day to the bottom 20% of society, this is an expenditure of \$48 billion/year at the current Indian population of 1.3 billion. This is 2.4% of GDP/year.

This calculation is all nominal. When we say \$0.5/day this is Rs.35 per day or Rs.12,775 per person per year. This a decent scale of transfer that eliminates poverty in India today.

The debate around this lies on the problem of spending 2.4% of GDP. This is a very large number, when compared with the small size of the Indian State. As an example, the total revenue of the central government is just 9% of GDP. We can debate whether spending 2.4% of GDP on this one project is a good idea. I personally think it is, provided it is part of an overall (daunting) policy project:

  1. It should be accompanied by closing down all the existing poverty programs;
  2. We'd need the State capacity to identify the poorest 20% of the population.
  3. Even under perfect execution on the above two issues, this will increase fiscal stress. We'd need to accompany this with fundamental reform of the tax system, so as to reduce the tax-related distortions which are hampering GDP.
  4. We'd need the political maturity where the government does not use this cash transfer highway to give out dole on a large scale when elections are approaching. I feel we would be playing with fire if these kinds of systems are built, without a corresponding Constitutional amendment that requires fiscal responsibility.

Cash transfers to all


This benign discussion does not carry through when you switch to `Universal Basic Income'. This is a transfer to everyone. This is attractive because it removes element 2 of the work program above -- you no longer need the State capacity to identify the poorest 20% of the population. But now the basic arithmetic jumps up by a factor of 5x:

If we deliver \$0.5/day to everyone in India, this is an expenditure of \$238 billion/year at the current Indian population of 1.3 billion. This is 11.9% of GDP/year.

For a country where the total revenue of the central government is 9% of GDP, this is completely out of reach.

There are countries where certain Universal Basic Income proposals are within reach. As an example, consider Sweden. Their population is 0.01 billion people. If they paid \$0.5/day to everyone, this would cost \$1.8 billion per year. Their GDP is pretty large -- it is \$600 billion USD per year. Hence, such a program is a cost to them of 0.3% of GDP. They might be able to afford numbers bigger than \$0.5/day also. It makes sense for them to discuss a small Universal Basic Income.

Conclusion


For rich countries, it is feasible to pay out \$0.5 per person per day to all. This is the fashionable `Universal Basic Income' proposal that is being talked about in the West. In the West, the left believes this is a good idea, while others think it is a bad idea. That is a reasonable discussion.

In India, we need to first get up to a per capita GDP of nominal \$10,000 per person per year before we start talking about this.

Like many other themes of the economic policy discourse in the West, Universal Basic Income is a discussion that belongs in the West which is inappropriately transplanted into India.We need to be grounded in our backyard, and have common sense about the numbers. We should understand our backyard, and  have an authentic sense of the important issues which should be the Indian policy discussion.

3 comments:

  1. It is not a fair comparison. $0.5 per day may be a decent amount in India, but it counts to nothing in Sweden. If taken at per capita income level, it turns out much higher. For example Finland is considering piloting it at about $20 per day, which takes it above 10% of GDP.

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  2. Some mistake here - if $95bn is more like 4.9% not 2.4% of GDP. And perhaps it can be Rs1000 per month per farming family which comes to $18bn, though it may not eliminate poverty completely

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