Poverty & Inequality

NYAY e-Symposium: The case for a universal basic income supplement

  • Blog Post Date 01 May, 2019
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Pranab Bardhan

University of California, Berkeley


Pranab Bardhan (Professor of Economics, University of California, Berkeley) argues in favour of an income supplement, albeit one that is universal.


Q 1: Can you explain why NYAY is necessary when we already have so many other poverty alleviation schemes? Why should we not just increase the budget for the existing schemes?

Income supplement programmes are necessary because the existing anti-poverty schemes still have left large sections of the people below the poverty (or destitution) line, and even larger sections of the people, even those above that destitution line, with highly uncertain income. Increasing the budget for existing programmes alone will not do – for example, MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) leaves out many poor who are not able-bodied workers (apart from all of the urban poor), the National Food Security Act (NFSA) leaves out the non-food needs of the poor, etc. Income supplement programmes are also better than product price support or input subsidies programmes, as the former distort the markets less. 

Q 2: Do you think that the money would be better utilised if instead it is used to improve the existing public education and health services? Or, have we simply given up on trying to make public education and health delivery functional? 

Those who support income supplement programmes are usually also keen to improve the public education and health services. The latter, however, will improve not just by throwing more money at them. For example, it has been observed that in the poorest nine states of India, out of whatever paltry sums of money they get every year for public health projects, a substantial fraction goes back unspent on account mainly of poor governance. 

Q 3: Would you prefer an alternate scheme that distributed the same amount of money through cash transfers over a larger number of households by reducing the amount to each recipient? If yes, why? 

I prefer an unconditional universal cash grant to everybody, even if it is a lower amount, for mainly three reasons:

  • Conceptually, I want it as part of each citizen’s right, rather than a handout to selected people. Right to minimum economic security should come under the Supreme Court interpretation of the ‘right to life’ in the constitution.
  • For far too long in India anti-poverty programmes have been used as part of political patronage distribution, for which the poor recipients are treated as supplicants. Universal programmes (universal basic income, universal healthcare, universal access to free vocational education programme, etc.) can get away from patron-client politics.
  • You need to avoid the problem of identifying the poor, which in India – a largely informal economy – is complex, controversial, and corrupt. 

Q 4: Do you have any concerns about the fiscal burden of this extra expenditure? Do you think that the existing tax rates would have to be changed or the existing subsidies eliminated to accommodate NYAY? 

NYAY is estimated to cost about 2% of GDP (gross domestic product). Those who are overly concerned about the fiscal burden of this or even more ambitious income supplement programmes are implicitly content with the current fiscal situation where a large fraction of subsidies go to the rich and middle classes and where the latter are substantially under-taxed. NYAY or no NYAY, we have to demand that those subsidies are drastically reduced, and the current under-taxation of property values and capital gains and zero-taxation of wealth and inheritance (at a time when our estimated wealth inequality from National Sample Survey (NSS) household survey data is mounting and reaching the Latin American range) are to be remedied. In connection with my work on the funding of a ‘universal basic income supplement’ I have estimated that a surplus of about 10% of GDP can be potentially mobilised from those sources (if we have the political courage to face the inevitable resistance by the rich), and spent on health, education, infrastructure, AND a basic income supplement. 

Q 5: What would you say to people who are worried that an infusion of cash would increase demand but not the supply and cause a price rise? 

A transfer of money from the currently subsidised rich to the poor can change the relative prices of, say, food, but note that currently all political parties are in favor of jacking up the minimum support price for food crops to help the farmers, which will have a similar effect on prices. As I have said income support (for producers and consumers) is better than price support (to producers). Also, the income rise on a mass level can give a boost to the currently stagnant investment prospects. 

Q 6: Which of the existing subsidies from the central government are dispensable and substantial enough to be considered for elimination? 

The list will include fertiliser, water, and power subsidies; capital subsidies and tax concessions for business; railway passenger subsidies; subsidised losses for many inefficient public sector enterprises, etc. NIPFP (National Institute of Public Finance and Policy) researchers have estimated that the total “non-merit” subsidies (of both central and state governments) came to about 6% of GDP in 2015-16 (this does not include part of the food subsidy that goes to better-off farmers in the form of price support). In addition the central budget has “revenues foregone” (mainly tax concessions to companies) amounting to about 6% of GDP. 

Q 7: Targeting the bottom 20% seems to be a herculean task. Which data can the governments use to identify the bottom 20%? What sort of targeting mechanism would you suggest? 

As mentioned in Q. 3, one argument in favour of a universal income supplement is that targeting like this is difficult. Some people have suggested some transparent exclusions (like those with houses of a certain size, cars, etc.), but one cannot exclude the upper 80% this way. But note that the same problem afflicts most targeted programmes, including the current government’s PM-Kisan, health, or housing programmes. 

Q 8: The proposed scheme is bound to generate perverse incentives for a significant part of the population. They would try to show that they are a lot poorer than they are or even to lower their incomes in order to qualify. How would you construct the scheme to minimise the damage from this obvious problem? 

Even apart from hiding income, most people in the large self-employed sector do not even have an idea of what their income is (not at least in the sense economists define income, with value added, depreciation, etc.). So some visible surrogate criteria (in terms say of housing conditions and other such things considered in the socio-economic caste census) have to be used. Once you are identified as belonging to the bottom 20% you get a card, there is no further perverse incentive. You show the card and you get the cash grant.  

Q 9: How would you ensure that this scheme does not turn out to be a Trojan horse to weaken or destroy the existing schemes like NFSA and MNREGA? 

As the UPA (United Progressive Alliance) government was the initiator of NFSA and MNREGA, and has now announced NYAY as additional to those programmes, there should be some relatively simple political ways of making them accountable if they turn out to default on that promise.    

Q 10: The deficiencies in the existing poverty alleviation schemes stems from weak State capacity. Will NYAY also not be hampered by the same? 

Cash transfer programmes are administratively somewhat simpler than other anti-poverty programmes, provided there is access to bank accounts. I understand there has been remarkable progress in the last few years in the extension of bank accounts and access to banking agents. The Economic Survey had shown data that except for Rajasthan and Madhya Pradesh all other states now have access to a banking agent within a distance of 5 kms. As cash transfer programmes expand, the fixed costs for banking agents will get spread over a larger population, and with costs thus going down one expects the banking access problem to improve a great deal.  

This post is part of I4I's e-Symposium on NYAY: https://www.ideasforindia.in/topics/poverty-inequality/decoding-congress-nyay.html

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