Can the government afford any version of Universal Basic Income?

Universal basic income reuters

In a speech on January 28, Congress President Rahul Gandhi promised that his party would provide an annual minimum wage to the poor if it wins the upcoming Lok Sabha elections. This seems to be Congress' version of Universal Basic Income (UBI). But, can the government afford it?

The debate over the feasibility of UBI started in India in 2017, when the Economic Survey of India authored by then chief economic advisor Arvind Subramanian had a 40-page chapter on UBI for India, highlighting its universality and unconditionality.

Should it be universal?

UBI has been adopted in small parts of many countries including Canada, Kenya and Scotland. In India, the Sikkim government has announced the intention to complete the scheme by 2022. However, to scale up UBI to the entire country is a challenging task.

Arguments have been made for and against the universality of the scheme. Veteran economist Pranab Bardhan feels that UBI should be treated as a basic right of every Indian citizen.

"Non-merit subsidies amount to 5 percent of gross domestic product (GDP). The central budget shows revenues forgone coming to 6 percent of GDP. Even if a third of these revenues are made available for this purpose, it makes 7 percent of GDP available for UBI which is a substantial sum, more than twice the total amount currently spent on all anti-poverty programmes," he wrote in a column.

But, economists have pointed out that India is a low-income country and does not have the fiscal capacity to implement the scheme on such a large scale yet.

Income expectations under UBI

Subramanian's Economic Survey 2016-17 advocated for UBI and said Rs 7,620 can be given to every citizen in India per year, irrespective of their economic standing.

Similarly, economist Bardhan, a vocal supporter of UBI, said that the government can manage Rs 10,000 per person per year under UBI if it does away with non-merit schemes, redirects revenue foregone and introduces fresh taxes for the wealthy.

The International Monetary Fund (IMF) report titled 'Fiscal Monitor – Tackling Inequality' also gave economic estimates for India's UBI. It estimated that India could provide a UBI of Rs 2,600 a year to every person if it eliminates food and energy subsidies. The calculations were based on 2011-12 data. The figure of Rs 2,600 per annum was reached by replacing food and fuel subsidies in India with a UBI.

Can the government afford it?

Gandhi's announcement made it clear that this would not be a universal scheme and would only cover the poor. According to the Rangarajan panel report on poverty, 30 percent of people in India are considered poor, which presently comes to 39 crore (population of 1.3 billion). So, if the same amount of money is now distributed amongst a limited number of people, the annual amount per person estimated in each of the above-mentioned scenarios goes up.

In the first scenario, an annual amount would go up to Rs 23,000, while it reaches Rs 37,600 in the second case and Rs 9,461 in the third.

There are 950 centrally sponsored sub-schemes that accounted for nearly 5 percent of the GDP. The big and flagship schemes of the government can be allocated 2.9 percent of the GDP. So, the only way Gandhi's claims are affordable to the government would be in the scenario projected by the IMF, with almost Rs 9,400 going to poor people annually, costing around 2 percent of the GDP. To take on this additional expense, the government will have to forego some of its schemes.

There is also evident misallocation (measured by poorer areas obtaining a lower share of government resources) within backward districts (accounting for 40 percent of total poor) receiving only a small share in most flagship schemes.