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Posted at: Feb 6, 2017, 12:48 AM; last updated: Feb 6, 2017, 12:48 AM (IST)

Back to basics

Government report misses key points on income
Back to basics
one for all: A universal system would generate community and multiplier effects.

THE government’s Chief Economic Adviser deserves congratulations on including a chapter in the Economic Survey of 2016-2017 on basic income, which would involve giving every Indian a modest amount each month as a citizenship right. This policy is gaining support globally, and — as the report shows — is affordable.

Sadly, the writers appear not to have studied the results of basic income pilots that SEWA, with myself as a collaborator, conducted between 2010 and 2013. They were given a copy of the book, but the text suggests they did not read it. Had they done so, they would have seen that the advantages would be greater than they suggest. The pilots show that, unless account is taken of the dynamic effects unleashed by a universal basic income, benefits will be understated and costs overstated.

The chapter is well-written and supports moving towards a basic income for all. Cynics will find fault. They should be told that actually the chapter understates the advantages, and ignores the positive dynamic economic or transformative effects.

For those fresh to the debate, the proposal is that every man and woman should receive a modest cash payment each month as a right of citizenship. The amount might be, say, Rs 500, or higher. Let us presume it is Rs 500. This would not cover all basic needs, but would make a substantial difference for the poor. It could be taxed back from the wealthy, or a system could be constructed to encourage them not to apply for it.

That level would be affordable, if expenditure on subsidies going mainly to middle-income and rich were ended, and if government phased out some of the thousands of national and state-level benefits that rarely reach beneficiaries. It is also technically and administratively feasible, with digitalisation and so on.

As those issues are covered in the report and elsewhere, I want to focus on issues not covered. SEWA projects are the only basic income pilots conducted in India. The report does not discuss the results in detail, and when mentioning the pilots makes two mistakes, one minor, one serious. Before coming to those, a minor grumble. The chapter makes too much of the challenge of financial inclusion. We found that once a basic income starts, people open bank accounts quite easily. You cannot judge the difficulty in the absence of a money flow. Someone with no liquidity will not wish to open an account. Once having an assured flow of money, they will have more interest in doing so. It is made easier if an intermediary NGO like SEWA can be mobilised to help.

The minor error comes with the comments on inflation, showing one-handed economics. The report states, ‘replacing the PDS will increase market prices of cereals the poor face’. First, many who should be receiving food rations do not do so. Second, the statement ignores what economists call the elasticity of supply. We found that the basic income led to more demand for food and more investment in seeds, fertilisers and so on, which expanded local production of better foodstuffs, so that unit prices probably fell over the 18 months.

The more serious error is the claim that our pilot found ‘a non-impact of UBI on labour supply’. They can’t have read the book. The results showed that basic income increased labour and work. Unlike studies the report discussed, which showed no impact elsewhere, we focused on primary and secondary activities. Many people, particularly women, expanded secondary economic activities, doing own-account farming or opening small-scale businesses.

This leads to the crucial omission. What the MP pilots showed was that a basic income system is transformative. In low-income communities, money is scarce. If a commodity is scarce, its price rises, meaning that moneylenders or landlords can charge annual interest rates of over 50 per cent, so that a windfall gain from a harvest or spell of wage labour typically goes in paying back loans or credit. That is a disincentive to try to increase income, meaning that disposable income is less than measured income. 

If a basic income system were introduced, the price of money would decline, raising the real value of any income, and reducing the tendency to go to moneylenders. 

This is only the first part of the transformative impact. The emancipatory value of a basic income exceeds its money value, because unlike in-kind subsidies, it gives recipients more control over when and how to spend on their needs. Contrary to middle-class prejudice, it leads to more spending on private goods and less on private bads, as we found and has been found around the world.

For example, we found that recipients switched from low-quality PDS rations to fresh market food and that child nutrition improved, as did health and access to healthcare, further raising their real income. The nutrition and health fed into better schooling, which economists see as raising long-term incomes. And contrary to the report’s defensiveness, the basic income led to more work and labour, resulting in more production and reduced economic inequality.

Unless these transformative effects are taken into account, one will overestimate the costs of basic income and underestimate the benefits. Elsewhere, attempts have been made to estimate the multiplier effects of cash transfers. These suggest that for every Rs 100 spent, the income multiplier is Rs 120 in the short term. It is scarcely an exaggeration to conclude that over the years a basic income system would largely pay for itself and increase economic growth. And it would help to reach the sustainable development goals.

Finally, the report has a useful section on alternative methods of advancing towards a basic income system. It inclines towards giving all women basic incomes, as a first step. This would be inadvisable, in spite of its appeal. The administrative costs would be similar to a universal scheme, and it would risk causing resentment among men. 

If a slow rollout were undertaken, for fiscal and administrative reasons, it would be better to require all States to identify the 10 per cent lowest-income districts and launch the scheme on a cost-sharing basis, with the Centre granting, say, Rs 500 per person, and the State government funding Rs 200 per person, perhaps in each case phasing out selected subsidies. 

It must be realised that a universal system would generate community and multiplier effects which selective, targeted schemes would not. It would also be wise for each State to set aside a small amount to pay to a designated body to overcome any obstacles to opening up accounts. The new Indian Network for Basic Income could play a valuable role. 

These are practical implementation challenges. What is exciting is that the evidence is strong that moving in this direction would make economic growth more inclusive and basic income a means of breaking cultural and other barriers to genuine human development. In that regard, the report marks an important step forward.

The writer is professorial research associate, SOAS, University of London, and co-author, with Sarath Davala, Renana Jhabvala, and Soumya Kapoor, of ‘Basic Income – A Transformative Policy for India’, published by Bloomsbury, New Delhi


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