By Gyan Pathak
Rahul Gandhi has finally promised Rs 72,000 yearly to 20 per cent of the poorest people in the country if Congress comes to power. BJP’s Arun Jaitley, the Union Finance Minister called it a bluff and termed Rahul’s announcing the basic minimum income scheme ‘a bid to cheat poor’. Supporters of the idea of Universal Basic Income (UBI) hailed the announcement. Skeptics, being worried about fiscal costs, raised probing finger as to how the required money would come?
However, the two recently published papers of the IMF, one published as Finance and Development article in December 2018 and the other as an IMF Working Paper with special reference to India in July 2018, have already proved that budget neutral UBI can be planned for economic growth and well-being of the people. The papers have also given various models of implementing such a programme emphasizing that a UBI can be a more effective way of supporting low-income households when existing income support programmes are inefficient, and can play an important role in generating public and political support for the implementation of structural reforms in support of economic growth.
The authors of the article published in December are soon coming with IMF Working Paper titled “Universal Basic Income: Debate and Impact Assessment” which the present article draws on. The article was titled ‘What is Universal Basic Income?’. The article says that simple UBI program could save administrative costs and increase the transparency of transfer systems, making them less subject to administrative discretion and corruption. It would also be useful as a strategic instrument to support structural reforms.
The IMF Working Paper published in July was more specific. It was titled “Universal Basic Income in Developing Countries: Issues, Options, and Illustration for India.” The paper starts by discussing the adoption of a UBI as a substitute for the Public Distribution System (PDS), which provides income support to households through price subsidies for wheat, rice, sugar and kerosene consumption. It then discusses the introduction of a UBI as part of an ambitious structural reform program centered around increasing energy prices to efficient levels that reflect the true social cost of energy consumption.
Both models are designed to be budget neutral. While the replacement of the PDS with a UBI would help to address under-coverage of low income households, this gain would come at the expense of a slight increase in leakage of benefits to higher income groups. Alternatively, by excluding higher income groups from the UBI, the savings could be recycled to finance the scheme. A key feature of the analysis in the paper is the focus on fiscally neutral reforms to help bring out the important trade-offs between various policy objectives and possible concerns about the adoption of a UBI, such as enhancing public expenditures (e.g., public investments in infrastructure, education, health and nutrition). Fiscal gains from subsidy reforms may finance such scheme, the paper showed.
The authors of the papers argue in support of replacing the inefficient system to reach the poor. They cited example that the Indian Ministry of Finance estimates that 36 percent of total PDS allocation never reaches final beneficiaries because of “out-of-system” leakages along the procurement-transportation-distribution chain (Ministry of Finance, Government of India, 2017a). More specifically, taking kerosene as an example, there is an estimated 41 percent gap between the total PDS subsidized kerosene allocation by the Central Government and actual household consumption as captured by the 2011–12 NSS (Ministry of Finance, Government of India, 2016). Furthermore, despite its broad coverage of the population, sizeable under-coverage of lower-income groups still exists under the PDS.
Based on NSS 2011–12, approximately 20 percent of households in each of the bottom two income quintiles do not receive any benefits. At the same time, a large proportion of higher-income deciles receives PDS subsidies, with the richest 40 percent of households receiving 35 percent of total PDS subsidies. It has been estimated that 36 percent of PDS total spending never reaches the intended households (Ministry of Finance, Government of India, 2017) due to the existence of “ghost beneficiaries” and the large illegal diversion of subsidized goods resold on the open market. That is, out of every 100 Rupees spent on the program, only 64 reaches households.
The case of energy subsidy and prices is more alarming. Since the rich consume more energy in all its forms, they are the largest beneficiaries of it. The poor are getting a little benefit. It has been estimated that the efficient energy prices would require following price hike: gasoline (67 percent), diesel (69 percent), kerosene (10 percent), LPG (67 percent) and coal (455 percent). The high level of subsidies to the rich can be cut to finance the UBI for poor. Rich should be charged efficient energy price without subsidy.
On average, household subsidy benefits are equivalent to around 10 percent of their total expenditures, with wealthier households benefiting more (on average, 11.5 percent of total expenditures in top three income deciles) than poor households (on average, 9 percent in bottom three income deciles). While households in the bottom four income deciles receive 17 percent of total energy subsidies, households in the top four income deciles receive 69 percent. Replacing these subsidies with a UBI in a budget neutral way would therefore result in a substantial redistribution of benefits from higher to lower income groups and a substantial increase in benefit generosity for lower income groups.
Over recent years the government has implemented substantial energy subsidy reforms but benefits are not percolated to the poor. Gasoline prices have been liberalized since 2010. Starting in 2013, diesel prices were increased by a half rupee per month until they reached international parity, and have been fully liberalized since January 2015. Since June 2017, gasoline and diesel prices at the pump are changed daily according to a revised automatic pricing formula that sets consumer prices, instead of twice a month under the previous regime. The government also used the fall in oil prices to offset the price decline at the pump with higher taxes. Currently, petrol and diesel are taxed once by the central government through a central excise tax and then again at the state level through a value-added tax. Excise duties, levied by the central government on petrol and diesel, have been increased nine times since November 2014. In 2017, the government committed to gradually phase out LPG subsidies by April 2018 for domestic consumers, by increasing the cost of LPG cylinders by four rupees/month.
The present government seems to be interested in only making money for themselves or giving maximum benefit to the rich even in the subsidies. They fail to visualize that a little curtailment of benefit to the rich can make the UBI budget neutral. Jaitley’s remark on Rahul is thus in bad taste. (IPA Service)