Time for universal basic income has come

Congress president Rahul Gandhi has promised to pay Rs 72,000 per year as basic income to the 20 percent poorest families of the country. This can be called Targeted Basic Income Scheme (TBIS).

It will provide a basic income to a targeted population. Our population is about 135 crore. The average size of our family is 4.45 persons. The number of families, therefore, would be about 30 crores. The poorest 20 percent families would number about 6 crores. At Rs 7,200 per family, this will require Rs 4.3 lakh crore.

I am, however, not in favour of providing this basic income only to the poor families. Prof Pranab Bardhan says that about one-half of the poor do not have Below Poverty Line (BPL) cards, while one-third of the BPL card holders are not poor.

Limiting basic income to the poor families means that only a small part of the money will reach the poor families. Say, Rs 100 is spent by the government on TBIS. One-third, or Rs 33 will go to Above Poverty Line (APL) families. The remaining Rs 67 will go to BPL.

However, another Rs 67 should have been provided to the left-out BPL families. Thus, against a requirement of Rs 133, the government will spend Rs 100, but only Rs 67 will reach the BPL families.

It is best, therefore, to get rid of the poor-rich division and pay this money to all the families under a Universal Basic Income Scheme (UBIS). This will entail paying Rs 7,200 to all the 30 crore families in the country.

The requirement of funds will accordingly increase from Rs 4.3 lakh crores to Rs 21.6 lakh crore. This is a massive amount considering that the total expenditure of the Central government in 2016-17 was Rs 19.5 lakh crore. Even this is possible though.

In the first stage, let the amount of UBIS be reduced to Rs 36,000 per family. This will require Rs 10.8 lakh crore.

This amount can be collected by a combination of three sources. First is a tax on petroleum. The Central government collected Rs 2.4 lakh crore as tax on petroleum in 2016-17.

The collection would be about 3.0 lakh crore in 2019-20. The present tax on petrol is Rs 15 per liter. This can be raised threefold to Rs 45 per liter. The price of petrol in the market will then increase from Rs 70 per liter presently to Rs 100 per liter.

This will beget the government an additional revenue of Rs 6.0 lakh crore. An additional benefit will be that petroleum consumption will reduce, our import bill will reduce, our currency will appreciate and the standard of living of our people will improve.

There will also be a huge environmental benefit from lower carbon emissions. We could also claim credit from the Clean Development Mechanism for this reduction. I will shortly discuss how the people will be compensated for this additional burden.

The second source could be to dismantle the plethora of welfare schemes that are mostly benefitting the welfare bureaucracy. The expenditure incurred by the Central government on "development" schemes in 2016-17 was Rs 6.9 lakh crore.

This will be about Rs 8.4 lakh crore in 2019-20. One-third of these schemes can be disbanded leading to savings of Rs 2.8 lakh crore. The Central government additionally spent Rs 1.3 lakh crores as subsidy to Food Corporation of India as payment for food subsidy under the Public Distribution Scheme.

This would be Rs 1.6 lakh crore in 2019-20. This can be wholly scrapped since all families would be getting UBIS. The total money available from these two steps would be Rs 4.4 lakh crore.

The third source could be to impose a cess of 50 percent on GST. An increase in the rate of GST would mean that one-half of the additional revenue will go to the States. Cess, however, goes wholly to the Central government.

The collection of GST in 2018-19 is expected to be Rs 11.6 lakh crore. An imposition of 50 percent cess would raise about Rs 5.8 lakh crore.

A combination of raising revenues from these three sources, namely, Petroleum Tax Rs 6.0 lakh crore, dismantling of welfare schemes Rs 4.4 lakh crore, and cess on GST Rs 5.8 lakh crore; can be used to raise the Rs 10.8 lakh crore required for the first phase of UBIS.

Let us now consider the impact on the economy. Let us say one-half of the families are poor. They will get UBIS payout of Rs 5.4 lakh crore. They will buy scooters, computers and TVs, and make houses.

They will use most of this money for buying goods from the market. In economic parlance it is said that the poor have a higher "propensity to consume." This will lead to increase in demand, a corresponding increase in production and set in motion a fortuitous cycle of economic growth leading to higher revenue collections.

This additional revenue in course of five years can be used to gradually increase the UBIS payout from Rs 3,600 per year to Rs 7,200 per year per family.

Now let us examine the impact on the lower middle class. I reckon the consumption of petroleum at 200 liters or Rs 14,000 per year. The additional burden @ Rs 30 per liter will be Rs 6,000 per year.

The per capita reduction of receipts from the dismantling of welfare expenditures will be Rs 15,000 per year for the family. The additional burden of cess on GST will be Rs 17,000 per family per year. The total burden will be Rs 38,000 per year.

On the other hand, the family will be getting UBIS payout of Rs 36,000 per year leading to a no-gain no-loss situation. Rich families consuming more than above averages will pay more while the poor families consuming less than above averages will receive more. A true welfare State will be established.

An argument is made that the poor will stop working once they get the UBIS payouts. Global studies point otherwise. An article in "Economy and Growth" quotes a study by Ioana Marinescu who surveyed global empirical evidence for cash transfers.

The study demonstrates that people do not stop working once they get these transfers. Similarly, Professor Pranab Bardhan says: "It is often claimed in some elite quarters that UBI will make people idle or induce them to spend more on alcohol and drugs.

Careful experimental data in different developing countries, including India, do not show any evidence of this." The fact is that as the lower desires of man or woman — food, clothing and shelter — are fulfilled, she or he rises to fulfill higher desires of music, sports and computer games.

I hope, therefore, that the Congress will at the minimum implement Targeted Basic Income Scheme, and preferably move to a Universal Basic Income Scheme.

(The writer is formerly Professor of Economics at IIM Bengaluru)