Universal Basic Income Scheme is feasible

The Finance Minister has announced that every small farmer in the country will get a direct transfer of Rs 6,000 per year in his account. The step is in the right direction but woefully inadequate. Economic Survey of 2016-17 had suggested that a Universal Basic Income Scheme (UBIS) may be considered by the government.

A fixed amount be transferred to the bank accounts of all the citizens of the country — Below Poverty Line (BPL) or Above Poverty Line (APL). Under UBIS, this amount will be paid to Mukesh Ambani and the newborn child of the Below Poverty Line (BPL) family alike. This amount will ensure that all citizens have a basic income to keep their body and soul together.

The plus points of UBIS are that it will eliminate all poverty at once since the every BPL family will get this money in cash, it will reduce the administrative costs by the removal of multiple welfare schemes, it will empower the people to use the money as per their requirements, and the chances of the BPL being excluded will become zero since all will get the UBIS. 

Recently, Rahul Gandhi has announced that the Congress will provide a basic income to the BPL only, and not to all the citizens. This is one step better than the farmers’ UBIS announced by the Finance Minister because it includes all BPL households, not merely the small farmers. The Congress proposal, like that announced by the Finance Minister, will not be “universal.” The division between BPL and APL will continue. 

The need is to implement a Universal Basic Income Scheme that covers all citizens of the country. The main argument against the UBIS is its cost. Finland abandoned its pilot UBIS scheme recently due to its high cost. However, my quick calculations show that UBIS can be implemented in India without any additional cost to the government. Let me elaborate the source of funds, impact on BPL households and impact on APL households in three sections below.

Source of Funds. According to the Economic Survey and the Budget documents, the Central government spent the following mounts on welfare of the people in 2017-18: Rs 140,000 crore on food subsidy; Rs 136,000 crore for welfare schemes including MNREGA, SC and ST, Awas Yojana, etc.; and Rs 134,000 crore on health and education. The total expenditure on these welfare schemes was Rs 410,000 crore. Additionally, the government spent Rs 100,000 crore on fertilizer and petroleum subsidies. These expenditures add up to Rs 510,000 crore. 

More money can be raised by imposing a UBIS cess on petrol and diesel. Our consumption of these fuels is about 14,532 crore litre per year. A UBIS tax of, say, Rs 10 per litre, can raise Rs 140,000 crore per year. A 10 percent UBIS cess on GST will raise Rs 120,000 crore. Total of these two cess will be Rs 260,000 crores. A 10 percent cess on Income Tax can raise Rs 100,000 crore.

Total money that can be made available for UBIS would be Rs 410,000 crore from welfare schemes, Rs 100 crore from fertilizer and petroleum subsidy, Rs 260,000 crore from cess on petroleum products and GST, and Rs 100,000 crore from cess on Income Tax, or total Rs 870,000 crore. Our population is about 135 crores. This money can be used to pay UBIS of Rs 6,000 per person per year or Rs 30,000 per family of five per year, or Rs 2,500 per family per month. That is a decent amount.

Impact on the BPL. Now let us assess the impact on the BPL households. My assessment is that one-half of the welfare subsidies of Rs 410,000 crore is going to meet the administrative expenses. Of the remaining Rs 205,000 crore, one-half is going to BPL and APL each. Thus, loss to BPL will be Rs 102,000 crore. I reckon that only five of the fertilizer and petroleum subsidy Rs 100,000 crore is going to the BPL Households.

The loss to the BPL households would be Rs 5,000 crore. Only 10 percent of the UBIS cess on petroleum and GST of Rs 260,000 crore will be collected from the BPL households because they buy less goods from the market. The burden on them will be Rs 26,000 crore. There will be no impact of cess on Income Tax on the BPL households.

The BPL households will thus become poorer by Rs 133,000 crore from the dismantling of welfare schemes and imposition of cess. On the other hand, they will get one-third of the UBIS payout of Rs 870,000 crore or Rs 287,000 crore. They will lose Rs 133,000 crore but gain Rs 287,000 crore and obtain a net benefit of Rs 154,000 crore. Impact on the APL households.

As said above, one half of the benefits from welfare schemes totaling Rs 102,000 crore is obtained by APL households. They will also lose 95 percent of the fertilizer and petroleum subsidy amounting to Rs 95,000 crore. They will pay 90 percent of the UBIS cess on petroleum and GST of Rs 260,000 crore. They will pay 100 percent of the cess on Income Tax of Rs 100,000 crore.

The total impact on APL households will be Rs 531,000 crore. Against this they will get two-thirds of the UBIS payout of Rs 870,000 crore or Rs 574,000 crore. They will lose Rs 531,000 crore but gain Rs 574,000 crore and obtain a net benefit of Rs 43,000 crore. They will be paying various cess from the left hand but getting more than the amount from the right hand. There will be no additional burden on APL households.

Overall assessment. The scrapping of all welfare schemes and imposition of UBIS tax on petroleum, GST and Income Tax would lead to a net benefit of Rs 287,000 crore to the BPL and a net benefit of Rs 43,000 crore to APL households. There will be no additional burden on the Central government. This happens because the huge administrative expenditures in running the welfare schemes will be saved and transferred in cash to the people of the country. The UBIS is not an issue of scarcity of funds. It is an issue of bureaucracy versus the people.

The political alliances —the NDA and the UPA alike—must make a bold move and pay an UBIS of Rs 2,500 per family per month without an additional burden on the government. The Finance Minister has taken a small step in the right direction by announcing a direct payout of Rs 6,000 per year to the small farmers. The UPA or NDA must take the next step and pay a decent UBIS to all the citizens of the country instead of pandering to the interests of the bureaucracy. Author was formerly  Professor of Economics  at IIM Bengaluru