Budget proposals need prudence

So, it is going to be a clash of promises in the ensuing election campaign this year as Modi's Budget relief to farmers and middle-income group take on Congress President Rahul Gandhi's recent announcement on minimum income guarantee to the poor. Coming in the last Budget, the exemptions and direct cash transfer (limited though), may or may not help Modi much. Yet the BJP expects to work some benefit out of these. However, the spotlight could also be back on the Universal Basic Income, which became part of India's discourse when the Economic Survey of 2016-17 proposed it.

Amid all the euphoria over such announcements and Budget proposals, the moot question is often missed. Is India rich enough to go for it? It is true that we cannot build a new India while millions of our brothers and sisters suffer the scourge of poverty. There is a hidden question too to this. What is the ideal threshold of eligibility for such money transfers?

It is also not known how payments would phase out as beneficiaries earn more. Since 1995, the Centre is giving pensions to the elderly, widows and disabled. However, implementing it on a large scale as being proposed poses problems in our country as the vast majority of Indians work in the informal sector - in unincorporated businesses that don't keep books or aren’t registered with the government, or both - which makes tracking income for the purpose of means-tested aid programmes difficult. About 80.9 per cent of India's employed population - with 80.7 per cent men and 81.7 per cent of women - is earning livelihood in the informal economy, the International Labour Organisation said last year in a report.

What is more worrying is that when it comes to the age group of 15-24 years, 98.3 per cent Indians are engaged in the informal sector. Does the government even know who earns how much whoever is in power? An option proposed by Arvind Subramanian, former Chief Economic Adviser to Prime Minister Narendra Modi, is not to worry about thresholds and send a basic income only to rural households. They had proposed a benefit of Rs 18,000 a year to the poor households. Finding resources for such a scheme will be difficult without overshooting fiscal deficit targets. The latter could lead to runaway inflation and other associated problems.

The only way it could work is if existing welfare schemes are subsumed within the minimum income rollout. One cannot have both. But the optics of doing away with subsidies on food, fertilisers and kerosene will have a political fallout for governments. The fiscal and political risks could be too much. According to Subramanian's report, spending a mere 2 per cent of GDP on a UBI of Rs 200 per person per month could cut the extreme poverty rate from 22 per cent to 7 per cent. A benefit of 1 per cent could cut the rate to below 1 per cent. Hence, prudence is required to balance fiscal and political fallout.