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A vote for minimum basic income, but of what kind?

Fortune India
By Professor  

A UBI scheme for all, unless implemented entirely by states with high pre-existing social development performance levels, does not seem feasible for implementation at a national level.


By Deepanshu Mohan, February 09, 2019


The acting Finance Minister Piyush Goyal recently unveiled the Pradhan Mantri Kisan Samman Nidhi scheme during his budget speech, in an effort to provide “supplemental income” to vulnerable farmers (with cultivable land up to 2 acres). A few days before this announcement, Rahul Gandhi said if the Indian National Congress is voted into power they would announce a Minimum Basic Income Scheme for the income deprived sections of citizens.


The discussion on providing an assured minimum basic income plan and/or implementing a Universal Basic Income style scheme has been subject to a lot of discussion in India’s economic policy circles for some years now.


Arvind Subramanian, the ex-chief economic advisor to the current government, in his 2016-17 Economic Survey report, had an exclusive chapter discussing the idea of UBI and presenting its case for states in India. Recently, Sikkim’s SDF government has assured universal basic income plan to its 6.10 lakh people, by 2022. Further, state governments of Telangana and Odisha too have similar income transfer schemes planned for farmers.


At this point, it is difficult to read much on what kind of a minimum basic income plan may be most feasible and appropriate, and how different is this scheme likely to be at a national level, from the pre-existing demands and discussions around the (fiscal) possibilities of implementing a universal basic income (as Subramanian and others have argued for).


What does seem clear though is that the political idea of a minimum basic income seems to be centered around a minimum income that is to be paid directly to the poorer sections (say, those below the poverty line or an income threshold), and is therefore, different from UBI-which seeks to provide minimum income support to all people (regardless of their income or social status).


In all its fairness, at a time when government is most likely witnessing a fiscal slippage and has a low tax-GDP ratio, a UBI scheme for all, unless implemented entirely by states with high pre-existing social development performance levels, does not seem feasible for implementation at a national level. Designing a minimum basic income plan for the poor may also need to address some key concerns, particularly in a country where implementation of social welfare policies suffer from what Kaushik Basu terms as the “ink on paper” problem-where all that is written on paper in ink (as law or policy) may/may not consequentially result in actual changing in human behaviour or realise affirmative action.


In exploring a viable alternative, here I argue for the case of designing a minimum basic income plan based on a negative Income Tax style proposal, seemingly more relevant for a nation-level implementation scenario. Before discussing the proposal, let me highlight a few reasons why such a proposal is required.


Right since independence, successive governments have tested means-based social transfers-as the main form of income support-for different social and income groups. Abstracting from the many details and variations in eligibility criteria (to get what one is entitled to), level of fiscal generosity and population coverage, most social welfare policies rely on conditional and unconditional basic income (CBI) transfers, further mediated and facilitated by agencies of the state (via local governments).


Welfare policies of such in-kind benefits are widely critiqued in most development literature on multiple problems: high bureaucratic costs; incentives to under-report incomes; errors in designing and applying for eligibility criteria, to cite a few. A culmination of these result in a welfare-trap for vulnerable groups.


What do we mean by a negative income tax style proposal?


The so-called Negative Income Tax (NIT) was first proposed by Milton Friedman in his 1962 book, Capitalism and Freedom. As against other conditional basic income based transfers, NIT seeks to moderate core concerns resulting in the welfare trap. The proposal would involve the government paying a certain income (i.e. deducted from a given threshold of what constitutes as basic income people need for access to basic social and household services). In case of India, this may substitute most of other cash(/in-kind)-based subsidies.


How can it work?


If the minimum income cut-off threshold is set at ₹40,000 per month (as an example), and the negative income tax percentage is 50% at a monthly level, someone who made ₹20,000 in a month shall be paid ₹10,000 by the government. Similarly, if one made ₹35,000 per month, she would be paid ₹2500 by the government (this is different from UBI which seeks to provide the same amount of money to all, regardless of their income).


The structure of NIT is such that there is always an incentive for people to work more and make more (to reach the desired income cut-off) and also report their correct incomes in the process (to get what they are entitled to from the government). While someone who makes less income-but not enough to pay income tax-will receive less from a negative income tax as against someone who doesn’t make any money at all, therefore, overall who earns more gets more from the government (till the basic income threshold). Of course, technocratic agencies within finance ministries (or those more autonomous) may be given greater responsibility on periodically (re)assessing the Negative Income Tax rates and the desired income cut-off levels.


The idea of incentivising people to work, especially for those in a working-age population category, tackles directly with the moral hazard issue, where under this proposal, those earning even a small income understand the value of earning more over time. This system, in its original proposal, hasn’t been implemented anywhere so far (including in the U.S. which debated a modified version of NIT that Friedman himself disapproved of).

In India, our tryst in robustly strengthening our social safety net warrants a bold, experimental approach. NIT offers a relatively simpler and administratively cost-effective criterion for re-designing our social welfare policies, as against to what we already have. A minimum basic income plan based on an NIT designed proposal say, applicable for a working age population category i.e. 15-45 may work well in mitigating a number of welfare trap issues and simplifying access to social security in a fiscally sound manner for states in India.

This idea of course requires an intensive review, debate and discussion, given that every state has its own income capacities that are varied from one to another. It may be reasonable at first to initially ascertain what percentage of NIT can be levied for and across states, that is mapped in proportion to their own levels of Gross State Domestic Product (GSDP) per capita levels and current state of demographic composition.

At the same time, there are two critical areas which need to be considered while thinking of a minimum basic income plan.

One, is the problem of conspicuous spending by households (identified as recipients to the scheme), particularly male members of households in deeply patriarchal social systems, who may use the income sum for unproductive means (i.e. alcoholism, drug use etc.). The rational expectations drawn out from handing out cash directly to people may not necessarily lead to rational decision making from the side of recipients.

The second problem is that of anticipating an increase in gendered unequal distribution of resources (especially social services) within households. The intra-household bargaining position of women in many rural and urban households remains particularly weak (particularly in some north, western states) and it may be worthwhile considering the idea of providing a basic minimum income (based on a NIT criterion) to women primarily in such (and most) spatial locations.

Both these problems surface as part of the likely implementation hurdles as seen from the catastrophic lessons of a post demonetisation and GST policy-landscape. Further, any threshold of basic income needs to be adjusted with inflation and (rising) costs to basic services (health and education). These services are mostly privatised across India and subsidising them remains key in determining income thresholds.

Another key issue connected here is with the process of rolling out a plan like this. The roll-out of any centrally planned social welfare schemes-as good as it may sound-need to be gradualistic, offering enough time for state agencies and the bureaucracy to understand and implement the scheme.

Our tryst in robustly strengthening our social safety net warrants a bold, experimental approach at this point. A gradually phased out NIT proposal of a minimum income plan offers a relatively simpler and administratively cost-effective criterion for re-designing our social safety net for vulnerable economic and social groups.

Deepanshu Mohan is assistant professor of economics, and director, Centre for New Economics Studies, O.P. Jindal Global University.