In the Economic Survey [2016-17] presented in the parliament on January 31, 2017, chief economic advisor [CEA], Dr Arvind Subramanian advocated universal basic income [UBI] instead of a plethora of subsidies given under extant dispensation. But, the idea found no mention in finance minister [FM], Arun Jaitely’s budget speech for 2017-18 presented on February 1, 2017.
Meanwhile, in an interview given to a group of economic editors on February 1, 2017, Jaitely opined that “UBI is an idea whose time should come but, politics of this country is not mature yet for its implementation”. He could have taken the idea on board at least on a trial basis but avoided. So, what are the constraints and what will be the opportune time? Will it come at all?
CEA couched the idea in Mahatma Gandhi’s philosophy that every citizen of India is entitled to live with dignity. Put in simple words, the genesis is as under:-
Whether or not, a person can lead a life with honor and dignity, all depends on his ability to generate a certain minimum level of income to make it possible. Left to himself, he may not be able to get to this level either because he has no job or he is a small/marginal farmer [or farm worker] perennially entrapped in subsistence.
Under such circumstances, the government may intervene to provide ‘unconditionally’ and on a ‘regular’ basis financial assistance – call it unconditional basic income [UBI] – to ensure that he can lead a decent living as contemplated by the father of nation.
Successive governments have spent hundreds of thousands of crores under welfare schemes meant for poor. The expenditure is mostly on subsidies under dozens of heads. Three major subsidies viz. food, fertilizers, petroleum products alone account for 2% of GDP or staggering Rs 300,000 crores annually.
The subsidies are administered through suppliers/manufacturers selling products at prices much lower than cost [or market price] who get the difference reimbursed from the government. But, this manner of administration suffers from three major flaws viz. (i) un-targeted; (ii) misuse/leakages and (iii) inefficient use.
First, making the product available at subsidized price to ‘all and sundry’ without any differentiation results in appropriation of the benefit even by those who do not deserve or need it. Indeed, beneficiaries include the rich and even super rich. According to Economic Survey [2015-16], 24% of fertilizer subsidy is cornered by large/rich farmers [holding size > 10 hectares].
Currently, there are 165 million beneficiaries of LPG subsidy majority of them being better-off/rich. This is despite Modi’s efforts in making over 10 million give up their subsidy entitlement under “GiveUp” campaign and bringing in about 20 million poor households under its fold. Likewise, kerosene subsidy is also un-targeted benefiting mostly the better-off.
Under National Food Security Act [NFSA], food is supplied to 2/3rd of India’s population at heavily subsidized prices of Rs 1/2/3 per kg for coarse cereals, wheat and rice. Such a humongous number is well above households [25-30%] living below poverty line. Clearly, substantial chunks of better-off enjoy this subsidy. A committee under Dr Shanta Kumar [2015] had recommended coverage under the scheme to be reduced to 40% but this has not been acted upon.
Second, the extant dispensation is prone to large-scale misuse. According to Economic Survey [2015-16], 41% of fertilizer subsidy is leaked via diversion to chemical factories and smuggling to neighboring countries and 24% goes to inefficient manufacturers. In food segment, there are substantial leakages 30-40% from public distribution system [PDS]. Kerosene subsidy is galloped by dubious traders who grab it for adulterating with diesel.
Third, keeping price of inputs at artificially low level makes users complacent resulting in their inefficient use. Thus, excessive use of urea is rampant leading to imbalance in nutrient use and lower crop yield besides causing damage to environment. At another level, supply of power at heavily subsidized tariff [free in some states] leads to excessive water use causing denudation of ground water.
The government has taken some steps to deal with these maladies. In LPG, by switching to direct benefit transfer [DBT], it has plugged leakages yielding savings of over Rs 20,000 crores. In food, it has eliminated 40 million bogus ration cards to yield Rs 14,000 crores. In urea, it has made its neem coating mandatory which has helped rein in diversion to non-agriculture use.
In food and fertilizers, Team Modi has proclaimed its commitment to DBT time and again. But, there is nothing on ground to demonstrate its seriousness. A few pilot projects currently being run for fertilizers in 16 districts and for food in 3 union territories [UTs] takes us nowhere.
DBT in fertilizers means that subsidy cannot be routed via manufacturers. This will in turn, require removal of control on maximum retail price [MRP] and dismantling of extant unit-wise NPS [new pricing scheme] for urea. But, government is not prepared for it even as under a comprehensive New Urea Policy [2015], it had frozen MRP at existing level and decided to continue NPS for 4 years i.e. till 2019. In food also, it has no intention to stop routing subsidy through the Food Corporation of India [FCI] and other state agencies which alone can pave the way for DBT.
Now, if universal basic income [UBI] is to be put in place, all existing subsidies and associated disbursement mechanisms will have to go. When, the government is determined to keep the latter intact, how will it make way for former? On the other hand, for the two to co-exist is preposterous; indeed this is ruled out by Jaitely himself.
But, what prevents government from disbanding existing subsidy disbursement mechanisms? In that event, selling price of fertilizers and food will increase sharply and there will be pressure to restrict subsidy [albeit DBT] only to the poor. Besides, in fertilizers, a number of high cost public sector plants will face risk of closure [these include politically sensitive stuff such as Gorakhpur and Sindri units of Fertilizer Corporation of India].
That is precisely what Jaitely was alluding to when he opined “politics of this country is not mature yet for implementation of UBI”. Therefore, for now, at least till the end of Modi’s term, the idea will remain confined to brainstorming by think tanks only.