Universal Basic Income in India Is a Tantalizingly Close Prospect

February 7, 2019

A flurry of announcements, most recently by India's opposition Congress party, holds out the tantalizing prospect that something like a universal basic income (UBI)—direct cash transfers to households, guaranteeing a minimum standard of living—may soon become a reality.

The government's Economic Survey of 2017–18 (which my team and I coauthored) advocated UBI as a policy idea and politicians across the spectrum have taken up the debate with renewed vigor. Several developments have conspired to rehabilitate it as a serious policy option.

The core idea of providing a basic minimum income was raised by India's first prime minister, Jawaharlal Nehru, in 1938 even before Indian independence in 1947. But, historically, the success of government anti-poverty programs in India has been mixed. Although there has been improvement in some areas, implementation has been afflicted by corruption, leakage and the exclusion of many of the deserving poor. For example, the major employment guarantee scheme in 2011–12 did not reach 40–65 percent of the poorest. Providing universal income is an appealing alternative because it obviates the need for identifying and targeting the correct beneficiaries.

The advent of biometric identification, which now covers nearly all Indians, financial inclusion and mobile penetration has created the scope for directly transferring cash to household bank accounts. There is still some way to go because biometric identification remains contentious and financial inclusion suffers from the last-mile problem: beneficiaries are still physically distant from banks or ATMs. But India is catching up.

The translation of ideas into actionable policy requires opportunity, which agrarian distress has created. For two years, prices received by farmers for most non-cereal crops have declined sharply, denting incomes and livelihoods. Politicians across India have felt compelled to act, not least since the ruling Bharatiya Janata party suffered setbacks in three state elections in December last year. The losses were widely attributed to the government not having addressed farmers' concerns.

The first step taken by the southern state of Telangana was to start providing cash transfers to land-owing farmers. The state of Odisha in eastern India followed by extending this scheme to agricultural laborers and tenants. Last week, the Congress party announced that providing a minimum income guarantee for the poor would be a key part of its manifesto for the parliamentary elections in May. The central government budget presented this week proposed a cash transfer of RS6,000 per year for all small and marginal farmers up to a landowning limit of two hectares.

None of these schemes amounts strictly to a UBI because they all aim to target a fraction of the population (with the exception of the small north-eastern state of Sikkim, which has promised a full-fledged UBI). Moreover, many are just announcements with implementation yet to be elaborated. Pronouncements have to contend with tight government budget constraints; neither the central nor state governments have much fiscal capacity to implement anything close to a true UBI, which could cost up to 5 percent of gross domestic product every year.

That said, the idea has gained such momentum that the question is no longer if it will happen, but what form it will take. My preferred idea is to exploit the political opportunity created by agrarian distress to start with a quasi-universal basic rural income.

Under this proposal, about 75 percent of all rural households would receive direct cash transfers that would top up their current incomes by about 40 percent for the poorest. Such a proposal would be more moderate in its fiscal impact than a true UBI, costing less than 1.5 percent of GDP. But even this model cannot be afforded unless wasteful and regressive agricultural subsidies for capital, power, fertilizer and water are simultaneously phased out. Making these cuts will be the real political challenge.

What is both distinctive and challenging about India is that a UBI will have to be financed and implemented jointly by the central and state governments. Cooperation between New Delhi and the states will be necessary to find the necessary resources. Competition between states ensures that the rewarding of tough political choices to implement a UBI in one area will be imitated by others.

When India repudiated its socialist past in favor of market reforms in 1991, then finance minister Manmohan Singh midwifed the change by invoking Victor Hugo's words, "no force on earth can stop an idea whose time has come." It is only a slight exaggeration to say that UBI is gaining similar momentum.

The writer, a visiting lecturer at Harvard University and senior fellow at Peterson Institute for International Economics, was India's chief economic adviser during 2014–18.