First, any universal programme is expensive.
For example, if we were to give every adult exactly the amount of income that defines the poverty line, which would ensure that everyone would be brought above the poverty line, calculations suggest the bill would amount to 11% of the GDP (Gross Domestic Product). This is just a hypothetical example. One can, of course, offer a lower amount per person that would be more affordable.
However, in this context, a sense of perspective is needed in discussing expenditures on programmes aimed at the poor, who by official estimates, constitute 30% of the population. Calculations suggest that if we take just twice the amounts that define the poverty line, almost 80% of the population lives below that.
Yet non-universal programmes targeted to the non-poor are being doled out without much controversy on a regular basis. The total bill from implementing the recommendation of the 7th Pay Commission that will benefit 4,700,000 employees and 5,200,000 pensioners (only 0.8% of the population) is 1% of the GDP. Calculations based on tax data suggest that the top 1% account for 13% of GDP, yet income tax which is only paid by 1% is a mere 1.87% of GDP. Bad loans in public sector banks (90% of which is attributed to large borrowers) constitute 5% of GDP by conservative estimates. Bad loans being a stock, a more relevant figure would be annual interest income if this amount was annuitised. At the current interest rate of 6.5% per annum, the annual interest income would be 0.3% of GDP. Compare this with the expenditure on the much-maligned MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) – a mere 0.4% of GDP.
Second, for such a programme not to add to the fiscal burden and create inflationary pressure, it has to be funded either by spending cuts or by increased taxes.
The scope for spending cuts certainly exists. Explicit subsidies cost the government 4.2% of GDP. Revenues foregone by the government on various exemptions and concessions given to tax payers constitute another 6.7% of the GDP. That adds up to almost 11%. A different exercise calculates the percentage of all central and state subsidies taken together that go to the non-poor, and finds this to be 9% of the GDP. There is no question that potential resources exist that could fund a UBI scheme, but the real issue is whether there will be political support for the subsidy cuts, about which one cannot be very optimistic.
How about raising taxes? Given that only 1% of the population pays income tax, while 2.3% file tax returns, the fiscal instruments to claw back the transfer from the rich are limited. Once again, even adjusting for India´s low per capita income, the startlingly low fraction of income-tax payers reflects the fact that the agricultural and informal sectors´ incomes do not fall under its net.
None of these are insurmountable problems. Cutting wasteful expenditure and raising the tax base are both essential steps in fiscal reforms to raise resources for development, whatever may be one´s priorities, whether it is investing in infrastructure or fostering human capital or alleviating extreme poverty. It just underlines the importance of serious fiscal reforms, without which all these discussions are like deciding on what kind of cuisine to have without any money in the pocket.
Is India ready for a universal basic income scheme? Perspective