The Singular Chancellor
The Merkel Model and Its Limits
In India, it is not unusual for the rich to receive more welfare money than the poor. As India’s Finance Ministry noted in its annual economic survey released in January, the problem is “almost intrinsic” to the country’s anti-poverty and social programs. Much of the money is funneled through India’s convoluted bureaucracy and ends up “leak[ing] to non-poor and…corrupt local actors.” But a new idea, the ministry suggests, could ensure that funds for the poor actually reach the poor: a universal basic income.
The decision to simply hand out cash to everyone is not new and, of course, quite political. In 2013, the Indian government had also toyed with a variant of universal basic income known as “direct cash transfer,” but it never took off because of the difficulties in determining who should receive such payments. But setting all that aside, the concept of universal income is a rather simple and appealing one: replace existing social programs with a comprehensive cash payment. And that payment doesn’t have to be large. The Finance Ministry’s economic survey estimated that a modest sum of $4 per person per month could reduce India’s poverty level from 22 percent at present to seven percent. The cost would be a mere two percent of GDP, or $42 billion, which is approximately the same amount the government spends in total on food, fuel, and fertilizer subsidies.
Compared to other social programs, universal basic income would also be simpler to implement in that it would be granted based on only one condition: Indian citizenship. Such an approach minimizes all the distortions, such as targeting based on income and other factors, and maximizes efficiency. This means that although a payment of few thousand rupees will have very little impact on the wealthy, the same payment to a very poor family would substantially improve their welfare.
Let’s consider the example of India’s mammoth public distribution system, which subsidizes food for poor households. The government estimates that 36 percent of the subsidies never make it to any household, and another 36 percent finds its way to non-poor households. The remaining 28 percent reaches its intended beneficiary—India’s poorest 40 percent. That means most of the government’s welfare spending is essentially wasted. Furthermore, some of that money goes toward unnecessary administrative expenses, or as economist Mike Munger has described it, “very expensive meetings where very smart people sit and worry about what to do about poverty.” In short, switching from the current system to a universal basic income would save money on overhead and increase the amount of money the poor receive. This is a Pareto improvement: enhancing the lot of some while causing no harm to others.
One criticism of the universal basic income in India will, most likely, come from within the poverty industry—the vast network of local, regional, national, and international public service agencies that facilitate the welfare system. Those who work in the industry argue that implementing a universal basic income would put many public employees out of work. But given the legacy of inefficiency and corruption within the Indian bureaucracy, this is not necessarily a worthwhile concern. It is also important to note that Prime Minister Narendra Modi’s election slogan from 2014 was “minimum government, maximum governance.”
Another frequent criticism of the idea is that it would be too expensive for a poor country like India, unlike affluent ones such as Canada or Finland where universal basic income is currently being piloted. In reality, a universal basic income would be considerably cheaper than the current array of subsidies and in-kind transfers that India offers because the current programs are extremely leaky. Further, as India’s recent economic survey highlights, a universal basic income would be designed to be budget neutral, meaning that it would replace other social sector programs.
Jean Dreze, one of the chief architects of India’s National Rural Employment Guarantee Act—an ambitious scheme that offers 100 days of guaranteed employment to anyone in rural India who agrees to work in manual labor—worries that universal basic income will displace “well functioning” programs, such as the employment guarantee. But Georgetown University economist Martin Ravallion and his colleagues from the World Bank have found, after years of research in Bihar, one of India’s poorest states, that “once one accounts for all the costs involved in India’s [National Rural Employment Guarantee Act], including the foregone earnings of participants, a basic income guarantee with the same budgetary cost would have a greater impact on poverty than the labor earnings from the existing scheme.”
Even from a theoretical perspective, Dreze’s fears seem unfounded. Supposing the National Rural Employment Guarantee Act was indeed “well functioning,” a universal basic income plan still offers more. The current government estimates that a modest universal basic income program—costing two percent of the GDP—would put 12,480 rupees ($193) in the hands of a rural four-person household. This amount is larger than the average annual earnings of a rural household under the National Rural Employment Guarantee Act. This is despite a steady increase in the minimum daily wage for all states in India because the states lack the capacity to create millions of jobs locally in rural areas. Furthermore, although the National Rural Employment Guarantee Act promises 100 days of unskilled employment, households have rarely gotten more than 50 days of employment on average. With a universal basic income, transferring a lump sum amount is much easier than creating millions of actual jobs on worksites close to where people live in rural areas.
Another concern, as noted in the economic survey, is that India’s universal basic income proposal will encourage people to stop working altogether. And yet, a significant body of economic research has shown that this is simply not true. As Munger notes, “It is much more expensive to try to force people to buy what we want them to want than to let them make their own choices.”
Even among those who support a guaranteed income, there are those who argue it should not be universal but targeted toward the poorest. It is true that such targeting has been made easier in India because of an advanced electronic payments infrastructure and the Aadhaar biometric identification program, through which nearly the entire Indian population has been registered. But a targeted program would be open to corruption. As Justin Sandefur, a senior fellow at the Center for Global Development, has noted, most of the research on welfare targeting has focused on the technicalities of rolling out such programs and not on graft. In India, politicians steer programs to their districts, poor or not, and local officials ask for kickbacks from their beneficiaries. A study conducted by Transparency International in 2005 showed that more than 62 percent of Indians had firsthand experience in paying bribes or peddling influence to successfully get things done by public officials.
It is also not always easy to identify who is poor. Poverty is both relative and dynamic. It is difficult to set a poverty line because there are disagreements on what, besides food, constitutes a basic need, whether it’s housing, clothing, education, medicine, sanitation, and fuel, for instance. And even once a line is set, households move above and below it over time. These nuances make targeting extremely complicated, which then significantly raises the administrative burden and cost of such a program.
Proponents of a targeted basic income point out that many of these problems could be addressed with technology, such as adopting biometrically authenticated smartcards; they were used in Andhra Pradesh and led to a significant reduction—by 12 percent—in misplaced funds for the National Rural Employment Guarantee Act. But that welfare program’s biggest design strength was its universality: the government made it available to all rural households, which could then opt into the program. It is also important to bear in mind that in Andhra Pradesh, more than 85 percent of its population was enrolled in the Arogyasri Health Insurance Program, which was meant only for the poor who make up no more than 30 percent of the state’s population. So, while technology can reduce certain types of leakages, it is unlikely to significantly improve targeting.
The idea of universal basic income has been around for decades. In 1962, the economist Milton Friedman called it a negative income tax and argued that it would lead to the lowering of taxes and an increase in benefits for the poor, while allowing all beneficiaries greater autonomy in providing for their own needs. Perhaps Munger summed it up best, “We could do worse. And we already have.” Not only would a switch from the current system to a basic income system create a better safety net, it would save the government money and provide greater autonomy for the poorest. After 70 years of experimenting with anti-poverty policies, India is now ready for a universal basic income.