Pranab Bardhan

Can India Afford a Universal Basic Income?

rupee

In the recent past, there has been a lot of talk around the government providing a universal basic income(UBI) to every Indian.  If UBI becomes the order of the day, then the central government will carry out an unconditional income transfer to every Indian, rich or poor, on a periodic basis (perhaps monthly).

The question is can we afford it? The answer seems to be no. This becomes clear from a remark made by the NITI Aayog Vice Chairman Arvind Panagariya, in a recent interview to The Indian Express: “The Tendulkar urban poverty line at 2011-12 prices is Rs 1,000 per person per month. Due to inflation between 2011-12 and now, at today’s prices, this sum would be significantly larger. But transferring even Rs 1,000 per month to all Indians would cost Rs 15.6 lakh crore (Rs 1,000 x 12 months x 130 crore people) a year. We simply do not have this magnitude of fiscal resources.”

The total expenditure of the Indian government during 2016-2017 has been projected to be at Rs 19.78 lakh crore. Rs 15.6 lakh crore amounts to around 79 per cent of the total expenditure of the Indian government. This makes it unviable. Or so it seems.

The question that crops up here is that why are economists who are recommending UBI, actually recommending it? It doesn’t take much Maths to understand that India cannot afford a universal basic income at this point of time.

The economist Pranab Bardhan in a 2011 article in the Economic & Political Weekly, said: “The main question is: if we want it to be universal, can we afford it? Of course the answer depends on the amount to be given out, if it will be a replacement for the existing transfer programmes which have a lot of wastage and misappropriation.”

The point being that many of the current subsidy programmes run by the government are excessively leaky. Given this, the subsidies don’t reach those that they are meant for. This includes subsidies on rice, wheat, kerosene, sugar, fertilizer etc. In this scenario, it perhaps makes more sense to shutdown these subsidies and handout cash directly to every citizen, who can then spend it the way he or she deems it to be fit.

The economist Vijay Joshi gets into the actual nitty-gritty of UBI in his book India’s Long Road—The Search for Prosperity. He talks about multiple things that will help government raise revenue as well as cut down on expenditure, and in the process, make way for UBI. Let’s look at his suggestions.

Joshi talks about a courageous government taxing agricultural incomes and in the process managing to raise 0.5 per cent of the GDP as annual revenue. He also talks about privatising public sector enterprises leading to efficiency grains and helping raise resources of 1 per cent of GDP annually, for the next decade. Over and above this, there are many counterproductive tax exemptions that have been given over the years. Joshi hopes that doing away with these exemptions would help raise revenues by around 1.5 per cent of the GDP per year.

Joshi then recommends the winding up of non-merit subsidies and food subsidies. In total, this would free up resources of at least 10 of the GDP and perhaps up to 12 per cent of the GDP. All this would make UBI viable, feels Joshi.

As he writes: “The most serious non-fiscal problem with transfer schemes is the identification of beneficiaries… Therefore, in my judgement, a universal cash transfer would be the best route to follow. I would therefore recommend the adoption of the scheme… which involves disbursing a ‘basic income’ of Rs 17,500 per household per year, into the bank accounts of all households.”

Transferring money to every household of this country would essentially ensure that the government does not have to figure out who is eligible for the transfer and who is not, a major problem with paying out almost all subsidies.

Assuming five people per household and a population of 130 crore we come up with 26 crore households. Hence, the total bill for universal basic income would work out to around Rs 4.55 lakh crore, at Rs 17,500 per household per year. If the government is able to eliminate other subsidies and at the same time raise revenues through measures like taxing agriculture, then the UBI is very workable.

And given that many existing subsidies are terribly leaky, transferring money directly to citizens and letting them decide what to do with, makes more sense. There is enough research evidence to show that when people(especially women) are given money they tend to use it wisely and don’t blow it away on alcohol and tobacco. Also, over a period of time, the overall UBI bill can be brought down by allowing people who do not want a basic income to opt out of it.

The trouble is all this is dependent on the fact whether the government is able to eliminate many subsidies that it currently offers including food subsidies. And that is easier said than done. For an economist, making a calculation, it is easy to assume, remove this subsidy, increase that revenue, and everything falls into place. For a politician, it isn’t. And that is where the whole thing starts to unravel.

Let’s take consider some of Joshi’s recommendations. Take the case of taxing agricultural income. On the face of it, this makes tremendous sense. Nevertheless, which politician would have the balls, to venture into this territory.

Or take the case of selling off public sector enterprises, lock, stock and barrel. No government till date has shown even a remote inclination to do something like that. Or doing away with tax exemptions that favours corporates. While politicians talk about it all the time, nothing seems to happen.

The joker in the pack is doing away with food subsidies. Currently, the government sells rice and wheat at subsidised prices through the fair price shops that make up for the public distribution system all over the country. The government acquires rice and wheat from farmers and then distributes it through the public distribution system. If food subsidies are done away with, this procurement would not be required.

Hence, in an ideal world, a successful universal basic income programme would mean the end of the procurement, transportation and distribution of subsidised rice and wheat. This would mean that the government would have to stop acquiring the massive amount of rice and wheat that it does from farmers directly through the Food Corporation of India and other state procurement agencies.

This is something that hasn’t been discussed at all by the economists recommending the universal basic income. Would politicians be ready for something like this? What would be the impact on food inflation? Does the open market for rice and wheat work well enough? What would happen to the five lakh fair price shops across the length and the breadth of the country? Would the government shut down the Food Corporation of India, or would it scale down its operations?

These are questions which no one would like to get into. In this scenario, my guess is that if universal basic income is introduced in the near future, it will be over and above the government subsidies already in place. And that can’t possibly be a good thing. It is something that the country cannot afford.

The column originally appeared in Equitymaster on January 27,2017

Some New Lessons on Jobs from an Old Economist

hyman minsky
Many economists do not write in a language which is easily understandable. While John Maynard Keynes was a terrific writer (he is possibly the only economist who actually came up with one-liners), his magnum opus The General Theory of Money, Interest and Employment, which was published in 1936, isn’t such an easy read.

Believe you me! I have tried reading it several times over the years.

Just because the book isn’t an uneasy read, doesn’t mean that the points it is trying to make are not important. As Paul Samuelson, the first American economist to win a Nobel Prize, wrote about Keynes’ book, in a research paper titled Lord Keynes and the General Theory. As he wrote: “It is a badly written book, poorly organized; any layman who, beguiled by the author’s previous reputation, bought the book was cheated of his five shillings…It is arrogant, bad tempered, polemical and not overly generous in its acknowledgements. It abounds in mares’ nests and confusions…In short, it is a work of genius.”

Another economist whose work is not easy to read is the American economist Hyman Minsky, who died in 1996. The world discovered Minsky and his work in the aftermath of the financial crisis that started in September 2008 and so did I.

I tried reading Minsky’s magnum opus Stabilizing an Unstable Economy but could only read it half way through. I have been lucky to have since discovered other authors and economists who have tried to explain Minsky’s work in a language that I have been able to understand.

Over the last few days I have been reading L Randall Wray’s Why Minsky Matters—An Introduction to the Work of a Maverick Economist. Other than discussing Minsky’s views on banking and the financial system in great detail, Wray also discusses what Minsky thought of unemployment. Minsky’s interest in unemployment primarily came from the fact that he was brought up during The Great Depression, when the United States saw never before seen levels of unemployment and a huge contraction of the economy.

And what did Minsky think of the unemployment problem? As Wray writes: “His argument [i.e. Minsky’s] was that simply increasing the “employability” of the poor by providing training without increasing the supply of jobs would just redistribute unemployment and poverty. For every better trained worker who got a job, a worker with less training would become unemployed. Minsky was not arguing against better education and training—he was arguing that to reduce unemployment and poverty we need more jobs, too.”

Minsky also argued against the idea that “if the economy grows at a sufficiently robust pace, the jobs will automatically appear.” As Wray writes: “The notion that economic growth together with supply-side policies to upgrade workers and provide proper work incentives would be enough to eliminate poverty was recognized by Minsky at the time to be fallacious. Indeed, evidence suggests that economic growth mildly favours the “haves” over the “have-nots”—increasing inequality—and that jobs do not simply trickle down.”
How do things stack up in the Indian context? First and foremost, let’s look at the youth literacy number and how it has changed over the years. As per the Human Development Report, in 1990, the youth literacy rate (i.e. individuals in the age 15 and 24) was at 64.3% in 1990. This improved to 76.4% in 2003. In 2013, the youth literacy rate for men was at 88.4% and for women at 74.4%.

What these data points tell us clearly is that the education level of India’s youth has improved over the years. But has this led to more jobs? Answering this question is a little tricky given how bad Indian data on jobs is.

Nevertheless, as the Economic Survey released in February 2015 points out: “Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labour force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent.”

Hence, even though the youth education has improved over the years, this hasn’t led to an adequate number of jobs. This is clearly visible in all the engineers and MBAs that we produce without having the right jobs for them.

As Akhilesh Tilotia writes in The Making of India: “An analysis of the demand-supply scenario in the higher education industry shows significant capacity addition over the last few years: 2.4 million higher education seats in 2012 from 1.1 million in 2008.” In 2016, India will produce 1.5 million engineers. This is more than the United States (0.1 million) and China (1.1 million) put together.
The number of MBAs between 2012 and 2008 has also jumped to 4 lakh from the earlier 1 lakh. As Tilotia writes: “India faces a unique situation where some institutes (IITs,IIMs, etc.) are intensely contested while a large number of the recently-opened institutes struggle to fill seats…With most of the 3 million people wanting to pursue higher education now having an opportunity to do so, the big question that should…be asked…are all these trained personnel required? Our analysis seems to suggest that India may be over-educating its people relative to the current and at least the medium-term forecast requirement of the economy.”

This explains why many engineers and MBAs cannot find the right kind of jobs and have to settle for other jobs.

A major reason for the lack of enough jobs is the fact that Indian firms start small and continue to remain small. As Economist Pranab Bardhan writes in Globalisation, Democracy and Corruption: “Take the highly labour-intensive garments industry, for example. A combined dataset [of both the formal and informal sectors] shows that about 92 per cent of garment firms in India have fewer than eight employees.”

It’s only when small firms start to become bigger, will jobs be created. As the Economic Survey points out: “A major impediment to the pace of quality employment generation in India is the small share of manufacturing in total employment…This is significant given that the National Manufacturing Policy 2011 has set a target of creating 100 million jobs by 2022. Promoting growth of micro, small, and medium enterprises (MSME) is critical from the perspective of job creation which has been recognized as a prime mover of the development agenda in India.”

And this, as I keep saying, is easier said than done.

The column originally appeared on the Vivek Kaul Diary on January 20, 2016

 

Here is One Chinese Story that Narendra Modi Needs to Listen to

Deng_Xiaoping
The Chinese economic growth story started in 1978 with Deng Xiaoping taking charge of the Chinese Communist Party. Interestingly, Xiaoping did not hold any official post. Nevertheless, he was looked upon as the Supreme Leader of China between 1978 and 1992.

Most accounts of China’s astonishing double digit growth for close to three decades give credit to Xiaoping for initiating Chinese economic growth and pulling out millions of people out of poverty in a very short period of time.

History when it gets written is built around the idea of Great Men doing great things. But things are never as simple as that.

As Matt Ridley writes in The Evolution of Everything: “If you examine closely what happened in China in 1978, it was a more evolutionary story than is usually assumed. It all began in the countryside with the ‘privatisation’ of collective farms to allow individual ownership of land and of harvests. But this change was not ordered from above by a reforming government.”

In the village of Xiaogang, 18 farmers came together. They despaired the dismal production of their farms under the collective system. And they did not like the fact that they had to beg for food from other villages. Given this, one evening they gathered together to figure out what they could do. This was at a time when even holding a meeting was considered a serious crime.

As Ridley writes: “The first, brave man to speak was Yen Jinchang, who suggested that each family should own what it grew, and that they should divide the collective’s land among the families. On a precious scrap of paper he wrote down a contract that they all signed…The families went to work on the land, starting before the official’s whistle blew each morning and ending long after the day’s work was supposed to finish.”

And this soon stared to show results. “Incentivised by the knowledge that they could profit from their work, in the first year they grew more food than the land had produced in previous five years combined,” writes Ridley.

Of course, the local communist party bosses soon came to know. The regional communist party chief intervened to save Yen and at the same time recommended that the same experiment should be copied elsewhere as well. “This was the proposal that eventually reached Deng Xiaoping’s desk. He chose not to stand in the way, that was all. But it was not until 1982 that the party officially recognised that family farms could be allowed – by which time they were everywhere,” writes Ridley.

The economic incentives of private ownership rapidly transformed farming in China and industry soon followed. While the Communist Party still continues to rule the country, the economic success of China wasn’t built on socialism. And there is a thing or two that Indian politicians can learn from this, given their obsession with socialism.

Private firms are normally better at running businesses than the government. This is something that politicians including prime minister Narendra Modi need to understand. As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “The last quarter century’s experience has shown that when the private sector is asked to provide telecom services, run airlines and airports, build and run ports, undertake banking, distribute electricity and even undertake water supply, the result is usually (though not always, for there is no shortage of private banks and airlines that have failed) a substantial improvement on what, the government was doing until then.”

This is basically means two things. One is that the government should be getting out of all the businesses that it has been trying to run for all these years. This is a point that I have often made in the past. There is no point in the government running more than 25 banks. There is no point in the government running a phone company or an airline for that matter.  It does not serve any purpose.

As Ninan writes: “It is a matter of regret that Narendra Modi, who got elected on the promise of ‘minimum government, maximum governance’, has shown no taste for radical change or minimizing government…The government system continues to run loss-making airlines and hotels, three-wheeler units and Mahanagar Telephone Nigam.”

Also, in its effort to do everything, the government doesn’t pay adequate attention to many important areas. As Ninan writes: “There is too little of government attention paid to core areas like law and order, education and health—too few judges, too few teachers who teach, too few hospital beds; also too few trade negotiators and too few policemen, especially those with proper training. It should be obvious that there are many things that the state does inadequately or badly, and many tasks that the state has needlessly taken on itself.”

The second point here is that the government should be encouraging entrepreneurship in all possible ways. One point against entrepreneurship are India’s multiple labour laws. But they may not be as much of a problem as they are made out to be.

It is often argued that Indian entrepreneurs do not expand beyond a certain point because it is very difficult to fire workers once they have been taken on. The Chapter VB of the Industrial Disputes Act, 1947, makes it very difficult for companies with 100 employees or more, to fire an employee without the permission from the government. This, it is argued, prevents entrepreneurs from expanding.

Economist Pranab Bardhan makes an interesting point in Globalisation, Democracy and Corruption: “It is not clear that the rigid law on retrenchment is always the binding constraint on manufacturing expansion. Take the highly labour-intensive garments industry, for example. A combined dataset [of both the formal and informal sectors] shows that about 92 per cent of garment firms in India have fewer than eight employees…Labour law cannot discourage an eight-employee firm from expanding to an 80-employee firm since Chapter VB of the Industrial Disputes Act does not kick in until the firm reaches the size of 100 employees.”

So what is stopping these firms from expanding? “The binding constrains on the expansion of that eight-employee firm may have to do with inadequate credit and marketing opportunity, erratic power supply, wretched roads, bureaucratic regulations etc. There are good statistical studies by some economists which show that states with more rigid labour laws have had lower industrial growth and that labour laws can be a constraint. But these studies do not show that they are the only or even the main constraint,” writes Bardhan.

What this tells us very clearly is that the Modi government should work towards removing these binding constraints. This will allow entrepreneurship to flourish. That will lead to more jobs, better pays, higher spending and in the process, higher economic growth.
The column originally appeared on Vivek Kaul’s Diary on January 11, 2016