Economy

Why Universal Basic Income Is Not a Perfect Substitute for Existing Subsidy Schemes

While the aim of all subsidy schemes is to increase the income of beneficiary households so that they can meet their requirements, replacing them with the UBI will also mean losing some of the other benefits of these schemes.

Should the UBI be universal or targeted? Credit: Reuters

Should the UBI be universal or targeted? Credit: Reuters

In India, many subsidy schemes are being implemented to improve the living conditions of the vulnerable segments of the population. However, these schemes are plagued by various problems like leakages in the delivery system, misidentification of beneficiaries – exclusion of deserving households – as well as inadequate and untimely assistance to the beneficiaries. Measures to overcome these deficiencies have engaged the minds of academicians, policymakers and social activists. In the recent past, the universal basic income (UBI) scheme has been proposed as an alternative to the existing subsidy schemes. This proposal has generated interesting debate among the academicians.

Proponents of the UBI scheme argue that the ultimate aim of all the subsidy schemes is to increase the income of the beneficiary households so that they can meet their requirements. Therefore, they argue that subsidy schemes are a roundabout method of helping the poor while the UBI scheme is a direct method of aiding the beneficiaries, minus the limitations associated with the subsidy schemes.

Unanswered questions surrounding UBI

This debate raises certain important issues. First, the basic issue is the rationality in considering UBI scheme as a substitute to the existing subsidy schemes. Implementation of the UBI, like that of the existing schemes, is bound to have problems which may be different from the ones associated with the existing subsidy schemes.

A crucial question is whether the UBI should be universal or conditional. Who should implement the scheme? Should the Union government implement it or leave it to the state government to implement the scheme? Should the amount given under the UBI scheme to beneficiaries be the same throughout the length and breadth of the country? Is it possible to have a mix of the both, the existing schemes and a modified UBI scheme? These are some of the questions which need to be addressed before taking any final policy decision.

To start the discussion, let us focus on the extent of substitutability between existing schemes and the UBI. No doubt, both measures aim to increase the income of the beneficiary household, but only to that extent can they be considered as substitutes. For instance, under the Integrated Child Development Services (ICDS) programme, there is a component under which supplementary food is given to children below five and ration is provided to expectant and nursing mothers. One can argue that this result can be achieved by giving an adequate amount to the beneficiary households. It must be remembered that ICDS, beside the Supplementary Nutrition Programme, has many more components like monitoring the growth of the children, pre-school education, improving nutrition and health education to women etc. If ICDS is replaced by a UBI scheme, then the benefits of these components of ICDS will be lost.


Also read: In Developing Countries, a Strong Case for Universal Basic Income to Combat Poverty


Similarly, MGNREGA provides employment and thereby improves the income of wage-seekers. In addition, it delivers benefits to the society. Even simple works like de-silting of tanks and application of the same to the fields have double the benefit. It increases the capacity of the water bodies and improves the fertility of the soil, which in turn, is bound to increase the income of the beneficiary household.

Works such as clearing and levelling of land and digging trenches are bound to increase the productivity of land and thereby income of the farmers. In the recent past, wage seekers under the MGNREGA scheme have been used to create community assets like panchayat buildings, roads etc. For the construction of Individual Household Latrine, the wage component is being met from the MGNREGA fund. If the employment scheme is replaced by UBI, then we have to forgo all these benefits. All these discussions emphasise that UBI Scheme is not a perfect substitute to the ESS.

Universal vs targeted

If, however, the UBI scheme is still implemented, then the question is whether it should be universal or targeted. The universal UBI scheme to provide reasonable income calls for an amount of about 5% of the GDP. Many suggestions have come on this aspect, but there is no unanimity on this issue. If the UBI scheme is targeted or is made conditional, then problems associated with identification of the true beneficiaries are likely to arise. There is no reason to believe that the intensity of these problems would be less severe than that are encountered in the existing subsidy schemes.

Under the 14th Finance Commission, a large amount of grants are being transferred to the state government by the Centre. The Union government may impress upon the states for implementation of UBI scheme at their end. This may result in differences in the form, amount and other elements of the scheme across states. To some extent, this may be justified because of differences in the price level, the extent of poverty and intensity of poverty.

Further, the implementation of UBI calls for a fairly good extent of financial inclusion in the country. It is difficult for us to claim that we have reached such a state. If cash is given to the beneficiary household then it is not certain that they will buy the goods that we intend them to buy. Even if they intend to buy, the market for these commodities must exist throughout the length and breadth of the country. Unfortunately, we have not attained that state. For instance, before the implementation of the subsidised rice scheme in Andhra Pradesh in the early 1980s, no private trader in dry areas used to take rice from towns to villages due to insufficient demand.

The results of the implementation of the direct benefit transfer scheme (DBT) in case of distribution of LPG cylinders, students’ scholars etc. are encouraging.


Also read: There’s Nothing Universal or Basic About Universal Basic Income in India


In the light of these observations, it is better to have a mix of a UBI scheme and the existing subsidy schemes. The mix may vary from state to state. The subsidy schemes which are working fairly in a particular state should not be disturbed and only those subsidy schemes which are not working effectively must be replaced by the DBT.

For instance, a household survey conducted in Puducherry and Chandigarh revealed that people were happy with the existing public distribution system (PDS), but the PDS was replaced by the DBT scheme. Therefore, the bundle of subsidy schemes should be state specific. This implies that amount given to targeted households should differ from one state to another.

A. Mahendran is a PhD Scholar at TISS Mumbai and S. Indrakant is the RBI chair professor at CSD Hyderabad.