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 the 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.

In India, many subsidy schemes exist to improve the lives of vulnerable citizens. Yet these schemes are plagued with problems – leakages in the delivery system, the misidentification of beneficiaries, the exclusion of deserving households, as well as inadequate and untimely delivery.

Scholars, policy-makers and activists have long been preoccupied with how to overcome these deficiencies. In the recent past, a universal basic income (UBI) has been proposed as an alternative to subsidy schemes.

Proponents of the UBI scheme argue that the ultimate aim of all subsidies is to increase the income of beneficiary households, to help them meet their needs. Therefore, subsidy schemes are a roundabout method, punctured by many deficiencies, whereas a UBI is a direct way to help beneficiaries.

This proposal has generated some complex and interesting debates.

Unanswered questions surrounding UBI

The basic issue is the rationality of considering UBI scheme as a substitute to existing subsidies. Implementing the UBI, as with existing schemes, is bound to be difficult, and the problems may be new ones.

One crucial question is whether the UBI should be universal or conditional. Others include, who should implement it – the Union government or the states? Should the amount given to beneficiaries be the same across the country? Is it possible to maintain a mix of the both the existing schemes and a modified UBI scheme?

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, supplementary food is provided to children below five, and rations to expectant and nursing mothers.

One could argue that the same result could be achieved by providing income to the beneficiary households. But the ICDS, besides its supplementary nutrition programme, has other tasks – monitoring the growth of the children, pre-school education, and improving nutrition and health education to women. If ICDS is replaced by a UBI, the benefits of these components 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. But it also creates public works. Even simple works, like de-silting a tank and shifting the sediment to fields, can have doubled benefits: increasing the capacity of water bodies and improving the fertility of the soil.

Other works, like clearing and leveling land or digging trenches, increase the productivity of land and so the income of farmers. MGNREGA has been used to create community assets – like panchayat buildings or roads. Even for the construction of individual household latrines, however, the wage component is met from the MGNREGA fund.

If employment schemes are replaced by UBI, then we forgo these benefits – so the UBI Scheme is not a perfect substitute to the ESS.

Universal vs targeted

A second crucial question is whether UBI should be universal or targeted. A scheme to provide a reasonable, universal income calls for an expenditure of about 5% of the GDP.

If the UBI scheme is targeted or is made conditional, then problems associated with identifying the true beneficiaries are likely to arise. There is no reason to believe that the intensity of these problems will be less severe than those encountered by existing schemes.

Under the 14th Finance Commission, a large number 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.

Join The Discussion