Disband subsidy delivery mechanism, switch over to UBI

In the Economic Survey (2016-17) presented in Parliament on January 31, 2017, Chief Economic Advisor Arvind Subramanian advocated Universal Basic Income (UBI) instead of a plethora of subsidies given under extant dispensation. But the idea found no mention in Finance Minister Arun Jaitley’s Budget for 2017-18, presented on February 1, 2017.

Meanwhile, in an interview given to a group of economic editors on February 1, Jaitley opined that “UBI is an idea whose time should come, but politics of this country is not mature yet for its implementation.” He could have taken the idea on board at least on a trial basis, but avoided it. So, what are the constraints? What will be the opportune time? Will it come at all?

The CEA couched the idea in Mahatma Gandhi’s philosophy that every citizen of India is entitled to live with dignity: “Whether or not a person can lead a life with dignity depends on his ability to generate a certain minimum level of income to make it possible. Left to himself, he may not be able to get to this level either because he has no job, or he is a small/marginal farmer perennially entrapped in subsistence.”

Under such circumstances, the government may intervene to provide ‘unconditionally’ and on a ‘regular’ basis financial assistance — call it unconditional basic income — to ensure that he can lead a decent living as contemplated by the father of the nation.

Successive governments have spent thousands of crores of rupees under welfare schemes meant for the poor. The expenditure is mostly on subsidies under dozens of heads. Three major subsidies — food, fertilisers and petroleum products — alone account for 1.5% to 2% of the GDP or Rs 2,50,000 crore-Rs 3,00,000 crore annually.

The subsidies are administered through suppliers/manufacturers. They sell products at prices much lower than the cost (or market price) and get the difference reimbursed from the government. This manner of administration suffers from three major flaws — non-targetedness; misuse/leakages; and inefficient use.

First, making the product available at subsidised price to ‘all and sundry’ without any differentiation results in appropriation of the benefit even by those better-off or rich, who do not deserve or need it. Indeed, beneficiaries include the rich and even the super rich.

According to the Economic Survey (2015-16), 24% of fertiliser subsidy is cornered by large/rich farmers. As regards the LPG subsidy, currently, there are 165 million beneficiaries, a majority of them better-off/rich. This is despite Prime Minister Narendra Modi’s efforts in making over 10 million people give up their subsidy entitlement under the “GiveUp” campaign.

Under the National Food Security Act (NFSA), food is supplied to two-thirds of population at heavily subsidised prices of Rs 1/2/3 per kg for coarse cereals, wheat and rice, respectively. Such a humongous number is well above households living below poverty line (25-30%). Clearly, substantial chunks of better-off enjoy this subsidy. A committee under Shanta Kumar (2015) had recommended coverage under the scheme to be reduced to 40% but this has not been acted upon.

Second, the extant dispensation is prone to large-scale misuse. About 41% of fertiliser subsidy is leaked via diversion to chemical factories and smuggled to neighbouring countries and 24% to inefficient manufacturers. In food too, there are substantial leakages of 30%-40% from the public distribution system (PDS). Kerosene subsidy is usurped by dubious traders who adulterate it with diesel.

Third, keeping the price of inputs at artificially low level makes users complacent resulting in their inefficient use. Thus, excessive use of urea is rampant leading to imbalance in nutrient use and lower crop yield, besides causing damage to the environment. At another level, supply of power at heavily subsidised tariff (free in some states) leads to excessive water use causing denudation of ground water.

DBT issue
There is no orchestrated policy response to deal with these maladies except to a limited extent in LPG, wherein the direct benefit transfer (DBT) was launched in January 2015.

But in the case of food and fertilisers, there is no seriousness to take it forward. A few pilot projects, fertilisers in 11 districts since January 2017 (seven more to be taken up from April) and food in three Union Territories take us nowhere.

The DBT in fertilisers means that subsidy cannot be routed via manufacturers. This will in turn require removal of control on maximum retail price and dismantling of extant unit-wise new pricing scheme (NPS) for urea. But the government is not prepared for it, as under a comprehensive New Urea Policy (2015), it has frozen MRP at existing level and has decided to continue NPS for four years — till 2019. In food also, it has no intention to stop routing subsidy through the Food Corporation of India and other state agencies which alone can pave the way for DBT.

Now, if UBI — a more nuanced version of DBT — is to be put in place, all existing subsidies and associated disbursement mechanisms will have to go. But, when, the government is determined to keep the latter intact, how will it make way for the former? On the other hand, for the two to co-exist is not only illogical but also preposterous.

What prevents the government from disbanding existing subsidy disbursement mechanisms? In that event, selling price of fertilisers and food will increase sharply and there will be pressure to restrict subsidy only to the poor. Besides, in fertilisers, a number of high cost public sector plants will face risk of closure. These consequences are politically unpalatable.

That is precisely what Jaitley was alluding to when he opined “politics of this country is not mature yet for implementation of UBI”. Therefore, for now, at least till end of Modi’s term, the idea will remain confined to brainstorming by think tanks only.

(The writer is a New Delhi-based policy analyst)