The ‘Universal Basic Income’ Proposal

Editorial from Economic and Potitical Weekly

Imagine a world in which everyone is unconditionally given a subsistence-level income by the state. This, combined with access to well-functioning public services would be, to quote Jean Dreze, “a fool-proof way of safeguarding the right to dignified living.” The chapter on “Universal Basic Income (UBI): A Conversation With and Within the Mahatma” in the Economic Survey 2016–17 (ES) begins with this. But unfortunately, given self-imposed “fiscal prudence,” the proposed UBI, which is neither “universal” nor “basic”, requires the dismantling of the most socially necessary welfare schemes, namely, the Public Distribution System (PDS), the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and the Mid-day Meal Scheme. The envisioned UBI turns out to be no more than a small compensatory transfer (or income top-up) to a part of the population, and that too, one that will require the government to prune or do away with in-kind transfers of food, guaranteed minimum days of wage work, and other public social security measures.  

The desire is to stick to budget neutrality even as its conception is the most illogical part of the UBI vision. In the face of the monstrous economic inequality that plagues the country, surely a proper UBI can be financed from income and wealth taxation of the very rich, as also, from indirect taxation of socially less desirable economic activities. Given that India has one of the lowest tax to gross domestic product ratios in the world, more so with respect to direct taxes (that include wealth and corporate taxes), it is inconceivable why the policymakers of this country cannot envisage a UBI that builds on higher tax revenue collections to expand the fiscal space.

Instead, a UBI as seen in the ES is anchored on minimising fiscal cost and pruning the government’s social-welfare administrative machinery. The chapter argues that the current social security system in India is bulky, inefficient, and in large part misallocates resources, and that these “realities” necessitate a serious thinking-through of better ways of spending public money for social welfare. It emphasises the gross misallocation of resources under six welfare schemes, in two simplistic maps which show that the shares of welfare spending in the poorer districts are less than the shares of poor persons in these districts. The UBI, the authors of the ES claim, is a way of rectifying this imbalance. However, any such rectification would assume a targeted cash transfer, not a UBI.

Further, it must not be overlooked that each of these welfare schemes has underlying mechanisms that ensure a safety net against market uncertainties. The PDS entails the state’s interventions in agricultural commodity markets that have historically resulted in more stable prices and a semblance of income security for farmers. The political currency of the public procurement system and minimum support prices is but an indication of the significance of such market interventions. The Mid-day Meal Scheme has shown that cooked meals in schools encourage school enrolment, apart from providing timely nutrition. The MGNREGS not only promises minimum days of wage work, but also creates and helps maintain locally planned public infrastructure, protects against seasonality of work, and provides some bargaining power to workers in rural labour-market wage setting. In fact the ES does make a passing reference—“replacing the PDS will increase market prices of cereals the poor face. Similarly, phasing down MGNREGS might reduce market wages for rural casual labour”—but goes on to make a case against these interventions.

Between 2004–05 and 2011–12, the offtake from the Food Corporation of India (FCI) grew by 71%; and household purchases through the PDS grew by 117%, indicating greater, more efficient coverage, while leakages in the PDS have come down from 54% to 35%. The ES extrapolates the leakage figures up to 2016, which points to a further reduction to 20.8%, without accounting for improvements in technology and expansion of coverage that must have occurred in the last five years. There has been a rise in rural wages, which in part is attributable to MGNREGS. Undeniably, rural infrastructure and more recently, farm assets are being created substantially under this scheme.

What is important today is that provisioning of social security services and goods has become a matter of political importance even in India’s northern states, as it has been for decades in the southern ones. In fact, in a few of these states, corruption and leakages have been reduced in the PDS and the MGNREGS even as they cover a greater proportion of the targeted population. This needs to be emulated in other states. To say that “the time is ripe for serious discussion” around a UBI that would entail dismantling existing hard-won social welfare measures, does not seek to build on past gains or social experience. The past decade has shown that the implementation of social welfare programmes can be improved by the participation of beneficiaries, ensuring greater transparency and accountability, the involvement of concerned non-governmental organisations, a degree of political will, and a proactive local administration.

Editorial from EPW,  Vol. 52, Issue No. 6, 11 Feb, 2017

The Universal Basic Income’s time may have come

Madan Sabnavis

The Economic Survey has traditionally been a document which gives us the latest on the state of the economy and provides some idea on the prospects for the year. 

Two things have changed in the last few years. Firstly, we get relatively better data on a regular basis on almost all economic indicators which denude to an extent the novelty of this document. Secondly, some high profile economists occupying the post of chief economic advisor have tended to re-orient the document towards being academic and theoretical. In fact, this trend has also been noticed in the RBI reports which are no longer meant for the common man but are for the academician, as it is hard to understand the cobwebs strewn all over the place with scenario analyses and a lot of jargon thrown in. This is the new phase of economic reporting from the official side. The Economic Survey this year has also done away with the detailed tables which were extremely useful. 

Pros and cons

This year, the Economic Survey has focused on the concept of universal basic income. The UBI is part of the acronym lexicon that has been in vogue with the NDA government — take the case of a programme being called INDRADHANUSH, and a campaign named JAM. It is felt that acronyms make it easier to remember what they stand for.

Now, the UBI has been presented in the usual style of a two-handed economist, with the pros and cons of the scheme listed and open to debate. There is a view that it is good for the nation but it can be implemented only after studying the effects and working of such a venture. 

Assuring a basic income for each and every individual or family is laudable as this should be the goal of any government in a developing country. This is normally measured by success in the areas of unemployment and poverty. The UBI also talks about actually moving away from all kinds of direct and indirect subsidies and passing them on to individuals through cash transfers so that they have the freedom to choose their living standard. 

This programme on the face of it sounds jumbled because we are talking of a socialist doctrine of providing basic income to all but mixing it with the capitalist mode of doing away with subsidies. 

The state’s role

To better understand the dilemma we need to ask a broader question as to what is the role of the state? The government is required in any country for addressing three economic objectives: bring about redistributive justice, enter areas where the private sector will not find attractive and creation of social infrastructure. Presently the government attempts to perform all the three roles with different levels of efficiency and success. 

Now, UBI can be debated from two angles. The first is whether governments should be giving an income without getting anything in return — an unconditional transfer. In most countries, these transfers are linked to an objective. Taking up some employment or sending children to school can be a requirement, which is how most conditional cash transfers work. In our case MGNREGS is a good example of conditional transfer where one takes up a job card and gets paid a daily wage. It is a different issue that there frauds occur and the work done is rudimentary to the extent of being meaningless. But this can always be tackled through better delivery and linkages with productive work such as, say, construction of rural infrastructure.

Providing free money is detrimental to society as it creates a moral hazard (which has been acknowledged in the Survey discourse) and is not connected with the use of money by the household. Poor households in particular have different priorities and may not be spending the money the way an economist would assume. 

About services

The second issue pertains to which services need to be discontinued with the amount involved getting into the transfer scheme. The present direct schemes pertain to food, fuel, fertilisers and interest. Fuel subsidy has been reduced to a large extent, but we also remain very vulnerable to global crude oil prices movement which can make inflation nasty and affect the conduct of monetary policy.

The last time there was a crude price shock, inflation would have risen more prodigiously had the subsidies not been in place. Food subsidy creates a problem because prices vary by almost 75-100 per cent across the country. For instance, rice can cost anywhere between ₹15 and ₹30 a kg; so too wheat. How do we ensure that households get enough to spend on food? The PDS ensures that there is a fixed price for these essentials; by doing away with we can again see pressure on inflation as food prices increase once the market is open. Today, the PDS forms a benchmark for dealers as they know that by charging a higher premium the poor would move to PDS.

Now the argument for UBI also meanders into the indirect subsidies that are provided by the Government, such as health and schooling. Can the Government actually abandon these responsibilities? Even in developed countries healthcare, education, and urban infrastructure are provided by the government and subsidised though the quality of services would be very different, say, between the US and India. Governments have to create social infrastructure; they cannot say the private sector can provide the same as the latter caters to only the elite classes with several entry barriers being erected for those who do not have minimum spending power.

Economic viability

One conclusion is that while providing a minimum basic income to all is essential, the state cannot do away with the indirect subsidy involved in the creation of social infrastructure. Also, plain vanilla transfers not linked to conditions leads to a mismatch of priorities between the Government and the individual and must be avoided. The system of linking an income with an activity is necessary to make the schemes viable. 

The task ahead is to ensure that these ‘conditions’ are well defined in terms of being acceptable from the economic standpoint. In the case of direct subsidies, even as we revel in the success of cash transfers and limiting the same on some products, crude oil touching $150 a barrel in future will seriously impact inflation and can come in the way of monetary policy. Clearly, the Government needs to think through these contingencies before they occur so that the country is better prepared.

(The writer is chief economist at CARE Rating)

The hidden agenda of Universal Basic Income

G. Sampath

The idea of a universal basic income (UBI) has been gaining ground globally. While Switzerland held a referendum on it last year (it was voted down), Finland introduced it earlier this month. Media reports suggest that the government of India’s flagship Economic Survey this year is likely to endorse the UBI, setting the stage for its introduction.

 
On the face of it, an unconditional basic income for everyone seems a great idea. In the West, the UBI is being discussed as a solution to two problems: unemployment due to automation; and growing social unrest caused by extreme inequality and precarity. It is expected to solve the unemployment problem by decoupling subsistence from jobs, freeing human beings to realise their true potential, preferably through entrepreneurship. It would address the second by supplying monetary resources to access the necessities of life. This, in a nutshell, is the popular understanding of the UBI. The reality, however, is not so rosy.

The UBI debate in India has been a narrow one — restricted, for the most part, to financial viability. Its advocates argue that it is a more efficient way of delivering welfare, while its opponents hold that the fiscal burden would be too much. What hasn’t received adequate attention is the politics behind the UBI: who is pushing the idea? To what end? And why?

The UBI evangelists
The most eloquent advocates of UBI today are free-market enthusiasts — the same lot branded as neo-liberals for their advocacy of deregulation, privatisation, and cuts in welfare spending. Their guru, Milton Friedman, was an early advocate of basic income. Outside the academic realm, the biggest champion of UBI is the global tech sector. Silicon Valley billionaires such as Elon Musk, the founder of Tesla Motors, and Facebook co-founder Chris Hughes have publicly backed the idea.

Could it be possible that the global financial elite have finally sprouted a conscience? The reports of the UBI pilot projects conducted so far offer a clue. Invariably, they all present the same conclusion: giving cash to the poor is better than traditional welfare.

Of course, it would be wonderful if the problem of inequality and poverty were solved for us by a sudden moral awakening of the rich. Unfortunately, the current enthusiasm for the UBI is not the product of such a momentous development.


Not an add-on benefit
The biggest myth about the UBI, partly responsible for sections of the Left endorsing it, is that it is a redistributive policy that would reduce inequality. It is indeed possible to have a redistributive UBI. But it would need to fulfil two conditions: it must be funded by taxing the wealthy; and the existing entitlements to the poor must not be taken away. Such a UBI would actually be a socialist measure that would increase the bargaining power of the working classes by giving them an income cushion.

But neither of these conditions is met by any of the UBI designs being promoted today, either globally or in India. The much-touted Finnish experiment is restricted to the unemployed. It does not cover all working individuals. And it only replaces the already existing basic unemployment allowance and labour market subsidy — it is not an add-on benefit.

In India, too, the UBI is not an add-on. On the contrary, it is about giving in a different form (cash), and under one umbrella, what is already being given (in-kind and cash benefits) via different channels.

Back in 2008, in an influential paper in the Economic and Political Weekly titled ‘The case for direct cash transfers to the poor’, Arvind Subramanian, the present Chief Economic Adviser of the government, along with economists Devesh Kapur and Partha Mukhopadhyay, argued that the ₹1,80,000 crore spent annually on centrally sponsored schemes and assorted subsidies should instead be distributed as cash directly to 70 million households below the poverty line. Put simply, the UBI in India is nothing but the old wine of direct cash transfer in a fancy new bottle.

Its objective remains the same: to eliminate the public distribution system (PDS) and with it, the food, fuel, and fertiliser subsidies. The same old arguments for replacing the PDS with cash transfers are now being trotted out in favour of the UBI. The addition of the word ‘universal’ signals greater ambition but alters neither the substance nor the motive.

But let us take the arguments in favour at face value. What constitutes a basic income? Common sense dictates that it should be whatever is required to take care of basic life needs. A logical equivalent for this figure would be the minimum wage. The central government’s move last year to raise the minimum wage for non-skilled, non-agricultural workers to ₹9,100 per month was set aside following opposition from industry. Perhaps ₹9,100 per month is too luxurious an income to qualify as ‘basic’. The actual minimum wage in India is around ₹4,800 per month. Could we then expect at least this amount from our UBI?

While different numbers have been bandied about, there seems to be a broad consensus around the Tendulkar committee poverty line of ₹33 a day. This works out to a basic income of ₹1,000-₹1,250 a month or ₹12,000-₹15,000 a year. But even this modest figure is estimated to cost 11-12% of the GDP. In contrast, all the government’s subsidies put together account for only 4-4.5% of the GDP. This presents three options: one, the government makes up the deficit through additional tax revenue; two, it limits the fiscal burden by shrinking the UBI coverage from ‘universal’ to those below the poverty line; and three, it further shrinks the amount being doled out.

Given India’s narrow tax base, and a policy mindset hostile to the idea of extracting more tax revenue from the wealthy, we can rule out option one. So the UBI we get, if we get one, would be derived from a combination of the second and third options, which means both ‘U’ and ‘B’ are out of UBI, leaving us effectively with what we already have: cash transfers.

Most critically, one aspect is taken for granted by all the three options: the UBI will be funded primarily by the money allocated for CSS and subsidies. In other words, a basic income, however paltry, would help strengthen the case for the elimination or a significant roll-back of programmes such as the PDS, midday meal schemes, and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).


Why a UBI now?
There is no point reprising here the case against direct cash transfers, which economists such as Jean Dreze have made convincingly. It is nonetheless fascinating to see the emerging contours of a distinctive political project.

The Jan-Dhan Yojana set out to make every Indian accessible to global finance. The Aadhaar card set out to make every Indian identifiable and enumerable as data — the currency of global tech. The high mobile penetration has connected every Indian to the global digital network. An element that was missing was consumer behaviour, which the recent demonetisation sought to address, by force-feeding ‘cashless’ to a cash-dependent population. The UBI fits perfectly in this scheme of things, as it seeks to compress the whole gamut of welfare benefits into one, and mount it on a singular JAM (Jan-Dhan, Aadhaar, Mobile) platform.

But why a UBI now? One explanation could be the immense pressure on India in secretive free trade negotiations. The developed nations have for long wanted India to wind up its food security-related provisions — both state procurement of foodgrains, and their subsidised distribution via PDS. A UBI would pave the way for the elimination of these measures, dealing a death blow to food security and deepening farm distress.

Another is that the Indian state is stuck with welfare commitments it cannot renege on without political and legal consequences. The efficiency/inefficiency argument for scraping PDS and MGNREGS never acknowledges that these are rights-based social entitlements with specified outcomes — and that is not accidental. Shifting the welfare paradigm to UBI would loosen the bonds of legal and social accountability. Under the PDS, for instance, the state must provide a specified quantity of foodgrains to the poor no matter what. With UBI, it has the option letting the payout slide behind inflation, as has already happened with the old age and widow pensions.

In the final analysis, we need to answer a simple question: is the UBI about reducing inequality and poverty? If the answer is yes, then there are many things the state could do at a fraction of what the UBI would cost — from enforcing the minimum wage law, to releasing funds on time for MGNREGS. But if a dispensation hostile to these tried and tested anti-poverty measures develops a sudden zeal to eliminate poverty through UBI, a measure of scepticism is in order.

Does financial inclusion really include?

 PAWAN BAKHSHI, ANAND PARAMESWARAN

The Pradhan Mantri Jan Dhan Yojana (PMJDY) has seen more than 218 million new bank accounts opened and over 180 million debit cards activated as of May 2016, making it a massive exercise in financial inclusion.

However, the potential of these accounts to drive regular and consistent banking habits, key to achieving universal financial inclusion, is yet to be exploited. Dormancy, despite significant reductions from about 67 per cent in January 2015, remains at about 26 per cent in May 2016. While average balance in active accounts has doubled from ₹836 to ₹1,700 in this period, it has the potential to go higher as people start using their accounts more frequently. If the PMJDY is to realise its vision, it is important that we understand the reasons for the current situation.
Low and slow 

 We undertook a study to get insights into the reasons for generally low usage of bank accounts from a behavioural science perspective. The findings of the study conducted in Punjab, Assam, Uttar Pradesh, Gujarat, Madhya Pradesh, Maharashtra and Tamil Nadu, open up multiple, behavioural science-informed avenues that can have a large impact on savings behaviour.

 

The PMJDY bank account user is usually poor, mostly in debt and repaying a loan. Often this loan is taken from informal sources such as moneylenders, at a very high rate of interest.

The survey found that the primary motive for people to open a bank account (encouraged by the PMJDY) was to save. Surprisingly, most poor people have the ability to ‘manufacture’ a surplus from their meagre incomes by compromising on their daily needs to repay the high interest loans. However, this ability to create surplus and the intention to save is not translating into actual savings for three major reasons.
The minus factors

Present bias: During our interactions, we observed many instances of ‘present bias’. The focus on meeting short-term goals results in a behavioural inclination towards informal financial channels with high cost of funds, where the ease of getting a loan outweighs the long-term cost of servicing the loan. People are aware of this shortcoming and try to compensate by using commitment devices, especially during an important life event for which they need to save money. When presented with choices, the respondents selected savings products that put restrictions on withdrawals and provided no additional benefits, over the ones that allowed for withdrawals. One of the respondents explained this seemingly irrational behaviour as driven by the need to “protect the money from ourselves”.

Psychological barriers: Account-holders’ mental model is that banks are meant for saving large amounts, typically in excess of ₹10,000. This means infrequent interactions with the bank and low likelihood of small savings.

Relevance: Since low-income customers are likely to be in a cycle of debt, credit is always relevant to them. However, credit is usually required to meet an immediate short-term need, so convenience and ease of access are valued. Therefore, most people do not see banks as a reliable source of credit because they perceive a high degree of uncertainty in securing a loan (cumbersome processes, time-consuming approvals, etc). Hence their preference for more traditional sources. As one respondent put it, “I don’t risk going to the bank for loans when I am certain to get the money from my moneylender.”

Given these reasons, the challenge then arises in designing products, communication, literacy initiatives and last-mile engagements so that these are relevant to the PMJDY bank account-holder for immediate use, while keeping sight of the future.
A better way

The research points to four behavioural levers that can be useful.

First, design products that bridge the gap between current and future needs. Emotionally relevant products with an artificial barrier to withdraw and with a focus on people’s future such as children’s education and marriage gives them a goalpost to bank and save. Many people tend to leave the money from government subsidies untouched for future use. Automated transfers of such subsidies to a savings account or pension account can therefore translate into savings. Banks could design product concepts that are easily understood. The overdraft facility offered by PMJDY bank accounts, for instance, is not well understood by most low-income customers. Instead the bank could design communication to inform people that they can borrow small values against monthly inflows. Similarly, given the familiarity of customers with loan repayments it might help to bundle small savings into loan repayment plans.

Second, address the psychological distance. The Reserve Bank of India encourages banks to address physical distances to branches in villages through ‘Bank Mitras’ or banking correspondents who perform basic services for customers. However, banks also need to address the psychological distance in addition to the physical distance. Besides the core product curriculum, Bank Mitras need to be given soft-skills training to engage with low-income customers and help reduce their inhibitions and intimidation of accessing a bank.

Third, recalibrate financial literacy initiatives. The shift that needs to be made is to move to ‘process literacy’ from traditional financial literacy — how one needs to (for example, save or borrow) rather than why one needs to emerges as an important finding.

Fourth, address perceptions. PMJDY has been successful in getting bank accounts to millions. However, addressing people’s perceptions, that anything from the government is free, will be key. People apply reciprocal relations when they engage with commercial financial institutions. They have to pay back to borrow again in the future. Initiatives from PMJDY should be seen as coming from the financial institution so that it is not envisaged as free money.

Banking and saving can lead to healthier and productive lives for those coming into formal banking channels, provided these initiatives are aligned to the context of the customer. The good news is that we have some answers to the problems. It is all about matching the offerings with the goals, aspirations and anxieties of this audience.

(Bakhshi is Senior Program Officer, Financial Services for the Poor, Bill 

and Melinda Gates Foundation; Parameswaran is Co-Founder, Finalmile

Consulting)

The mirage of inclusive growth

Deepanshu Mohan

In the age we live in, the process of securing a persistent rate of higher economic growth is considered to be the ultimate means of achieving prosperity for all. Economists and policymakers insouciantly use the word ‘inclusive growth’ in penning down the objectives and rationale for every policy and reform measure.

It becomes pertinent thus to explore the underlying neo-liberalist idea of inclusive growth that fails to apply in evidence to the developing world context (specifically to India in South Asia).

The idea of inclusive growth has shaped our understanding of growth since the mid-1960s. The process of achieving such growth encompasses an inclusion of all sections as beneficiaries and partners in growth, and envisages that an inclusion of the excluded should be embedded in the growth process.

Such growth, as expected, by itself will then lead to a high elasticity of poverty reduction (higher reduction of poverty in per unit of growth), also reducing income inequalities at individual and group levels. 

Curve of inequality

Simon Kuznets (1966) explained how inequalities do not last for long. According to Kuznets, ‘Economic inequality increases over time while a country starts developing; however, after a certain average income is attained, inequality becomes to decrease’.

The curve of inequality — the Kuznets curve — is inversely U-shaped, where inequalities tend to decline after a point because of two reasons: Firstly, with higher economic growth, the tax revenue of governments is likely to increase, enabling them to spend more on infrastructural development, education, healthcare and skill development; particularly in backward areas where the need of such social investment is felt more, in improving opportunities for people lacking the capital to grow.

And secondly, after the initial period of economic growth and boom, the stated expectation of neo-liberal advocates is that it will trickle down to people, by creating more jobs and incomes for many.

Jagdish Bhagwati cites the need of ‘Track II’ reforms in developing countries where he calls for the government to massively spend the economic benefits from liberalising markers on healthcare, education, etc. for the initial growth to trickle down and achieve the principles of equity and sustainability.

 It just widens
In a her 2012 paper, Indira Hirway provides some useful empirical evidence from South Asia to debunk myths attached to ‘inclusive’ theoretical application of neo-liberalist version of economic growth. Hirway explains how, in spite of the adoption of pro-market policies in most South Asian countries, the level of income inequalities continue to widen.

Out of the 14 Asian countries studied, inequality has increased in 11 — including Sri Lanka, China, Cambodia, India, Indonesia and Nepal. Malaysia and Thailand were the only two countries where inequalities decreased at the margin. In the case of India, the Gini coefficient (a measure of income inequality) rose from 0.44 to 0.47 during the last decade.

The issue with the Indian case has primarily been with the implementation of Track II reforms where, in spite of higher, sustained economic growth levels from early 2000s, public spending on education and healthcare has remained drastically low (less than 3 per cent and 2 per cent of the GDP, respectively, till now). This has resulted in the accumulation of economic wealth in limited geographical city centres where economic prosperity is enjoyed by the few who directly accrue the benefits, leaving ‘the others’ entirely dependent on the government. Upward income mobility within these lower income classes remains an issue due to the lack of adequate education, health standards and access to increasing productive job opportunities.

In the field of employment and labour, scholars indicate a poor performance in generating productive employment with ‘decent work’ conditions. In India, the unemployment rate increased from 1.96 per cent in 1993-94 to 2.2 per cent in 1999-2000, to 2.37 per cent in 2004-05 and to 2.06 per cent in 2009-10.

Though different reasons are cited for explaining this increase by economists, trends show the rate of growth of employment including the rate of growth of ‘decent work’ has been far from satisfactory.

This is not just true in the case of India but other developing economies as well. According to the ILO, during 1995-2006, open unemployment grew by 22 per cent, pegging the global unemployment rate at 6.3 per cent. While the output growth rate was much higher than job growth, it is appalling how the obsession with production as the ultimate factor of inclusive and consistent growth still wheels the imagination of our policymakers.

Need an alternative
A major limitation of the theory underlying the neoliberal policy framework is that it leaves two important macro-economic components outside its purview — natural resources or natural capital, and unpaid work or work that is outside the production boundary but within the general production boundary of the UN System of National Accounts. Both these exclusions are associated with the excluded sections of population, relevant for developing economies.

So, there is a strong need for policymakers in India and across the developing world to give a fresh look at the macroeconomic framework underlying the present policies. It is critical to end the tug of war between the growth and the redistribution phases as there is a clear lacuna between these two.

The mainstream growth process that creates exclusion as well as inequalities tends to overpower the redistribution process and intensifies exclusion in the process. As supported by Hirway, ‘both the growth phase and the redistribution phase should be complimentary to each other for the mainstream growth process to be inclusive’.

For this, first, the macroeconomic policy framework warrants a radical change, where we need a vision shift in moving from short term focus goals to a more long-term focus.

It is also important that growth in developing economies continues to remain more labour-intensive and broad-based, as a generation of production employment opportunities on a large scale is perhaps the best way for including the excluded and marginalized sections of the population. This can be achieved by investing more in the development of small and medium-scale enterprises and providing an easier line of credit to their development.

Secondly, it is critical to adopt a rights-based approach accepting the citizenship’s rights of people. Provision of education, healthcare, basic infrastructural needs are part of the basic rights of every citizen. A persistent increase in social investments such as education and healthcare are attached with long-term benefits and are part of a macro strategy for improving productivity of workers and for enhancing aggregate effective demand in the economy.

It would, therefore, be useful for developing economies to think afresh on the theoretical applications of existing neo-liberalist policies that somewhere have failed to include the excluded and in the process modify the theoretical basis of such policies to indigenize them more suitably with a longer term focus.

(The writer is executive director of Centre for International Economic Studies at OP Jindal Global University)

An unkind cut for senior citizens

Alok Ray

The Government recently announced a significant reduction in interest rates on the so-called ‘small savings’ instruments — including various postal savings schemes, Senior Citizen Savings Scheme (SCSS) and Public Provident Fund (PPF) — to bring them in line with comparable bank fixed deposit interest rates. With rates likely to go down further, senior citizens, who depend on interest income for survival, are naturally upset.

The Government has stuck to its fiscal consolidation targets which the RBI considers a precondition (along with falling CPI inflation) for further cuts in the ‘repo rate’ (the rate at which RBI lends short-term funds to banks). 

Combined with the RBI dictum to banks to use ‘marginal cost’ (instead of average cost) of funds to determine the ‘base rate’ for lending, this should reduce interest rates for all depositors and borrowers across the spectrum. It implies that senior citizens would suffer more in the coming days.

Basic logic

What is the basic argument for bringing down interest rates for small savings instruments in line with bank interest rates? One major reason why banks fail to pass on the rate cuts to customers is that the effective interest rates on postal savings instruments, Senior Citizen Saving Scheme (SCSS) and PPF (specially if the tax benefits from PPF savings are taken into account) are significantly higher than those offered by bank FDs. As a result, even if the RBI reduces the repo rate, banks cannot afford to reduce the interest rates on FDs which, in turn, restricts their ability to lower interest rates to borrowers. So, in the interest of more efficient transmission of monetary policy, the RBI has announced substantial cuts in interest rates on postal savings schemes, SCSS and PPF.

Most economists would agree with the arguments advanced up to his point. The trouble arises because, in India (as in most developing countries), the interest rate instrument is used to promote more than one policy objective. 

In the absence of a workable social safety net, the interest earnings from accumulated savings serve as the only available means to protect the real income of senior citizens other than those receiving inflation-indexed monthly pensions. The across-the-board reduction in interest rates, even when justified in the interest of more efficient monetary policy transmission, may go against the objective of income stabilisation for the retirees.

Some economists argue that real interest rates (equal to nominal interest rates minus inflation) would remain the same when, along with reduction in inflation, the nominal interest rates are also being cut equally. Hence, there would be no adverse impact on interest earners. This argument is invalid since consumer prices are rising even when consumer price inflation is falling, unless, of course, we are considering a negative inflation rate (which is not the case in India). 

So, the nominal income from interest earnings would be falling while the nominal cost of living as reflected in expenditure on food, house rents, electricity bills and medical costs are rising or at best remaining the same. Clearly, the standard of living of the people depending on interest earnings for survival would be squeezed.

The question is, how to cushion the impact on less affluent retirees living on interest income, with least damage to monetary policy transmission. Several options can be considered. One, the interest rate on the SCSS may be left unchanged. Since one can invest only up to a maximum of ₹15 lakh in this scheme and even a 10 per cent interest would fetch only ₹1.5 lakh interest income a year, the major beneficiaries would be senior citizens with income well below the tax- exemption limit of ₹3 lakh a year. 

Given that only bonafide senior citizens can avail themselves of SCSS and that, too, up to a maximum total investment of ₹15 lakh, the additional interest cost on banks would be limited.

Finding solutions

There is much less justification for not reducing the interest rate on PPF which offers triple tax benefits (‘EEE’ meaning tax exemption on investment amount, interest earnings and withdrawal). Only relatively affluent people (not limited to senior citizens) with surplus income to save can make use of this scheme to save taxes. 

Each year, a person can invest up to ₹1.5 lakh in PPF, saving taxes of more than ₹45,000 (if in the 30 per cent tax plus surcharge bracket). Further, given that the interest income from PPF is totally tax exempt, the effective return from this instrument is much higher than all other schemes, including SCSS. Since all (affluent) people, irrespective of age, can invest in PPF, the additional interest cost and tax revenue loss could be a lot more than in the case of SCSS.

Raising the extra interest rate for senior citizens from the current 0.5 per cent to, say, 1 per cent, while reducing the general FD rates, is another possibility. 

Since the FD interest income is taxable, the biggest benefits would again accrue to poorer senior citizens below the tax exemption limit and progressively less for people in higher tax brackets. As postal deposit rates are being brought in line with bank FD rates of comparable maturity, the same extra interest benefit should be offered to senior citizens by post offices also (which is not the case now). 

All these modifications should be supportable on both equity and progressivity principles of public finance.

Apart from the economic justification advanced above, in a democracy, the electoral power of senior citizens (whose number is increasing with rising longevity) cannot be ignored. The recent roll-back of the Budget proposal for (partial) taxation of withdrawal from EPF, due to public outcry, is a case in point.

The writer was a professor of economics at IIM-Calcutta

The Aadhaar coup

Jean Dreze
The Aadhaar project was sold to the public based on the claim that enrolment was “voluntary”. This basically meant that there was no legal compulsion to enrol. The government and the Unique Identification Authority of India (UIDAI), however, worked overtime to create a practical compulsion to enrol: Aadhaar was made mandatory for an ever-widening range of facilities and services. It became clear that life without Aadhaar would soon be very difficult. In these circumstances, saying that Aadhaar is voluntary is like saying that breathing or eating is voluntary. Legal or practical, compulsion is compulsion.

Sweeping powers It took the Supreme Court to put an end to this doublespeak. In March 2014, the court ruled that “no person shall be deprived of any service for want of Aadhaar number in case he/she is otherwise eligible/entitled”. This was a very sensible interpretation of what it would really mean for Aadhaar to be voluntary. Throughout the proceedings, incidentally, the Central government stood by the claim that Aadhaar was a voluntary facility. The Supreme Court did nothing more than to clarify the implications of that claim.It is important to note that Aadhaar could work wonders as a voluntary facility. A certified, verifiable, all-purpose identity card would be a valuable document for many people. But the UIDAI has never shown much interest in the Aadhaar card, or in developing voluntary applications of Aadhaar. Instead, it has relentlessly pushed for Aadhaar being used as a mandatory identification number in multiple contexts, and for biometric authentication with a centralised database over the Internet. That is a very different ball game.
In concrete terms, the Bill allows the government to make Aadhaar authentication compulsory for salary payments, old-age pensions, school enrolment, train bookings, marriage certificates, getting a driving licence, buying a SIM card, using a cybercafé — virtually anything. Judging from the experience of the last few years, the government will exercise these powers with abandon and extend Aadhaar’s grip to ever more imaginative domains. Indeed, Aadhaar was always intended to be “ubiquitous”, as Nandan Nilekani, former Chairman of the UIDAI, himself puts it.
 

The Supreme Court order caused consternation in official circles, since it ruled out most of the planned applications of Aadhaar. The Aadhaar Bill, tabled last week as a money bill in the Lok Sabha and passed by it, is the Central government’s counter-attack. Under Section 7, the Bill gives the government sweeping powers to make Aadhaar mandatory for a wide range of facilities and services. Further, Section 57 enables the government to impose Aadhaar identification in virtually any other context, subject to the same safeguards as those applying to Section 7. 

Mass surveillance
Why is this problematic? Various concerns have been raised, from the unreliability of biometrics to possible breaches of confidentiality. But the main danger is that Aadhaar opens the door to mass surveillance. Most of the “Aadhaar-enabled” databases will be accessible to the government even without invoking the special powers available under the Bill, such as the blanket “national security” clause. It will be child’s play for intelligence agencies to track anyone and everyone — where we live, when we move, which events we attend, whom we marry or meet or talk to on the phone. No other country, and certainly no democratic country, has ever held its own citizens hostage to such a powerful infrastructure of surveillance.

If this sounds like paranoia, think again. Total surveillance is the dream of intelligence agencies, as we know from Edward Snowden and other insiders. The Indian government’s own inclination to watch and control dissenters of all hues has been amply demonstrated in recent years. For every person who is targeted or harassed, one thousand fall into line. The right to privacy is an essential foundation of the freedom to dissent.

Mass surveillance threatens to halt the historic expansion of civil liberties and personal freedom. For centuries, ordinary people have lived under the tyranny of oppressive governments. Compulsion, arrests, executions, torture were the accepted means of ensuring their submission to authority. It took long and harsh struggles to win the freedoms that we enjoy and take for granted today — the freedom to move about as we wish, associate with whoever we like, speak up without fear. No doubt these freedoms are still elusive for large sections of the populations, especially Dalits and those who live under the boot of the security forces. But that is a case for expansion, not restriction, of the freedoms we already have.

The Aadhaar Bill asks us to forget these historic struggles and repose our faith in the benevolence of the government. Of course, there is no immediate danger of democracy being subverted or civil liberties being suspended. Only an innocent, however, would fail to anticipate Aadhaar being used as a tool of mass surveillance. And mass surveillance per se is an infringement of democracy and civil liberties, even if the government does not act on it. As Glenn Greenwald aptly puts it in his book No Place to Hide, “history shows that the mere existence of a mass surveillance apparatus, regardless of how it is used, is in itself sufficient to stifle dissent.”
 

Uncertain benefits
The champions of the Aadhaar Bill downplay these concerns for the sake of enabling the government to save some money. Wild claims are being made about Aadhaar’s power to plug leakages. In reality, Aadhaar can only help to plug specific types of leakages, such as those related to duplication in beneficiary lists. It will be virtually useless to plug leakages in, say, the Public Distribution System (PDS), which have little to do with identity fraud. On the other hand, recent experience has shown that Aadhaar could easily play havoc with the PDS. Wherever Aadhaar authentication has been imposed on the PDS, there have been complaints of delays, authentication failures, connectivity problems, and more. The poorer States, where the PDS is most needed, are least prepared for this sort of technology. There are better ways of reforming the PDS. Similar remarks apply to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

I have seen some of this damage at close range in Jharkhand, where Aadhaar was supposed to prove its mettle. Aadhaar applications (in the PDS, MGNREGS, and even the banking system) have had poor results in Jharkhand, and caused much disruption. For instance, MGNREGS functionaries have cancelled job cards on a large scale for the sake of achieving “100 per cent Aadhaar seeding” of the job-cards database. MGNREGS workers have been offloaded by rural banks on Aadhaar-enabled “business correspondents” who proved unable to pay them due to poor connectivity. And the proposed imposition of biometric authentication at ration shops threatens to disrupt recent progress with PDS reforms in Jharkhand.

Seven years after it was formed, the UIDAI has failed to produce significant evidence of Aadhaar having benefits that would justify the risks. Instead, it has shown a disturbing tendency to rely on public relations, sponsored studies and creative estimates (including the much-cited figure of Rs.12,700 crore for annual savings on the LPG subsidy). To my knowledge, there has been no serious evaluation of any of the Aadhaar applications so far. Worse, some failed experiments have been projected as successes through sheer propaganda — business correspondents in Ratu (Jharkhand) and “direct benefit transfer” of kerosene subsidies in Kotkasim (Rajasthan) are just two examples.

No doubt Aadhaar, if justified, could have some useful applications. Given the risks, however, the core principle should be “minimum use, maximum safeguards”. The government has shown its preference for the opposite — maximum use, minimum safeguards. The Aadhaar Bill includes some helpful safeguards, but it does nothing to restrain the use of Aadhaar or prevent its misuse as a tool of mass surveillance. And even the safeguards protect the UIDAI more than the public.

The wizards of Aadhaar are fond of telling us that we are on the threshold of a “revolution”. With due respect for their zeal, a coup would be a more appropriate term. The Aadhaar Bill enables the government to evade the Supreme Court orders and build an infrastructure of social control. Further, it does so by masquerading as a money bill, pre-empting any serious discussion of these issues. This undemocratic process reinforces the case for worrying about Aadhaar.
(Jean Drèze is Visiting Professor at the Department of Economics, Ranchi University.)

Limits of the Socio-Economic Caste Census 2011

Economic and Political Weekly 

It was the Ministry of Rural Development which, for close to five years beginning in 2010, designed, planned and oversaw the execution of the 2011 Socio Economic and Caste Census (SECC), whose first batch of results were released earlier this month. Yet, it was somewhat unusual to see Union Minister for Finance, Arun Jaitley, rather than his colleague in Rural Development, Rao Birender Singh, holding centre stage at the release event in New Delhi. This is enough of a clue about what the census is going to be used for.

The SECC has its origins, first, in the widespread dissatisfaction with the third below the poverty line (BPL) Census of 2002 and, then, with the former United Progressive Alliance government’s decision in 2011 to carry out a caste census, in a less than serious manner. With many central and state government programmes directed at the BP Lpopulation, surveys were periodically carried out by the states under direction from the Ministry of Rural Development to identify the potential beneficiaries of the schemes. The problem with the BPL surveys was that they had substantial errors of exclusion and inclusion (those who should have been identified as BPL were excluded and those who were not BPL were included, respectively). A more transparent criteria-based approach formed the basis for the 2011 SECC. Households which did not meet even one of the 14 criteria covering ownership of assets (a three/four wheeler, refrigerator, etc), regular employment (working in the government) and income (a household member paying income tax, etc) would be considered deprived. In addition, certain kinds of households—all manual scavengers, all ragpickers, etc—would automatically be considered as suffering extreme deprivation.

The new approach made more sense and the initial results available for rural India do confirm the continuing incidence of extreme deprivation; its most striking expression is that the income of the highest earning member in 75% of households is less than Rs 5,000 a month. Yet, none of the data tell us anything new unless we had been carried away by a mobile density of 90 per 100 persons as being an indicator of a very low overall level of deprivation. The information that has been thrown up by the 2011 SECC on the overall degree of deprivation is to be found in different forms in the National Sample Survey, Census of India and even in the, somewhat dated, National Family Health Survey.

If yet there is some excitement in the centre about the SECC it is because of what the government thinks it can do with the data. The 39% of the rural population identified as being deprived because it does not meet even one of the 14 criteria covered in the SECC is much lower than the 75% of the population that is to be covered under the National Food Security Act (NFSA). Could the central government then be thinking of cutting back on its food security obligations by restricting NFSA coverage to 40% of the population? The finance ministry may be attracted by that possibility but that would require the NFSA to be amended and the state governments to agree. The finance ministry may also feel that the availability of information categorising the entire population according to different kinds of deprivation would make a shift to cash transfers—as many in the government want to—much easier. Others see this as “big data” which can be used to track the population’s characteristics.

All this presupposes that the mass of information that has been collected is accurate and that the data has been validated. The initial analyses of the rural data throw up some anomalies. News reports point out, for instance, that according to the survey the incidence of ownership among households in New Delhi of fishing boats plying the Yamuna waters is higher than along Tamil Nadu’s long coastline. With all the data for all the districts yet to be compiled and the methodology of compilation yet to be examined, the validity of the 39% number as deprived cannot be assumed to be accurate. The finance ministry is therefore better advised to leave it to the rural development ministry to first put together the final results of the SECC for rural and also for urban India.

Caste is the other set of data which is yet to be released. We are now told that the Niti Aayog will compile and put out the information. Census information on caste should have been canvassed by the agency with the best skills for the purpose— the Office of the Registrar General and Census Commissioner, India (ORGI). However, the ORGI baulked at collecting this information as part of the Census of 2011. The government of the time then decided to conduct a separate caste census but in the end tagged it along to the rural development ministry’s socio-economic survey, which was conducted by individual state governments. It has been pointed out by a former census commissioner himself that a census on the complex issue of caste identity is not one to be tossed about from agency to agency. The caste data when it is finally put out may show up even bigger weaknesses of the 2011 SECC.

In the end, the SECC will turn out to be most useful only if the socio-economic component of the data is used for the specific purposes for which it was collected. The Indira Awaas Yojana could, for instance, cover only households living in one room or kutcha houses as identified in the SECC. It would be a case of overreach if the finance ministry sees the SECC as providing it an opportunity to reduce coverage and slash welfare expenditure.

Importance of old-age pensions

Jean Dreze 

It was a new experience, last summer, to go from village to village with student volunteers and listen to elderly women and men. Our main purpose was to understand how pension schemes for widows and the elderly worked in different States (Bihar, Chhattisgarh, Himachal Pradesh, Jharkhand, Madhya Pradesh, Maharashtra, Odisha, Rajasthan, Tamil Nadu and Uttar Pradesh to be precise). Testimony after testimony has opened our eyes to the critical importance of old-age pensions as a pillar of social security in rural India.

The first thing that struck me was the immense number of elderly people, and their miserable plight. They escape our notice most of the time, but if we have an eye out for them, they spring up everywhere. They live quiet and unobtrusive lives, some passing time on a broken charpoy, others collecting twigs, limping from one place to another, or simply lying ill in the darkness of a shabby backroom. They rarely complain — at least not in public — but if you enquire about their well-being, the tales of sorrow are endless.

It is not just in poor households that widows and the elderly have a hard time. Even in relatively well-off families, money is always in short supply, and the comfort of the elderly often takes the back seat. We met plenty of women and men who lived a life of deprivation even as their adult sons built good houses or rode motorcycles.

Whenever public meetings were called to talk about social security pensions, elderly women and men came out of their houses in large numbers to join the discussion. Those who were not receiving a pension pleaded for help to apply. Pensioners, for their part, complained that the pension amount was far too low. Even so, they clung to their bank or post-office passbooks as they might precious possessions. In their harsh lives, the pension was a chance to enjoy small comforts — relieving their pain with some medicine, getting their sandals repaired, winning the affection of their grand-children with the odd sweet, or simply avoiding hunger. 

Small leakages, but no big scams
The main insight from the survey was the basic soundness of pension schemes as a tool of social security and economic redistribution. Most of the recipients are, by any standard, deprived people who need social support — and indeed have a right to it. Aside from contributing to their economic security, pensions give them some dignity and bargaining power. The administrative costs are very low. Last but not least, the survey (which included verifying pension records in 160 sample villages) did not find any evidence of major fraud in pension schemes. There are leakages here and there, for instance when post-office employees take a cut to disburse pensions, but nothing like the scams that plague many other forms of government expenditure. And the leakages, such as they are, can be dealt with quite easily.

Having said this, pension schemes for widows and the elderly have five major flaws as things stand: narrow coverage, bureaucratic procedures, low pension amounts, irregular payments, and high collection costs.

To start with, the coverage of pension schemes is too narrow. According to Central guidelines, social security pensions are meant for “below poverty line” (BPL) families; financial support from the Central government is restricted to this category. Some States have launched their own schemes, with their own funds, to expand the coverage of pensions beyond BPL families. But the bulk of pensioners are selected from the BPL category. The unreliable and exclusionary nature of this eligibility criterion is now well understood in other contexts.

In the context of pensions, it is all the more inappropriate, because widows and the elderly are often extremely deprived even in relatively well-off households. BPL targeting should be abolished in favour of a universal or near-universal approach, whereby any widow or elderly person who does not meet well-defined exclusion criteria (such as having a government job) is eligible for a social security pension.

Second, application procedures tend to be very cumbersome. Numerous supporting documents have to be produced, and it often takes years for applications to wind their way up and down different layers of administration — Gram Panchayat, Block, District, State and back. In Latehar district (Jharkhand), we learnt from the Sub-Divisional Magistrate that pension applications were being forwarded to the State government at a snail’s pace simply because he had to sign each application six times. With about 13,000 applications pending, that meant 78,000 signatures, for this purpose alone. He was blindly signing application forms even as he was talking to us, without, for all that, making much of a dent in the backlog.

Third, the amounts of social security pensions are ridiculously low. The Central contribution to old-age pensions has remained at an abysmal Rs. 200 per month since 2006 —an insult to the dignity of the elderly. Some States top this up with their own resources, but even the topped-up amounts are measly, except in a few States like Tamil Nadu where the standard pension amount is now Rs. 1,000 per month. Pension amounts should be increased without delay and indexed to the price level.

Fourth, pension payments are highly irregular in most States. Often, pensioners have to wait for their pension for months, without having any idea as to when the next payment will materialise. This defeats the purpose of old-age pensions, which is to bring some security in people’s lives. More than ten years have passed since the Supreme Court ordered State governments to ensure that social security pensions are promptly paid by the 7th of each month, but few States have acted on this.

Fifth, even when payments are relatively regular, collecting them is often costly and tedious for old people with little mobility, education and power. Going to the nearest bank and queuing up there for hours can be an absolute ordeal for them.

Post offices are closer, but the convenience comes at a price — corrupt post-office employees often expect an inducement. Alternative options such as postal orders, business correspondents and cash payments pose their own problems. The Central government’s odd insistence on fast-tracking the transition to “UID-enabled” payments of social security pensions (one of the least appropriate applications of this problematic technology) is likely to be very disruptive — “UID-disabled” may well turn out to be a more accurate term in this case. 

Signs of change
All these problems are easy to fix. The main reason why it is not happening is that the people concerned count for so little. But this is changing: widows and the elderly have started agitating for their rights, with a little help from associations such as Ekal Nari Shakti Sangathan and Pension Parishad. Under public pressure or for other reasons, many States have started improving and expanding their pension schemes — Odisha, Tamil Nadu, Rajasthan, among others. Even Bihar and Jharkhand, the incorrigible laggards in such matters, are developing a serious interest in pension schemes.

Odisha, no paragon of good governance in general, presents an interesting case of a State which has put in sustained effort to strengthen pension schemes. Eligibility conditions have been relaxed and the coverage of pensions has been extended well beyond the ambit of Central guidelines. The lists of pension recipients are updated regularly and posted on the internet. Pensioners have well-designed and well-maintained passbooks with details of pension payments. Last but not least, pensions are promptly paid in cash at the Gram Panchayat office on the 15th of each month — even on August 15. This arrangement, very convenient for pensioners, is strictly enforced and appears to work very well.

The Central government, for its part, seems unable to get its act together on this issue. The need to put social security pensions on a sounder footing is well accepted in principle, and useful recommendations for this purpose have been made by an expert committee. However, little has been done to implement these recommendations — not even raising the Central contribution to old-age pensions above the paltry Rs. 200 per month. The “savage cuts” (as Union Minister Jairam Ramesh called them) in social expenditure sought to be imposed by the Finance Ministry are not going to help matters. The axe of fiscal austerity weighs most heavily on the poor and powerless, including destitute women and men who are expected to get by with Rs. 200 per month even as prices go through the roof.

(Visiting Professor at the Dept. of Economics, Allahabad University)