Go for an“inclusive growth dividend” in India
India spends substantial amounts on welfare programmes but delivers them inefficiently. After accounting for administrative costs, leakage, and targeting errors, even official government documents estimate that a considerable fraction of fiscal outlays on government-implemented programmes do not reach the intended beneficiaries.
As a result, several leading economists have suggested that India should adopt a Universal Basic Income (UBI) as its main anti-poverty strategy, replacing existing welfare schemes with direct income transfers into bank accounts of beneficiaries (or their mothers, in the case of children). Such an approach, they argue, could yield a UBI worth between 3.5% and 10% of GDP, depending on which programs were replaced, and nearly eliminate extreme poverty in India.
This approach has several attractive features. It would eliminate targeting costs and errors of exclusion (since the programme is universal), reduce administrative costs and leakage, and directly reduce poverty. Several studies from around the world have shown that income transfers have yielded a variety of positive impacts in the lives of the poor with no evidence of increased spending on temptation goods like alcohol or tobacco. This idea of a UBI gained policy prominence in the 2017 Economic Survey, which discussed its merits extensively. Yet little has been done since to try it out in India. One reason is that it is very difficult politically to replace existing schemes – even the inefficient ones – leaving limited fiscal space for a UBI.
We propose a more modest beginning towards using income transfers to mitigating extreme poverty in India. Specifically, we propose an “Inclusive Growth Dividend” (IGD) pegged at one per cent of GDP/capita. At current income levels, this translates to ₹100 a month per person. If we start with pilots in the 100 poorest blocks in India (covering ~2.5 crore people), the cost would be ₹3,000 crores/year. This can easily be financed from the ₹65,000 crores of savings reported by the Government from using Direct Benefit Transfer (DBT) in welfare programmes.
A modest IGD can deliver several benefits. First, it minimises the risks to the poor by supplementing rather than substituting away existing benefits. Given implementation challenges that we have observed in our own research, we do not consider it prudent to replace existing welfare programs with DBT by fiat. The first goal of an IGD would simply be to demonstrate the government’s capacity to credibly and consistently deliver an income supplement to all citizens, even in the poorest areas.
Second, the amount is meaningful for the poorest households but too small to reduce incentives to work. While global evidence has consistently found that unconditional transfers do not reduce work, UBI critics in India continue to voice this concern. Indeed, we prefer the term IGD to UBI as “basic income” connotes an amount that is enough to live on. An IGD would instead be one component of people’s income which reaches all citizens and grows equally for all with the country’s growth. It would thus be a powerful practical and symbolic commitment to universally shared prosperity.
Third, global evidence suggests that an IGD can promote female empowerment. A mother with two children would receive ₹300/month -- a considerable amount when the flagship national maternity benefits scheme provides ₹500/month for only 12 months and for only the first pregnancy.
Fourth, an IGD would promote the government’s goal of universal effective financial inclusion. While millions of bank accounts have been created under the Paradhan Mantri Jan-Dhan Yajana and other schemes, a substantial fraction have no balances or are inactive. A regular monthly transfer can catalyse the use of these accounts as a vehicle for savings, build household comfort with interacting with the formal financial system, and improve supply-side incentives for creating last-mile cash access solutions.
Finally, and perhaps most importantly, building the infrastructure to deliver an IGD can improve the accountability of other government programs by making cash transfers an attainable benchmark against which they can be evaluated. The hypothetical question of “should we do a programme or simply give the money directly to intended program beneficiaries” would become a very real one. In many cases beneficiaries themselves can exercise this choice (as we discussed in our previous column on the PDS).
In other words, income transfers would become a low-implementation cost “index fund” for development spending and in-kind programmes and subsidies would need to demonstrate that their targeting, administrative and implementation costs deliver more value than their cost. Over time, programs that deliver less value than their cost could be replaced with income transfers while those that deliver more value can be retained.
The Jan-Dhan, Aadhar, Mobile (JAM) infrastructure is making it easier to deliver income support to Indians at scale, but this potential has not yet been realised. An IGD pilot (financed by central/state governments, foundations, or a combination) covering all citizens in some of India’s poorest blocks provides a fiscally and practically feasible way of testing this potential.
Karthik Muralidharan is Tata Chancellor’s Professor of Economics at UC San DiegoPaul Niehaus is Associate Professor of Economics at UC San DiegoSandip Sukhtankar is Associate Professor of Economics at the University of Virginia
The views expressed are personal