REFORMING INDIA'S WELFARE SYSTEM

Most countries provide some form of welfare assistance to those who are less fortunate. And while there might be disagreement on how to deliver such aid or even who should receive it, few dispute the principle of a basic safety net.

India’s current welfare system suffers from two major inefficiencies: High bureaucratic costs associated with running these programs, and massive leakages from the system. Estimates by the Ministry of Finance show that in just the two large subsidy programs, PDS and MNREGA, as much as 40% and 65% of the funds respectively did not get to the people who most needed it.

Here is the ultimate irony: A country that ranks 2nd in total food production ranks 100th among 119 countries in the 2017 Global Hunger Index despite allocating Rs. 1.3 Lakh crores last year to provide subsidized food grains to two-thirds of the country’s population. The country produces more than enough food yet its people don’t get enough food.

Let’s face it. The current welfare system is badly broken because of the middleman–the hundreds of government departments responsible for distributing welfare. What is required is a simple welfare system that could virtually be administered by a computer that will shrink the size and scope of the government and eliminate the departments responsible for distributing welfare.

There are three novel alternatives to the current welfare system.

(1) A Universal Basic Income (UBI) scheme under which every citizen is guaranteed a minimum subsistence income

(2) A negative income tax (NIT) in which people earning below a threshold amount receive a rebate from the government calculated on the basis of a table of negative tax return and

(3) An annual redistribution of all income generated from the sale of national assets including public sector undertakings, natural assets extracted from the ground, federal land, oil and mineral rights,  and the sale of all spectrum.

In its simplest form, UBI guarantees every adult an amount that covers basic human needs like food, shelter, clothing. This income is unconditional, and people can supplement it by working. Numbers calculated by the Chief Economic Adviser show that a UBI of around Rs. 900 a month to 75% of the population would cost almost 5% of GDP. Eliminating all the current subsidies and welfare programs would save about 3.1% of GDP leaving an additional fiscal burden of about 2% of GDP. This is a substantial cost.

For UBI to be fiscally sustainable, it will need to be limited to adults below a certain threshold income. This brings in the additional burden of means testing and the risk of people getting this income that don’t need it. Another alternative is to provide the UBI only to the women as a way to acknowledge their uncompensated contribution at home.

The UBI amount could be deposited directly into the beneficiary’s bank account or given in the form of a debit card which gets automatically topped up every month. The latter approach would help in the push to make India into a cashless economy and also prevent the money from being used for alcohol or other restricted purchases.

Given India’s political realities, however, it is virtually guaranteed that politicians will tinker with UBI in the future and make it fiscally unsustainable. The only way to insulate UBI from politics is through a constitutional amendment that simultaneously eliminates all other welfare programs and guarantees that the UBI should be designed to help people based on their income and not as members of particular occupational groups or castes. In other words, we need to help a poor man who also happens to be a Dalit or a farmer, not because he is a Dalit or a farmer but because he is poor.

The second option is the NIT which is a means-tested version of universal basic income. This would not guarantee a set income for every adult but would provide payments to people based on how much below a certain threshold they earn. The NIT would thus be a mirror image of the regular tax system. So, assuming that the threshold level was Rs. 2 lakhs annually, then anyone with a reported income of Rs. 1.2 lakhs would get an amount equal to a negative tax rate ( say 25%) times the difference between the reported and threshold income (here Rs 80,000), or Rs. 20,000 per year.

The NIT has certain advantages. The vast majority of Indians don’t pay any direct taxes so are hugely disconnected with the government and its goals, size, and sources of revenue. Forcing them to file a tax return to avail the NIT would increase awareness of where government revenues come from which could potentially reduce the tendency to loot and destroy public property. It would also be helpful in conveying the large cost of government to voters. Secondly, a NIT does not disincentivize work because it only covers the gap between what someone makes and a certain basic income so there is no penalty for getting a raise that puts one over the income threshold.

The disadvantages are of course that tax returns would need to be filed monthly and the additional paperwork related to these filings could overwhelm the tax authorities. There is also the issue of people being unable to fill out returns. One out of every four adults in India is functionally illiterate, especially at the low-income level where this would be most applicable, and may be unable to file a return unless the filing process is greatly simplified.

The third option is to redistribute all the revenue generated from the sale of state-owned assets including public sector undertakings, mineral and oil rights, coal, sand, land, spectrum and other assets that belong to the citizens of the country. Alaska has a similar program where an annual dividend from state oil revenues is paid to citizens each year – a windfall of $2072 per person in 2015. To ensure that bureaucrats and politicians do not dip their hands into this revenue, a separate body, completely independent of the government, could be constituted to monitor the sale of assets and its redistribution.

India needs a welfare system that guarantees at least a minimum subsistence income, promotes freedom of choice and personal responsibility, reduces the humiliation associated with the current system, provides an ostensible incentive to work, and reduces leakages and administrative waste.

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2018-07-26T22:46:51+00:00 October 22nd, 2017|

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