As COVID-19 sinks the economy deeper each day, Maitreesh Ghatak and Karthik Muralidharan propose an alternative anti-poverty measure that’s different from the Universal Basic Income and targeted schemes.
Basic income transfers have been promoted by a number of development economists as an important tool with which to fight poverty. There are also, however, strong opponents of such transfer schemes who critique them for reasons of infeasibility, further claiming that they will disincentivize capable adults from being a part of the workforce, and thus speed up economic decline.
A paper by Maitreesh Ghatak and Karthik Muralidharan proposes an alternative: Inclusive Growth Dividend, or IGD.
An IGD is described as a “universal, supplemental income transfer pegged at 1% of Gross Domestic Product (GDP)”, that could have major positive impacts on India’s development while avoiding the risks and shortcomings of Universal Basic Income (UBI) transfers. Here are key points, drawing from Ghatak and Muralidharan’s proposal, that discusses benefits of the IGD as compared to the UBI and targeted schemes, how the IGD could work in India and what it could achieve.
IGD Vs UBI: Differences, Advantages At first look the IGD seems similar to the UBI but it differs from it in key ways:
- The IGD is universal like the UBI in that it is provided to all citizens, but while the UBI aims to cover each individual’s basic cost of living, the IGD is a supplemental transfer that would only be successful in supporting the individual receiving it if they had other sources of income. For this reason, it is argued that income transferred as per IGD would incentivise employment and boost economic activity for lower income groups, unlike basic income transfers which may disincentivize people from looking for work. For eg., For farmers, the supplementary income transferred through an IGD will encourage them to invest in a more productive, if more expensive crops; Workers will be able to meet transport costs and travel from villages to work more easily; And vulnerable sections of society will be driven to seek out better forms of work thanks to the safety net provided by the IGD, instead of discontinuing work altogether.
- The UBI’s basic income transfers are estimated to cost anywhere between 4 to 10% of GDP, which is why it is seen as infeasible. An IGD would, however, can be capped at 1% of GDP. Capping it at this percentage will also account for inflation, ensuring that the amount transferred remains consistent in real terms. IGD Vs Targeted Schemes: What Makes IGD Better? - The Indian State has relied primarily on targeted schemes and transfers rather than either a UBI or an IGD model. Such schemes specifically target economically underprivileged sections of society, but they end up with loopholes that lead to corruption, oversight and exclusion. An IGD model would eliminate this.
- An IGD model would also curb the costs involved in creating and implementing targeted schemes (as it would be universally applicable, targeting wouldn’t be necessary).
- An IGD model would also reduce electoral and social problems associated with targeted transfers that make them unpopular among those sections of society who are just above the cutoff (usually based on income level) that would qualify someone to benefit from such schemes.
- Transfers like IGD have also been shown to have directly measurable macroeconomic benefits (benefits to the economy overall). In a study conducted in Kenya, similar transfers provided at the community level are estimated to provide a fiscal multiplier effect (effect that each unit of public spending has on the nation’s economic output) of 2.7, increasing demand and boosting the economy.
- The manner in which an IGD is rolled out could also promote social justice and development in areas like gender equality. For instance, transfers to children below the age of 18 could be made into the bank accounts of their mothers.
- A successful IGD would improve India’s state capacity (the ability of the state to provide for its citizens) and increase the credibility of the Indian state. Up until now, there hasn’t been a major public welfare project that seeks to reach every single Indian citizen in a regular and consistent manner. Executing this would prove that the Indian state is capable of delivering on large-scale projects such as these.
- IGD could also function as a kind of benchmark to ensure efficient public expenditure. Policy makers could consider the effectiveness of public spending projects by comparing their proposed economic effects against simply providing the same amount to all citizens through an IGD. In India, How Would the IGD be Implemented? - One of the central problems with transfers like the IGD is the infrastructure required. Fortunately, some of the government's biggest investments over the past 10 years have been in areas that will aid in providing such infrastructure.
- Specifically, investment into the Jan-Dhan Yojana, Aadhar and Mobile devices and telecom and digital connectivity can be used to make an IGD feasible. The Jan-Dhan Yojana has created a huge number of bank accounts and shown that the government has the ability to do so. Aadhar can provide biometric access to the money from an IGD, and mobile messaging can be used to inform citizens about the nature, timing and accessibility of the transfers. In the future the transfers may even take the shape of ‘mobile money’ or use in digital wallets. It is estimated that India has built up about 80% of the infrastructure needed for an IGD.
- To provide for an IGD, instead of phasing out other schemes, total welfare spending by the government should increase. 1% of GDP is a feasible increase which would prove a valuable addition to India’s current social welfare architecture, especially in these times of COVID-19 where opportunities for employment have become scarce.
- Finally, the IGD should also be seriously considered by the current administration as it fulfils their slogan and promise of social benefits, development and justice for all - “sabka saath, sabka vikas, sabka vishwas”. Read the full paper by Maitreesh Ghatak and Karthik Muralidharan here.
Or hear this VoxDev talk by Karthik Muralidharan that explains the key points discussed in the paper:
On the UBI, watch this video explainer:
Or you can read this explainer discussing the pros and cons of UBI on The Balance.
You can also read more about IGD, taking off from Ghatak and Muralidharan’s paper, here. Related Articles on IPC: Employment After the Lockdown: Gender, Caste & Urban-Rural Gaps A paper by Ashwini Deshpande investigates the effect of the COVID-19 lockdown on employment and finds that women and Dalits, especially those in rural areas, are the worst affected.
Intuitively, printing more money seems like a common-sense solution to alleviating issues of economic inequity and non-access. Counterintuitively, economic reasoning suggests that this isn’t a practical solution to such problems. So, why can’t we print more money? An explainer. Maitreesh Ghatak is Professor of Economics at the London School of Economics; Karthik Muralidharan is the Tata Chancellor's Professor of economics at the University of California, San Diego
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