Universal Cash Transfers in India: The Case for an Inclusive Growth Dividend

The idea of Universal Basic Income (UBI) has gained traction over the past decade. While the idea of a basic income has existed since the American and French Revolutions, it has never been implemented on a country-wide level. Myriad questions remain on its execution: should it replace most or all existing welfare programs? Is it fiscally feasible, and how can it be funded? Would it be the best way to provide people what they need?

In high-income countries, UBI advocates have focused on concerns around increasing automation of jobs. In low- and middle-income countries the discussion is driven around whether a UBI would be able to provide services more effectively and fairly than existing government programs. This seems possible: cash transfers are proven to reduce poverty, encourage savings, and promote women’s empowerment, and a universally distributed cash transfer would ensure no one who needed it was excluded. While the reasons for wanting to implement a UBI might vary between countries, the first country-wide experiment with it could revolutionize benefits programs around the world.

For these reasons, Maitreesh Ghatak and Karthik Muralidharan’s “An Inclusive Growth Dividend: Reframing the Role of Income Transfers in India’s Anti-Poverty Strategy” argues for India’s adoption of an “Inclusive Growth Dividend” (IGD) for all citizens as part of a portfolio of programs for fighting poverty. The IGD differs from traditional UBIs in some key ways. The total value of the IGD is pegged at 1% of GDP, so while not providing a living wage, it is a politically and fiscally viable policy that would make a difference for poor households in India. 1% of GDP is far more affordable than providing a living wage for everyone, but its value will automatically adjust over time alongside economic growth and “would thus be a powerful practical and symbolic commitment to universally shared prosperity.”

The authors cite current research into income transfer programs in India and worldwide to argue the IGD could be both feasible and effective. A recent policy initiative in India (PM-KISAN) provides 6000 rupees per year (around $82) for all farming households in the country — about half of all households — costing about 0.5% of GDP. The authors propose extending about this same amount of benefit to all citizens (working out to about 110 rupees ($1.60) per citizen per month). Basic income has been a topic of serious political discussion, and the state has invested in infrastructure to transfer money directly into people’s bank accounts. The authors write that money is the main constraint for the transfer program, and “assume that [the infrastructure investments] provide enough of a foundation for implementation to happen if there is political will behind the program” (p 33). They provide practical implementation guidance for the 15th Finance Commission and central and state governments. Given this work, the IGD is not a pipe dream but something that could feasibly be implemented in the next few years.

But would the IGD be a good idea? Here, it is most important to see how the IGD compares to more common program types: 1) direct provision of goods and services and 2) targeted cash or in-kind transfer programs.

Direct social services in India are often implemented poorly: for example, despite having access to public healthcare, most people in rural India choose more cost-effective private providers instead. Similarly, millions of parents choose private schools over free public schools; as the authors state: “What does it say about the quality of your product, that you can’t even give it away for free” (p 10)? However, attempts to replace public expenditure with income have been beset with problems. When other benefits programs in India have shifted, many people experienced delays for vital payments. A wholesale switch away from direct service provision would likely be disastrous.

Thus, Ghatak and Muralidharan recommend IGD not as a replacement for directly provided services, but as a complement. One of the goals of the IGD would be to provide a quality benchmark for other government programs. Over time, programs that provided better services than the IGD could be retained, while programs that were proven to be cost-ineffective would be scrapped. The two systems would exist in tandem to provide the best services for India’s highest-need citizens.

Targeted programs distribute cash or in-kind transfers (like food) based on certain recipient characteristics: for example, income level, family structure, job, or children’s vaccination status. The IGD aims to address some of the issues with such programs. Targeted programs have high administrative costs and introduce room for corruption. Exclusion from targeted social programs may mean that needy families go hungry. Targeting also means making difficult values judgments on who to include in a program. In PM-KISAN, landholding farmers receive benefits while landless, often poorer families receive nothing (p 15). Targeted programs can also have negative psychological effects for families who do not receive the programs — often quite similar to targeted families — while universal programs eliminate this.

In short, universal programs would be more cost-effective than targeted programs, but they would cost more money overall because they give money to more people. The authors argue the benefits to society are well-worth the additional cost.

There is extensive literature on the benefits of cash transfers in low- and middle-income countries. The poorest quarter of families in India have few or zero assets or savings. In agriculture, in which most people worldwide are employed, income is seasonal. During the “lean season” many families cannot pay for necessary food, education, and healthcare. Cash transfers can provide the vital means of dealing with these yearly fluctuations and shocks. Research shows cash transfers promote savings, especially for women; and increase women’s participation in work. With this stable source of income, people are also more likely to take higher-risk and higher-reward opportunities, such as growing new crops or migrating to a city, that make them richer in the long run. Most of India’s population could benefit from the IGD in these ways — not only farmers or those who meet specific criteria.

Finally, most common concerns about unconditional income transfers are unfounded. Critics wonder if as a cash transfer, IGD would discourage poor households from working and that these households would spend the money on alcohol. These IGD criticisms are largely unsubstantiated. First, the proposed IGD is only about $20 per person per year. While this amount could make a substantial difference for subsistence-level households, it is only between 6-9% of poverty line income and impossible to live on by itself (p 29). Beyond this, the latest research on cash transfers from low- and middle-income countries shows no evidence that fewer people are working when they receive cash, nor that people are spending the money on alcohol and tobacco. Most people are spending their lives working to reach a subsistence level, so a regular cash transfer such as the IGD would allow them time to work for more than mere survival.

In India, the IGD would avoid the fiscal and political pitfalls of UBI while retaining the important features of unconditional cash transfers. In different countries, the exact implementation, amount, and feasibility of a universal cash transfer program would differ, but the evidence on the benefits of such programs are applicable across the globe. Policies such as these could help billions of people globally move towards financial stability and a higher quality of life.

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Ghatak, Maitreesh and Karthik Muralidharan. 2019. “An Inclusive Growth Dividend: Reframing the Role of Income Transfers in India’s Anti-Poverty Strategy.” http://personal.lse.ac.uk/ghatak/IPF_Ghatak_Muralidharan_2019.pdf