UBI would outperform PDS, energy subsidies: IMF analysis

The Universal Basic Income, which is currently being debated in India, will outperform the Public Distribution System (PDS) in terms of coverage, progressivity and generosity, the IMF said on Wednesday.

The International Monetary Fund (IMF) said its observation is based on the results of a microsimulation exercise is conducted in India.

In its annual Fiscal Monitor report, the IMF carried a special box on the results from the microsimulation analysis of a policy reform that replaces food and fuel subsidies in India with a Universal Basic Income (UBI).

Noting that the need to reform existing subsidy programmes in India has recently gained momentum, the IMF said part of the policy debate has focused on the potential role of the UBI as an alternative to the existing system of state subsidies, which are typically characterised as fraught with inefficiencies and inequities.

The UBI will outperform the public distribution system in terms of coverage, progressivity and generosity, it said.

The simulations are intended to illustrate the potential benefits from using a UBI both to reform a current but inefficient social safety net (in this case, the PDS) and to generate public support for an ambitious fuel price reform.

Based on India’s 2011–12 National Sample Survey, the analysis assesses the welfare impact of replacing the subsidies that existed in that year with a UBI in a fiscally neutral manner.

The IMF said the fiscal envelope devoted to the UBI is equivalent to the combined fiscal cost of the PDS and energy subsidies in 2011–12, which would finance an annual uniform UBI for every person in India of Rs 2,600 rupees (about USD 54) in 2011–12, equivalent to about 20 percent of median per capita consumption in that year.

Although such a transfer is more modest than that often discussed in public debate, it would still incur a fiscal cost of approximately three percent of the GDP, the IMF said.

The report notes that since the analysis is anchored in 2011–12, it does not take into account the significant subsidy reforms enacted by the government of India in recent years.

In general, reaping the potential gains from the introduction of a UBI would need careful planning to overcome political, social and administrative challenges, especially when subsidy reforms involve such large price increases, it said.