Universal income in developing countries: Issues, options, and illustration for India

Abstract This paper discusses two common arguments for the adoption of a universal income support in the form of a uniform cash transfer (UI): that it can be a more effective way of supporting low-income households when existing safety net programs are inefficient, and that it can generate broad support for structural reforms. Using India as an illustration, the paper discusses the trade-offs that need to be recognized in adopting a UI in these contexts. It shows that replacing the 2011 Public Distribution System (PDS) with a UI results in welfare losses for many low-income households, although much of this can be reduced by returning the PDS operational losses and the fiscal savings from excluding the highest-income groups to households as higher individual transfers. In contrast, replacing inefficient energy subsidies—raising energy prices to efficient levels—could simultaneously deliver unambiguous distributional gains, help address fiscal pressures, and improve energy efficiency with associated environmental and health gains. Realizing such measures would, of course, require careful communication and implementation to address political and social barriers to reform.