Universal Basic Income- Boon or Bane for the Economy?

Universal Basic Income (UBI) is a concept first introduced in the Economic Survey of India (2016-17). This is a model for providing all citizens of a country or other geographic area with a given sum of money, based on certain economic criteria. The purpose of the UBI is to prevent or reduce poverty and increase equality amongst citizens. The concept of UBI is not limited to India. Several other countries in different parts of the world have not only considered but have also implemented it with varying degrees of success.

Need for the UBI

In past years, there has not been a significant increase in jobs and since technology is replacing human resources, we can be sure that in the future robots and automation will replace human jobs on a larger scale. So, a minimum cash transfer is needed for basic food, health, nourishment and shelter of families without any steady income. Proponents believe that UBI will help to remove inequality and bring people out of poverty to a great extent. It will also help people prepare for unforeseen situations like loss of property, medical conditions etc. Since UBI is direct cash transfer from government to citizens, this will reduce the role of bureaucracy leading to reduced leakages in the welfare system.

Though this concept of UBI seems promising, accompanied challenges cannot be denied.

Challenges of the UBI

First and foremost is giving cash in the hands of the public may lead to misuse including unproductive detrimental activities. Simply giving cash in the hands of people without any obligations might lead to an increase in consumption of temptation goods such as cigarettes and alcohol. Moreover, it will lead to inflation at the local market due to the sudden increase in demand without proportionate increase in supply.

Second, providing cash transfer might bring a reduction in labour force participation. It will make people less willing to work, not only impacting the current generation but the overall economy of the country. For example Nyunantam Ayay Yojna (NYAY) is targeting the poorest 20% of the country. In a country where nearly 14.52 lakh households have income between Rs 5000 and Rs 10000. An amount of Rs 6000 per household may seem perfect for an average household which may motivate them to opt out of the labor force. As a result, the input labor cost of several industries including agriculture will go up.

The third is related to the targeted population – whether all people should be included or only the poorest of the poor or particular percentage such 20% of the population as proposed under NYAY scheme? Since a large percentage of the people resides in rural areas where bank infrastructure is still not very strong, there is a possibility that many people will be left out and hence the purpose will not be served.

Lastly the cost of this scheme is going to be very significant which might force the government to subsume or eliminate some of the ongoing welfare schemes. It is being assumed that NYAY scheme if launched could cost nearly 1.8 percent of GDP. Additionally, the government might have to resort to borrowing in order to fund this scheme and hence leading to a higher fiscal deficit.

How to make UBI a reality?

Given India’s current situation with high unemployment rates among youth, the scheme seems promising. But simply giving cash in the hands of people might not serve the purpose. In order to ensure maximum benefits from this scheme, some kind of obligation must be attached. Obligation example such as mandatory skill training of youths or sending children to school or providing community service. This will help the government to keep a check on the harmful uses of the transferred money.

The government can subsume non-merit subsidies like electricity and gas connection which are over INR 152,000 crores and utilize these funds for UBI as this often go in the hands of wealthier individuals, instead, merit subsidies like education and rural infrastructure which are going to improve society as a whole should be emphasized more.

Proper income database should be maintained to increase the tax base in order to avoid the burden of borrowing on the government in the longer run. Instead of abolishing, we should supplement existing schemes with UBI, though not in monetary form but as services.

UBI can be implemented in different ways to avoid above discussed challenges. The family should be asked to provide family data for arriving at an intervention like micro business unit that may work best for family considering geographical and economical environment. The financial requirement shall be derived based on the intervention selected for family. The money budgeted for UBI may be used a collateral to bank for getting working capital for the micro business..

Considering, an overly pessimistic default rate of 40% default rate, 2.5x more families can be offered this support. Access to the market is very important as the person must be able to sell his produce in the market and generate income. Under these circumstances, one would be able to earn a living. In order to make it successful, we need to roll out this whole process in phases and evaluate it at the end of  every phase.

In addition to this,   family should be provided welfare services those are critical. i.e If a family consists of pregnant women then she should be provided with regular health check-ups, medicines, nutritional supplements and so on. Similarly, for children, provision of education should be made compulsory.

Welfare spending in India: Current Scenario

The above pie chart depicts the budgeted spend on major welfare schemes by the central government in 2019-20. The total amount of all the schemes is approximately Rs 507,540 crores. With a UBI spend of INR 6,000 per month to each family, the estimated cost will be approximately Rs 380,000 crores which can be easily funded without disturbing the ecosystem of already ongoing schemes.

Case Study

A pilot project by Self Employed Women’s Association (SEWA) and the United Nation Children’s Fund (UNICEF) was implemented in Madhya Pradesh in 2011-12 where Rs 300 were provided to every single adult and Rs 150 to children. The preconceived notion is that free money often incites people to enjoy more leisure and make less motivated to work. However, on the contrary, the findings of this pilot project were quite positive. There was a drastic improvement in the living conditions as people used the money in the construction of toilets, buying more assets, repairing and expanding their living space. Gender Equity also increased as women were able to receive money in their hand. There was a significant decrease in the percentage of dropouts in schools thereby improving overall attendance. Behavioral change such as people started saving more over keeping money at home. This proved that the transfer of cash leads to improvement in economic activities, nutrition, health, and education. Sikkim ruling party Sikkim Democratic Front (SDF) is also planning to implement UBI by 2022. Across the world, some of the nations have already tested this idea on an experimental basis. Finland, Canada, the Netherlands, and the US are some of the countries who have successfully implemented it and experienced positive results.

Our Take

More efficient tax administration, rationalization of schemes and proper information database is the key to success for this scheme. It all depends on how the government comes out with a rollout plan. However, precaution needs to be taken beforehand for the successful implementation of this scheme.

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