Explained: Indian Government Is Actively Considering Universal Basic Income; Will It Work?

Recently, the National Human Rights Commission (NHRC) informed the United Nations Human Rights Council (UNHRC) that the Indian government was examining and actively considering the the recommended implementation of a universal basic income (UBI).

“This matter is under examination and active consideration of the GoI,” said the NHRC’s May 2020 report submitted to the UNHRC as a part of the Universal Periodic Review process, which is done every four-and-a-half-years.

The report reviewed the implementation the UPR Working Group’s 152 recommendations, one of which was to “continue studying the possibility of a universal basic income as a way to further reduce poverty levels”.

The Indian government had accepted the recommendations in September 2017.

There have been calls from the private sector as well as civil society for the government to give a significant fiscal push to the economy battered by Coronvirus pandemic. It’s possible that the government is considering UBI as one solution to boost the domestic demand.

What is UBI and why is it being considered?

UBI refers to a guaranteed minimum income to all citizens given by the state unconditionally.

The idea of UBI has been in discussion for a few years now. The 2016-17 Economic Survey devoted a whole chapter to the subject.

Both developed and developing countries have been toying with the idea of the UBI for their own specific goals.

The developed countries have been reeling under demand slump since the 2008 Global Economic Crisis. Some economists are of the opinion that this slump is structural and not cyclical (for example, an ageing population consumes less) and therefore strategies like low, even negative interest rates, will not help the economy.

Another factor is the looming threat of automation. Sure, historically, new technologies have killed old jobs but simultaneously created new jobs. Satellite TV killed the cable companies. Mobile phones killed telephone manufacturers. But now, we have a mobile repair shop every 5 kilometres and STB installation executives.

However, the problem is that the technological changes today are happening at a pace that a person would be required to keep re-skilling himself for a new job very quickly. One, he cannot keep doing so at age 50, and two, this means no long-term career — which has served as a foundation for a stable family life for a long time.

Most of the people would be stuck at the bottom of everything they do. An example of this is the new jobs created by the gig economy which are marked by low income and low worker protection.

UBI in this scenario — ageing population, increased automation, demand slump — seems like a good idea.

It will take care of the basic needs of the people, offset rising inequality, and maintain the demand necessary for mass consumption goods.

The attractiveness of UBI for developing countries is dependent on a different goal — poverty alleviation.

The argument is that instead of a complex system of numerous welfare schemes, a UBI transfer directly in the Jan Dhan accounts of the citizens would be more efficient, save government a lot of money, and provide a choice to the citizens on how they want to spend it.

With UBI, the government can end the inefficient system of subsidies etc. that adversely affect the development of competitive markets.

For example, the PDS scheme currently forces a poor person to eat only the grains that are offered through the fair price shop, and has seen leakages as high as 80-90 per cent. For the scheme, the government also has to take up the labyrinthine task of procuring, storing and safely transporting the grains.

The government is also accused by the environmentalists to have promoted water guzzling crops like rice in the place of healthier native varieties.

In place of PDS, the government could directly credit a basic income in the accounts of the beneficiaries, who could then use the money to buy the grains of their choice in the market.

Will UBI work for India?

There are three grounds of evaluation:

One, fiscal impact

Economist Pranab Bardhan argued that if India takes up the money spent on non-merit subsidies and revenue forgone primarily because of tax concessions to companies, introduces significant fresh taxation of the rich, and removes some wasteful welfare programmes (he is against replacing current programmes like ICDS, mid-day meals, and MGNREGA), a sum of Rs 1,000 per person per month can be given.

He says that an amount of Rs 10,000 per person per year can be given without additional taxation. This amounts to around 10 per cent of the GDP, and reasonable savings on non-merit subsidies and revenue forgone come around 12 per cent of the GDP.

Two, political will

It is no doubt that a UBI scheme in addition to existing schemes and superimposed on complex welfare bureaucracies will be a huge fiscal burden. If UBI comes, it has to come as reform, and not just a welfare measure.

The challenge is that the vested interests against replacing existing welfare programmes are too strong.

Since Independence, the Socialist Raj has seen development of clientele networks by political parties who feed it through the welfare schemes. These schemes therefore have been an opportunity for huge corruption.

The politics of redistribution and poverty alleviation in India is riddled with Big State or maai-baap government sensibilities. The default solutions have been job reservation and subsidisation of private goods.

Therefore, there would be resistance from the political class, and the beneficiary groups against UBI.

Three, effectiveness

The JAM trinity can be counted on to ensure better targeting and minimising leakage.

A pilot study in Madhya Pradesh, Delhi between 2010-2013 showed that the nutritional uptake, school enrolment and female attendance, sanitation, health and healthcare, women’s status and well-being improved; the status of disabled and vulnerable groups improved more than others.

The study also offered some lessons:

• local cooperation and awareness and cooperation of local institutions should be obtained at the outset

However, one problem with UBI overall is that it can address the challenges of demand and purchasing power, but not supply-side and capacity problems faced by the developing countries.

Developing countries have low income opportunities, low human capital investment. There is a limitation to how much people can “buy” themselves out of poverty. A person in a remote area with money may still not be able to get good education for his child if there are no good schools available.

Also, who is to say the money will be spent on school? What if it is spent on alcohol?

With supply-side bottlenecks unaddressed, putting money in the hands of people will only increase the inflation. The expectation with the UBI is that it will trigger a virtuous cycle with entrepreneurs responding to the assured demand.

As a professor at the University of Michigan points out, the most powerful poverty-reduction tool is economic growth.

UBI should not decrease the incentive for real reforms like removal of the barriers to job creation, land and labour reforms, justice system reforms, logistics and connectivity infrastructure etc.