Demystifying Univerasal Basic Income in India

A lot has been discussed about the Universal Basic Income (UBI) and its applicability to India. The primary objective is to enable every citizen to have a certain minimum income. The term ‘universal’ is meant to connote that the minimum or basic income will be provided to everyone irrespective of whatever their current income is.

In discussing the applicability of the concept of basic income to India, three questions arise. The first is whether it should be ‘universal’ or ‘restricted’; the second is what the level of minimum income is and how this is to be determined; and the third is about the financing mechanism for implementing such a scheme.

Economic Survey -2016-17

• Economic Survey for the year 2016-17 has an entire chapter edicated to the discussion on Universal Basic Income (UBI).

• In this article let us try to understand the concept of Universal Basic Income, why it is needed, what are the challenges in its implementation and other related issues.

What is Universal Basic Income?

• Universal Basic Income is a periodic, unconditional cash transfer to every citizen in the country.

• Here, social or economic positions of the individual are not taken into consideration.

• The concept of universal basic income has three main features. They are as following:

1. UBI is universal in nature. It means UBI is not targeted.

2. The second feature of UBI is cash transfer instead of in-kind transfer.

3. The third feature is that UBI is unconditional. That means one need not prove his or her unemployment status or socio-economic identity to be eligible for UBI.

Why Universal Basic Income?

• As a form of social security UBI will help in reducing inequality and eliminating poverty. Thus it ensures security and dignity for all individuals.

• As human labour is being substituted by technology, there will be reduced wage income and reduced purchasing power. UBI will compensate for reduced purchasing power.

How UBI works?

• Under UBI, only those with zero income will receive the full benefits in net terms.

• For those, who earn additional income over the basic income, the net benefits will taper off through taxation.

• So even though the basic income is universal, only the poor will receive the full benefits.

What UBI means to the Government?

• There would be drastic changes in the way government spends its revenue generated from taxation and other sources.

• Currently, Government spends its revenue on various services as well as on subsidies.

• UBI would mean that government may move away from service delivery and empower its citizens to access services through cash transfer.

What Economic Survey 2016-17 says about UBI?

The Economic survey 2016-17 assumes that in practice any program cannot strive for strict universality. So survey proposes some alternatives.

• First, survey targets bottom 75 percent of the population and this is termed as ‘quasi-universality’’. The cost for this quasi-universality is estimated to be around 4.9 percent of GDP.

• Second alternative targets women, who generally face worse prospects in employment opportunities, education, health or financial inclusion. A UBI for women can reduce the fiscal cost of providing a UBI to about half. Giving money to women also reduces the concerns of money being used on ‘temptation goods’.

• Third, to start with a UBI for certain vulnerable groups such as widows, pregnant mothers, the old and the infirm.
But, if any one of the above alternatives is adopted, it will also face the problem of ‘exclusion error’ in the identification of beneficiaries. Efficiency will be reduced. Corruption will creep in. More importantly, UBI will not remain ‘universal’.

Why the idea of UBI is good in the Indian context?

• The idea of the UBI is more relevant for India than for the advanced economies which have been considering it so far since governments in India tend to ‘mess up’ when it comes to distinguishing the poor from the non-poor.

• As a result, the poor get very little of what is spent in their name. Also, it is argued that many of the subsidies benefit the rich more than the poor.

Whether support to vulnerable sections should be in the form of goods and services or as cash?

• Cash gives the discretion to beneficiaries to spend it any way they like.

• But it is assumed they would be wise in their discretion. On the other hand, the provision of services or goods directly to beneficiaries may be directed to achieve certain objectives in terms of nutrition or health or education.

• In the provision of services, the concern is about leakages and quality of service. Some countries have adopted a middle path of conditional transfers, which means that transfers in the form of cash are subject to the condition that they are spent on meeting defined needs.

• As far as India is concerned, there are a whole lot of services provided by the state, and it would be impossible to knock them off and substitute them with general income support.

• Therefore, income support should be thought as a supplement to services already provided even though a hard look at some of the provisions is absolutely essential. Poor quality of services from government-run institutions has become a matter of concern.

What are advantages of UBI

• First, UBI would give individuals freedom to spend the money in a way they choose. In other words, UBI strengthens economic liberty at an individual level. This would help them to choose the kind of work they want to do, rather than forcing them to do unproductive work to meet their daily requirements.

• Universal Basic Income would be a sort of an insurance against unemployment and hence helps in reducing poverty.

• UBI will result in equitable distribution of wealth. As explained above, only poor will receive the full net benefits.

• Increased income will increase the bargaining power of individuals, as they will no longer be forced to accept any working conditions.

• UBI is easy to implement. Because of its universal character, there is no need to identify the beneficiaries. Thus it excludes errors in identifying the intended beneficiaries – which is a common problem in targeted welfare schemes.

• As every individual receive basic income, it promotes efficiency by reducing wastages in government transfers. This would also help in reducing corruption.

• Considerable gains could be achieved in terms of bureaucratic costs and time by replacing many of the social sector schemes with UBI.

• As economic survey points out, transferring basic income directly into bank accounts will increase the demand for financial services. This would help banks to invest in the expansion of their service network, which is very important for financial inclusion.

• Under some circumstances, UBI could promote greater productivity. For example, agriculture labourers who own small patch of land and earlier used to work in others’ farm for low wages, can now undertake farming on their own land. In long term, this will reduce the percentage of unused land and helps in increasing agriculture productivity.

What are the main arguments against UBI?

• A guaranteed minimum income might make people lazy and it breeds dependency. They may opt out of labour market.

• There is no guarantee that the additional income will be spent on education, health etc. there are chances that the money will be spent on ‘temptation goods’ such as alcohol, tobacco, drugs etc.

• Given the large population size, the fiscal burden on government would be high. Also, as Economic Survey 2016-17 noted, once implemented, it may become difficult for the government to wind up a UBI in the case of failure.

• If the UBI is funded by higher taxes, especially by the indirect taxes, it will result in inflation. This, in turn, will reduce the purchasing power of the people and lowers the value of the amount transferred.

• A ‘guaranteed minimum income’ might reduce the availability of workers in some sectors which are necessary but unattractive and raise the wages of such works. For example, the wages of agriculture labour might increase due to non-availability of workers willing to work in others’ farm.

What are the challenges that may face in Implementation of UBI?

• According to World Bank, in India, there are only 20 ATMs for every one lakh adult population. Nearly one-third of the Indian adults remain unbanked. With such a state of financial service infrastructure and financial inclusion, it would be difficult for the people to access their benefits.

• Financing the ‘guaranteed minimum income’ would be another challenge. There are chances that UBI would become an add-on to existing subsidies rather than replace them.

Should UBI be universal or restricted?

• Coming to the concept of the UBI, it is necessary to first decide whether income supplements should be ‘universal’ or limited to certain easily identifiable groups.

• Most calculations involving the provision of income to one and all are beyond the capabilities of the present Central government Budget unless the basic income is fixed at too low a level. It is extremely difficult to cut so-called implied subsidies or hidden subsidies in order to fund resources, as some proponents argue.

• These supports range from subsidised bus fares to subsidised power tariff. The attempt must be to think in terms of reducing the number of beneficiaries using easily definable criteria.
• Elaborate exercises for identification will defeat the purpose. It is true that a universal scheme is easy to implement. Feasibility is the critical question.
• There is also the consideration of fairness. But strict targeting will run into complex problems of identification.

What should be the minimum increase?

• Whether the scheme should be universal or restricted depends on the level of basic income that is proposed to be provided.

• If we were to treat the cut-off used to define poverty as the minimum income, then the total fiscal burden would be enormous. This apart, there is no consensus regarding what that cut-off should be.

• More than 60% of the total poor lies between 75% of the poverty line and the poverty line. Therefore, what is needed is a supplement to fill the poverty gap.

• One alternative would be to determine the required income supplement from the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

• The total annual income supplement can be equivalent to 100 days of the wages prescribed under the MGNREGS. This is equivalent to 20,000 per year. This amount can be treated as the income supplement.

Who the beneficiaries should be?

• It is difficult to cover the entire population. Even providing one person per household with this income will mean 5 lakh crore per annum, which is 3.3% of GDP.

• What is feasible is a scheme which limits the total expenditure to around 1.5 to 2% of GDP, which is between 2 lakh crore and 3 lakh crore.

• A criterion needs to be evolved which can restrict the total cost to this amount. One way of doing it will be to limit it to all women above the age of 45.

• This is an easily identifiable criterion because Aadhaar cards feature the age of the person. However, this is only one alternative.

How to finance the scheme?

• Some analysts have suggested that we can remove all exemptions in our tax system which would give us enough money.

• Apart from the difficulties in removing all exemptions, tax experts advocate removing exemptions so that the basic tax rate can be reduced.

• It is estimated that out of the Rs. 2 lakh crore which is needed, Rs.1 lakh crore can come from the phasing out of some of the expenditures while the remainder must come from raising additional revenue.

Following steps may be considered by the government

• Phase out the MGNREGS, which will realise close to Rs.40,000 crore.

• Fertilizer subsidies are another item of expenditure which can be eliminated.

• Higher income groups can be requested to forego supplemental income. This will reduce the expenditure, as has been done successfully in the case of cooking gas.

Several challenges involved in implementing such a radical plan are as follows:

• One big challenge relates to the phasing out of food-related subsidies.

• Any plan to replace food related subsidies has to contend with the implications of such a move on food security of the country.

• Also, whether farmers will continue to produce enough foodgrains in the absence of price incentives remains a big question.

• UBI is also inevitably linked with government withdrawal from other channels of public service delivery.

• However, withdrawal of government support from public goods and necessities like health, education is not justifiable as the weaker section have varied needs which cannot be met simply by transferring money.

• It is also argued that unconditional cash transfers might raise wages due to the decline in the supply of casual labourers.

• There is also question of whether a shift towards it should be a substitute for all existing subsidies or whether it should complement the existing ones.

• The other big challenge relates to co-ordination between state and central governments.

• Any plan to phase out subsidies and tax exemptions (relating to the GST) will require an extraordinary degree of co-operation between the states and the Centre.

• Also, any pre-specified commitment by the government such as an inflation-indexed UBI worth Rs450 per person could generate fiscal stress during an economic downturn.

The idea of a universal basic income to replace subsidies appears appealing but may be hobbled by implementation hurdles.
Several challenges involved in implementing such a radical plan are as follows:

• One big challenge relates to the phasing out of food-related subsidies. Any plan to replace food related subsidies has to contend with the implications of such a move on food security of the country. Also, whether farmers will continue to produce enough foodgrains in the absence of price incentives remains a big question.

• UBI is also inevitably linked with government withdrawal from other channels of public service delivery. However, withdrawal of government support from public goods and necessities like health, education is not justifiable as the weaker section have varied needs which cannot be met simply by transferring money.

• It is also argued that unconditional cash transfers might raise wages due to the decline in the supply of casual labourers. There is also question of whether a shift towards it should be a substitute for all existing subsidies or whether it should complement the existing ones.

• The other big challenge relates to co-ordination between state and central governments. Any plan to phase out subsidies and tax exemptions (relating to the GST) will require an extraordinary degree of co-operation between the states and the Centre.

• Also, any pre-specified commitment by the government such as an inflation-indexed UBI worth Rs450 per person could generate fiscal stress during an economic downturn.

UBI and JAM Trinty

• AM is the short form of Jan Dhan-Aadhaar-Mobile.

• Currently, there are 26.5 crore Jan Dhan accounts across the country. This covers 21 percent of the population. Of these accounts, 57 percent are Aadhaar seeded.

• Over a billion Aadhaar cards have been distributed.

• When the trinity of Jan-Dhan, Aadhaar, and Mobile (popularly referred to as JAM) is fully adopted, a more efficient mode of delivery would be available.

• JAM system could be used to provide funds to each individual directly into his or her account.

The main problems in ‘JAM Trinity’

• Authentication failures in Aadhaar are as high as 49 percent in Jharkhand. This will result in the exclusion of beneficiaries.
• A Large number of Jan Dhan accounts are not active. According to Financial Inclusion Insights (FII – 2015), only 40 percent of the accounts are active.
• Still, nearly one-third of the Indian adults remained unbanked.
• There are issues in mobile network connectivity, especially in rural India.

UBI in other parts of the world

• Finland has started a pilot programme this year to understand the effects of a basic income. Finland government would pay €560 per month to two thousand unemployed individuals for next two years, and it would continue to provide the income even if individuals find employment during this period.

• Some regions in the Netherlands and Canada have also announced the pilot programme.

• But, last year, Switzerland voted on UBI and rejected the proposal to transfer 2,500 Swiss francs per month to every adult citizen and long-term resident. The fiscal implication was the main reason for rejection of the proposal in Switzerland.

Way ahead UBI alone is not sufficient for the overall upliftment of poor. Two distinct sets of reforms are needed:

• Broad-based economic reforms that would strengthen entrepreneurship, remove barriers to job creation, and increase the returns to human capital investments by the poor.

• Specific reforms to allow the poor to gain better education and health.

Conclusion:

• To conclude, introducing the UBI is unrealistic. In fact, the concept of a basic income must be turned essentially into a supplemental income.

• Such a scheme will be feasible provided we restrict the beneficiaries to groups which can be easily identified. This restriction essentially comes from fiscal compulsions.

• Regarding finances, it is not easy to remove all implicit subsidies.

• The design for financing the scheme has to be viewed in a more pragmatic way. Restricting the fiscal burden to 1.5 to 2% of GDP seems desirable and feasible.

• Half of this can come from phasing out some of the existing expenditures while the other half can come by raising fresh revenue.

• Lastly, the proposal here refers only to the income supplement that can be provided by the Central government. Similar efforts can be made by the respective State governments, if they so desire.

By Gudipati Rajendera Kumar