Universal Basic Income: Benefits and Challenges – Explained, pointwise

Introduction

The Economic Advisory Council (EAC) to the Prime Minister released a report on inequality prepared by the Institute for Competitiveness. The broad focus of the report was on the nature of inequality and poverty in the country. Two suggestions given by the report have become a matter of discussion among the economists. The Report advocates fallback job options for urban Indians along the lines of the Mahatma Gandhi National Rural Employment Guarantee Scheme for rural Indians. The Report has also supported the provision of Universal Basic Income as an elementary safety net, an idea that is still considered somewhat radical by many policy makers.

What is Universal Basic Income?

It is a guaranteed regular cash transfer by the Government to all citizens irrespective of their income or financial condition. As a universal safety net, UBI will be applied to all individuals, irrespective of income and age. The Economic Survey (2016-17) had noted that the UBI has 3 components namely; universality, unconditionality, and agency. Universal: UBI will cover all citizens, Unconditional: UBI has no criteria to select the beneficiaries, Agency: Providing support in the form of cash transfers to respect, not dictate, recipients’ choices.

UBI is supposed to be easily accessible, periodic, in the form of funds (and not vouchers or coupons) and is paid to individuals not households. 

Since governments commit to a legally stipulated and equal financial grant, it is also considered to be a form of social welfare, especially for those who are unemployed, sick and at the end of their working life.

What has been the global experience with respect to Universal Basic Income?

In 2020, countries worldwide resorted to cash transfer to help vulnerable citizens cope up with the economic turmoil posed by the pandemic. Among the developed economies, where economic growth had stagnated, most cash transfers schemes have broadly adhered to the principles of UBI.

Canada, provided $1,400 per month to those who lost income due to the COVID-19 pandemic.

The United States offered its citizens cheques of US$ 1,200 for individuals or US$ 2,400 for those who were married.

South Korea issued cash transfers of US$ 820 for its citizens and Japan announced cash transfers of US$ 931 per person.

The Arab Monetary Fund, which includes poorer economies like Iraq, Somalia, and Libya, have reached a consensus on the implementation of UBI set at 10% of the per capita income.

The birthplace of the idea of modern nations providing direct cash to stimulate growth and ensure minimum living standards is the Scandinavian region of Europe – Denmark, Norway, Finland and Sweden.These nations implemented their own variety of Nordic welfare systems back in the 1970s at a time when none of them were considered rich.

What are the major social safety measures in India at present?

India spends about 2% of its GDP on core social protection and welfare schemes. This translates into an expense of INR 9 lakh crore in more than 10,000 schemes. This amount does not cover the high set-up costs and expenditure in maintaining the systems (including manpower) to administer them.

Annual budgets for some of India’s key flagship welfare schemes amount to INR 379,100 crore per year. These include MGNREGS, PM Kisan Samman Nidhi Yojana (PM Kisan), and National Social Assistance Programme, among others.

What are the perceived benefits of implementing Universal Basic Income?

Tackling Extreme Events: A basic income support to everyone will help the masses in developing strong resilience against extreme events like COVID-19 Pandemic, or other shocks like natural disasters (floods, tsunami, earthquakes etc.). Multiple reports have shown that most of the rural poor have become financially vulnerable while the poorest of the poor are virtually going hungry because of pandemic impact.

Similarly, UBI will help the masses face price shocks arising due to global conflicts. The Russia Ukraine conflict has pushed up the oil prices which has increased inflation levels in India.

Economic Revival: The recent pandemic has forced shut many enterprises and resulted in huge layoffs. This has diminished the consumption demand in the economy, UBI can be helpful in reigniting the demand and revive the economy.

Ensuring Dignity: An assured periodic cash transfer would allow every individual to live a more dignified life thereby upholding the Right to Life under Article 21.

Social Justice: A society that fails to guarantee a decent minimum income to all citizens will fail the test of justice. Hence UBI, by guaranteeing a minimum unconditional income, promotes social justice.

Promotes efficiency: UBI seeks to replace the existing myriad subsidies given by the government under its social welfare schemes that are riddled with misallocation, leakages and inclusion/exclusion errors. The Economic Survey (2016-17) noted that 7 of the top government schemes suffer from acute misallocation of funds while ignoring the poorest districts in many states. Further, there is ineffective programme communication that means beneficiaries are not well aware of their entitlements, eligibility criteria, and delivery mechanisms. UBI will ease the implementation. There will be no exclusion errors. Implementation costs will come down due to direct transfer of cash through existing systems and infrastructure.

More Choices: UBI is not tied to the recipients’ behavior, and they are free to spend the money as they wish. This is in contrast to the conditional in-kind transfers that limit the options for beneficiaries. UBI will entrust them with the responsibility to devise their own spending proportions for utilities and other goods

What are the challenges in implementing Universal Basic Income?

Fiscal Stress: Implementation of UBI would require a huge amount of money which is difficult to arrange considering the widening fiscal deficit of the Government. Covering about a billion beneficiaries would cost INR 12 trillion (annual) just for each adult to get a monthly INR 1,000 (or INR 12,000 annual). According to different estimate, a transfer of INR 10,000 per annum will cost around 10% of GDP to the exchequer whereas all current welfare schemes putting together costs ~ 5.2% of GDP.

Subsidy Withdrawal: Post UBI the government may phase out critical subsidies like power, water, fertilizer etc. which may cripple many enterprises in the agriculture and industrial sector.

Universal Nature: Further, a UBI would require providing benefits to also about 78% of the population who do not fall in the poverty bracket. This means the amount paid to each individual may be too small to have any significant impact on people’s lives. Moreover, the universality of the transfer does not address the aspect of equity.

Improper Human behavior: Recipients might misuse the money they receive and undermine social security objectives. Further UBI will induce people to work less or create a disincentive to work. Although, the opinion of economists is divided here. A 2018 study on the behavioural effects of cash transfers found just a 1% drop in labour supply induced by a 10% income boost.

What should be the approach going forward?

First, The government can rethink true universality, as the well-off can be omitted from the cash transfer schemes. There can be automatic exclusion of certain class of citizens (like possession of certain assets).

Second, after deciding the quasi basic income criteria, the Government should leverage the potential of JAM trinity (biometric identification, financial inclusion, and mobile penetration) for directly transferring cash to household bank accounts.

Third, it must be embraced in a deliberate and phased manner. Gradualism can be adopted in following ways: (a) Giving choice to individuals between UBI and existing schemes; (b) UBI for women only; (c) Universalize UBI across some specific vulnerable groups only like for widows, pregnant mothers, the old and the infirm; (d) UBI in urban areas only which have good banking infrastructure and financial inclusion; (e) UBI for a class of sections like implementing for the poor at the bottom 25%.

Fourth, focus should be placed on equitable access to education and creation of more jobs along with a vision to attain a long term growth rate. This would be more beneficial in poverty and inequality reduction rather than merely giving guaranteed incomes.

Conclusion

It may not not be feasible to have a basic income that is universal or to substitute existing welfare subsidies. A UBI in India could be implemented as a supplemental, unconditional, recurring cash transfer to the target population while keeping the existing welfare infrastructure intact. UBI can be a potent complement to broader poverty eradication programmes

Source: Mint, The Times of India, The Leaflet, Money Control