ECONOMIC SURVEY 2016-17 Summary Chapter 9 – Universal Basic Income: A conversation with and within the Mahatma

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Following is the Summary of ECONOMIC SURVEY 2016-17 – Chapter – 6 Fiscal Rules: Lessons from the States:

“ A Just society needs to guarantee to each individual a minimum income which they can count on and which provides the necessary material foundation for a life with access to basic goods and a life of dignity.”

What is UBI?

• It is a radical and paradigm shift in thinking about social justice and a productive economy.
• It requires that every person should have a right to a basic income to cover their needs, just by virtue of being citizens.

Underlying principles of UBI

1. Universality: Every citizens gets it
2. Unconditionality: No strings attached
3. Agency: Explained below*

Why UBI is Relevant Today

• Social Justice: It promotes liberty because it is anti-paternalistic, opens up the possibility of flexibility in labour markets.
• Poverty Reduction: UBIis probably the fastest way of reducing poverty. It is more feasible in a country like India, where it can be pegged at relatively low levels of income but still yield immense welfare gains.
• Agency*: The poor in India have been treated as objects of government policy. An unconditional cash transfer treats them as agents, not subjects. Thus poor can utilise the money in their own customised way to alleviate their condition

 Thus poor get a chance to work out his priorities and improve his condition

• Employment: UBI has the potential to open up new possibilities for labour markets. It creates flexibility by allowing for individuals to have partial or calibrated engagements with the labour market without fear of losing benefits.

Explanation

When In dire need of job workers agree to work at huge discounted wages. With as assured UBI, such distressed acceptance of work would reduce also reducing functional unemployment.

• Administrative efficiency: It promotes efficiency by reducing waste in government transfers.

Arguments against UBI

1. UBI reduces incentive to work: This view was held by Gandhiji himself. However,
   • The UBIis likely to be minimal guarantee; It is unlikely to replace incentives to work.
   • No evidence to suggest that the only motivation for which people work is necessity
   • Rather the incentive to productive work is liberated only when individuals are not hostage to necessity
2. It effectively detaches income from employment: Concept of inheritance already detaches income from employment in favour of the rich. So, receiving a small unearned income from the state shouldn’t be economically or morally problematic
3. Unconditional income withoutany regard to people’s contribution to society: On the contrary it can be a way of acknowledging non-wage work related contributions to society, for eg, homemaking contributions of women.
4. Fiscal cost due to political reasons: Once introduced it may become difficult for the govt to wind up UBI in case of failure. For e.g. NDA used to denounce NREGA of UPA, but once in power it categorised it as a core of the core scheme.
5. Exposure to market risk: Unlike food subsidies, a cash transfer’s purchasing power may severely be curtailed by market fluctuations.

Analysis of existing programmes for poor

• There are about 950 central sector and centrally sponsored sub-schemes in India. Top 11 schemes account for about 50 percent of total budgetary allocation.
• Food Subsidy or PDS is the largest programme followed by Urea Subsidy and the MGNREGS. The other programs include Crop Insurance, Student Scholarships, National Handloom Development Programme etc.
• Many of these schemes have diverse benefits beyond immediate poverty reduction – for instance, student scholarships have inter-generational consequences for individuals.
• Considerable gains could be achieved in terms of bureaucratic costs and time by simply replacing many of these schemes with a UBI.

Misallocation of resources across districts:

The poorest areas of the country often obtain a lower share of government resources when compared to their richer counterparts.

Explanation:

• In a state, districts with say 40% of total poor population of the state get less than 40% of funds for a given set of schemes. Thus poor districts / states are the one which are grappling with inadequate funds.
• Resources allocated to districts are generally proportionalto the district’s ability to spend them efficiently; richer districts generally have better administrative capacities and thus get allocated more funds.
• However, there has been some improvements in district-wise allocation for schemes in the recent past, probably reflecting improvements in state capacity.

Consequences of misallocations:

• Misallocation affects targeting of resources to the poor, known as “exclusion error” wheredeserving poor and needy find themselves unable to access programme benefits.
• If a state or a district with more poor is allocated very little resources, then it is almost certain that some deserving households would be excluded.
• An estimate of the exclusion error from 2011-12 suggests that 40% of the bottom 40% of the population are excluded from PDS. For MGNREGS it is 65%.

India’s tryst with targeted schemes

• Targeting commenced with the drawing up of lists of poor based on self-reported income in 1992
• However, India’s record of targeting welfare programmes to the poor has been suspect
• Identification of BPL households have been criticized for crowding out the poor and the truly deserving from BPL card ownership and instead providing leakages to the rich
• Acknowledging issues inherent in targeting few states like TN, Chattisgarhuniversalised access to PDS and few other schemes
• National Food Security Act(2013) mandated access to PDS to about 70% households
• It was a gradual move towards greater inclusion error to avoid exclusion issues

Solutions provided by UBI on following issues:

1. Misallocations to Districts: UBI will simply amount to transfer of money to beneficiaries account. A functional JAM system would help in direct benefit transfer. Thus bureaucratic hurdles and efficiency could be bypassed.
2. Out of System Leakages: UBI reduces them as money is directly transferred to beneficiaries account thus making it harder to divert. Monitoring of UBI would thus be easier than other schemes
3. Exclusion Error: As UBI is a universal scheme it should bring down exclusion errors compared to targeted schemes
4. Psychological Benefits: The World Development Report (2015) argues that individuals living in poverty have
   1. A preoccupation with daily hassles and this results in a depletion of cognitive resources required for important decisions;
   2. Low self-image that tends to blunt aspirations;
   3. Norms that may require investments in social capital to the detriment of private opportunities.
5. Access to formal credit: UBI can remove credit constraints as they increase one’s income. A recent analysis on farmers suggests that if their consumption levels increase to a certain level then there is sudden increase in access to formal credit

Concerns

1. Last mile concern remain in accessing banking services as many times banking or post office facilities are located at a distance.
2. Cash Transfers could promote spending on ‘temptation goods’ – alcohol, tobacco,paan etc. However NSS 2011-12 Data suggests that these goods form a smaller share of consumption as per capitaexpenditure increases
3. UBI would become an add-on to, rather than a replacement of, current anti-poverty and social programs, which would make it fiscally unaffordable

WAY Forward

1. Careful calculation of the potential cost of UBI should be done. For e.g. replacing the PDS will increase the market prices of cereals for the poor.
2. UBI should be carefully indexed to inflation

Prerequisite of UBI

1. Successful adoption of JAM

• Crucial to the success of the UBI is effective financial inclusion.
• In terms of JAM preparedness, considerable ground has been covered rapidly, but there is quite some way to go.
• Failure to identify genuine beneficiaries results in exclusion errors.
• The success of UBI hinges on the success of JAM.

2. Consensus between Centre and states regarding funding

• A key federal question will be the centre-state share in funding of the UBI
• This would, like the GST, involve complex negotiations between federal stakeholders.

Guiding principles to implement UBI

1. De jure universality, de facto quasi- universality: It means though we may want to provide a universal right of UBI to all, practically it will be difficult to justify passing benefits to the rich. Economic Survey suggests 4 ways to exclude the rich:
   1. Define the non-deserving based on ownership of key assets such as automobiles or air-conditioners or bank balances exceeding a certain size.
   2. Adopt a ‘give it up’ scheme wherein those who are non-deserving chose to opt out of the programme just as in the case of LPG
   3. Introduceasystem where the list of UBI beneficiaries is publicly displayed. this would “name and shame” the rich who choose to avail themselves of a UBI
   4. Self-targeting: Beneficiaries regularly verify themselves in order to avail UBI – Then rich, whose opportunity cost of time is higher, would not find it worth their while and the poor would self-target into the scheme. However it conflicts with the essence of JAM,whose appeal lies in its direct, costless transfer of the state’s welfare subsidies to beneficiaries’
2. Gradualism: The UBI must be embraced in a phased manner. A key advantage of phasing would be that it allows reform to occur incrementally.For e.g. we can start off by offering UBI as a choice to beneficiaries of existing programs.

UBI for Women only

• Womenfaceworse prospects in almost every aspect of their daily lives – employment opportunities, education, health or financial inclusion.
• A UBI for women can, therefore, not only reduce the fiscal cost of providing a UBI (to about half) but have large multiplier effects on the household.
• Giving money to women improves the bargaining power of women within households and reduces concerns of money being splurged on temptation
• The UBI could also factor in children in a household to provide a higher amount to women. This addition, though, has three potential problems –
  1. It may not be easy to identify the number of children in a household;
  2. It may encourage households to have a greater number of children;
  3. Phasing out boys from beneficiary list once they reach a certain age (say 18 years) may not be easy to monitor and undertake.
     

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