Can UBI reignite the economy?4 min read . Updated: 29 Jan 2020, 06:05 PM IST
Variants of universal basic income could boost consumption but will first need to overcome significant fiscal and administrative challenges
Amid a consumption slump, several economists have called on the government to “put money into people's hands". Some have even suggested the government to do that literally: through unconditional, regular payments to citizens as part of a universal basic income (UBI). But is implementing UBI financially and administrative feasible? And would it even work?
Unlike developed countries, where UBI is being proposed to insulate citizens from the disruption of automation, developing countries view it as a measure to boost income and alleviate poverty. In India, the idea of a national UBI emerged with the 2016-17 Economic Survey. The survey laid out the blueprint for a ‘quasi’ UBI, proposing ₹7,620 per year to 75% of the population. In 2019 prices, this would cost the Indian government around 4.5% of GDP. Since then, others have proposed versions of the same concept that differ significantly in both scope and cost.
Economist Reetika Khera, for instance, has kept women at the centre of her version suggesting that basic income be first transferred to pregnant women, children, the widowed, the elderly and the disabled before being extended to the rest of the population.
In contrast, Maitreesh Ghatak and Karthik Muralidharan have suggested making basic income truly universal and unconditional but cap the total cost to 1% of GDP. This results in smaller monthly transfers ( ₹110 per person per month) but still significant enough to reduce poverty, improve financial inclusion and boost female empowerment.
Others have approached UBI as an alternative to existing subsidies and government spending. For instance, the International Monetary Fund (IMF) suggested that if subsidies were eliminated, the government could provide all Indians with ₹2,600 (in 2011-12 prices) every month.
Using a similar approach, Mint crunched the numbers to estimate the costs of various versions of UBI. We find that some versions, such as a pure UBI which provides all Indians with ₹1,215 per month (based on the latest estimated poverty line), would be prohibitively expensive (more than 10% of GDP and exceeding the centre’s tax revenues). But other versions could be potentially affordable and cost less than 3% of GDP (the potential savings from rolled-back subsidies). The Congress brainchild Nyuntam Aay Yojana (NYAY), for example, which proposes ₹6,000 a month to the poorest 20% of households, would cost less than 3% of GDP but would be costly if it had to become universal. Similarly, the Economic Survey proposal could be feasible if it is limited to just poor households - but any larger version would quickly become too expensive.
All these calculations assume a basic income programme implemented nationally and funded entirely by the centre. But the states, too, can take the lead. Telangana’s Rhythu Bandhu scheme, for instance, which provides Rs. 8000 per acre per year to landholding farmers, preceded the current national-level farmer cash transfer scheme (PM Kisan). But for states to implement a larger-scale UBI on their own could be difficult. For instance, a basic income pegged at a state’s poverty line and targeting the state’s poor would significantly eat into state expenditures and poorer states would bear the greater burden (e.g. it would cost Bihar nearly 20% of its state GDP). Consequently, almost all proposed UBI programmes have incorporated a cost-sharing mechanism between the centre and state governments.
But even if states and centres do find the finances, implementation is a challenge. For a start, identifying the poor in India has been a perennial problem. Programmes and subsidies designed for the poor often end up being disproportionately used by the rich. An increasingly popular solution is to use the data from the Socio-Economic Caste Census (SECC) to exclude obviously ineligible beneficiaries. The Economic Survey’s UBI proposal suggested excluding beneficiaries based on SECC data on asset ownership (e.g. cars or air-conditioners). But even this system is not fool-proof. SECC data, collected in 2011, is now dated but there are also questions around its accuracy.
Moreover, even if the poor are correctly identified, getting money into their hands can be difficult. Despite a national push to increase the coverage of bank accounts among the poor, usage of bank accounts remains weak. For instance, the World Bank’s World Findex Survey found a big gap between account ownership and usage in India. Nearly 80% of adults owned an account in 2017 but almost half of these accounts were inactive (no deposit or withdrawal in the previous year). This gap is even higher for the poorest 40% of the population.
These considerable fiscal and administrative challenges could explain why there have been only a handful of UBI experiments across the world. Consequently, many questions about UBI remain unanswered. By definition, any version of UBI will immediately increase incomes but less is known about the long-term effects on local markets and the economy. Evaluations of other cash transfer programmes, though, hint at the promise of UBI. According to one review, studies across the world have shown that giving people cash does not result in the commonly perceived negative effects. When given cash, people do not waste it on alcohol or drugs and neither are they less inclined to work. Instead, they seem to, depending on their circumstances, spend it on different items ranging from food to education to assets. In India, then, where the poor face varied constraints and financial volatility, a large-scale UBI-type programme may be one way to smooth consumption, alleviate poverty and give the economy the demand boost it needs.