Universal Basic Income: has its time really come?

Universal Basic Income: has its time really come?

After farm loan waiver and then universal cash transfer to farmers announced by the Centre (PM-KISAN Scheme) and several states, comes the call for Universal Basic Income (UBI) in some form. For instance, Rahul Gandhi has already promised a minimum income for all, if elected. Has the time for UBI really come in India?

What is UBI? Basically, it is an unconditional cash transfer (unlike in-kind benefits like subsidised food or freebies like bicycles or TV sets distributed by political parties) for all people (or at least all people below some income threshold). In less developed countries, it is being conceived as a general anti-poverty measure, whereas in advanced industrial economies, it is being seriously considered as a possible initiative to take care of the unemployed as job insecurity is rising due to rapid technological progress.

UBI has its advocates, from both Left and Right. Since private property rights in natural resources cannot be abolished, Leftists support UBI as it guarantees every citizen at least a minimum share in the national economic dividend. Rightists favour it on efficiency grounds as a replacement of a multitude of poorly implemented welfare schemes. The biggest practical advantage of UBI is that, since it is universally available, it avoids the exclusion and inclusion errors common to targeted subsidy/transfer programmes.

In addition, it is free from the administrative hassles/costs and siphoning off of benefits by unintended people. Unlike in-kind transfers, it gives the recipients the freedom to decide how they spend the money. Also, unlike unemployment benefits, UBI money stays with the person even if he gets a job, which provides him the incentive to seriously look for employment.

Consequently, it is argued that by replacing the plethora of currently available targeted subsidy/transfer schemes, it should be possible to provide better benefits to people even within the same budget constraint.

The major problem in the Indian context is that no political party in power would have the courage to abolish all the subsidies and antagonise different vote banks by replacing them with  a single UBI scheme. Hence, implementing an UBI would be an additional fiscal burden, one that would be impossible to finance. For example, the Rythu Bandhu scheme of Telangana to provide a cash grant of Rs 4,000 per acre to all farmers (which is essentially an UBI for all farmers, rich or poor) was hailed by economists as superior to farm loan waivers (which have adverse incentive/efficiency effects) announced by many other state governments. But, subsequently, the Telangana government also announced a farm loan waiver, which shows how difficult it is to remain free from competitive electoral politics.

According to one estimate, an UBI providing even a poverty-level income to all citizens of India would cost about 10% of the GDP, which exceeds the current net (after transfer to state governments) Tax/GDP ratio of the central government (about 8%). However, it should be noted that the impact on tax revenue would be somewhat less than the estimate as a part of the transfer (if it is really universal) would come back to government as tax revenue to the extent people with income above the taxable limit would have to pay a part of the additional income as taxes.

One way could be to finance an UBI by building an additional government kitty using a part or whole of the Corporate Social Responsibility (CSR) money of all the public and private sector companies. Incidentally, this kind of an UBI — $1,000 annually to every resident — has been in existence in Alaska in the US for more than 35 years, using part of the profits of the oil companies. But the companies would not agree as the government would get the credit whereas the companies are paying for it. To take care of the problem, the government may put up ads publicising the individual contributions of companies.

However, CSR funds are often used to finance projects of people or NGOs favoured by the company owners or top managers. UBI financed by CSR funds would not leave any discretion to either the government or the companies to distribute benefits to their favoured people or agents. Consequently, this idea is unlikely to go through, unless the government is able to force the companies to subscribe to the scheme which, again, is very difficult, given the political clout of the business people.

Another possibility is to go for some universal child allowance, which would cost less than an universal guaranteed income for all citizens. But, it would create a disincentive for population control — especially among poor, uneducated people -– which India cannot afford.
Then there is the problem of possible adverse consequences for work efforts, especially for poor people accustomed to a very low standard of living. Getting a guaranteed poverty-level income may well induce some of them to take it easy and not work or look for work at all. This has been a problem with some welfare recipients even in rich countries like the US.

Finally, given the limited budgetary resources of the government, universalising benefits spreads the benefits thinly over a larger number of recipients. Recent research on the effectiveness of different anti-poverty schemes in Bangladesh and India suggest that to enable poor people to permanently come out of poverty, the transfer per household should be of a significant amount, sufficient to buy and maintain some ‘capital’ such a cow (with fodder) or a sewing machine (with funds to keep it in running condition). If so, that tilts the balance in favour of larger sums to a smaller number of the really poor, rather than universalising transfers. 

To sum up, despite the theoretical efficiency advantages of UBI, the chances of replacing the multitude of targeted subsides/transfers/freebies by some form of UBI are very low, given the current fiscal, political and economic compulsions in India. Hence, the time for UBI has not yet come.

(The writer is a former Professor of Economics, IIM Calcutta)