by Shashank Sreedharan
Bill Gates, Mark Zuckerberg, Elon Musk, Bernie Sanders, Angus Deaton, and Archbishop Desmond Tutu. The biggest names in business, politics, and economics, have this in common: a favourable view of universal basic income. What, then, is universal basic income (UBI), why does it have such strong support from some of the brightest minds on the planet, and why should India be thinking about it?
What is the concept of Universal Basic Income
A basic income is a periodic cash payment unconditionally delivered to all on an individual basis, without means test or work requirement. Considered a viable way to reform social security to address the shortcomings that the current system is rife with – targeting and delivery – the main motive behind UBI is to address the behavioural, design, and implementation downsides in the currently used systems of unemployment and social security benefits.
Let us consider an example: X lives in a rural town close to a big city in India. He usually works on a big farm during the sowing and harvest seasons, and on construction sites during the remaining months of the year. Due to bad monsoons, harvest is really poor one year, and the construction jobs have all moved to the big city. If he takes whatever daily wage jobs are available in his community, he could make Rs. 3000 a month. On the other hand, the state unemployment benefit gives him Rs. 5000 without working. The current system of unemployment benefits encourages people not to take on work unless it is well-paid, out of fear of losing benefits. On the other hand, they are also forced to take up these jobs because continuing to avail benefits requires a demonstration of job hunting. Similarly, there is a substantial exclusion error with traditional social security benefits by virtue of their using means testing and income-based targeting to identify recipients. This is one of many issues addressed by UBI.
Why the UBI is a good idea
A basic income also incentivises an uptake in entrepreneurial ventures. A Mowat Centre report illustrated how UBI facilitates a thriving social mission ecosystem with enhanced risk-taking abilities afforded by the removal of worrying about where from–and if–the next pay check comes, and the associated mental stress that restricts productivity and innovation. By de-risking social entrepreneurship for those who cannot risk the potential downside, UBI can effectively address poverty, empower historically marginalized communities, and serve as a catalyst for entrepreneurial uptake. Furthermore, unconditional basic income helps provide financial protection against unexpected financial loss.
Several countries have conducted pilot studies to explore the feasibility of making basic income a social security mainstay. Most notably, the Finnish government implemented a 24-month pilot in January 2017. In his article on UBI and initial observations from the pilot, the Guardian columnist Aditya Chakrabortty discusses how UBI’s potential rests on it being unconditional. By guaranteeing some income periodically, it liberates the recipients to pursue work they find meaningful, which in turns results in better economic outcomes. Canada and Netherlands have also launched UBI pilots in early 2017, both as a social security measure and as an alternative to developmental aid. These examples are from the developed world. What about the developing world?
In the first ever basic income pilot that is long-term, universal, and gives cash transfers that are enough to live on, GiveDirectly in Kenya is providing unconditional monthly cash transfers to over 6,000 individuals in dozens of impoverished villages in Kenya on the poverty line for 12 years. Several thousand more people will receive short-term aid, to gather evidence on the impact of no-strings-attached cash transfers, and on long-term effects of providing basic income. These transfers are made via mobile phones to the village residents. The findings indicate that the basic income resulted in positive health outcomes, increased ownership of livelihood-supporting assets, increased productivity, and the emergence of several new entrepreneurial ventures.
Can basic income work in India?
The Economic Survey of India 2016-17 discussed UBI as a viable alternative to a plethora of state subsidies targeting poverty alleviation. According to the ESI, if we considered a basic income transfer of INR1000 per month (approximately $15/month), we would have 20 million beneficiaries. Conditional on the presence of a well-functioning financial system, shifting to basic income may be the fastest way of reducing poverty (ESI, 2016-17). Even a basic income of $4 per individual per month can reduce India’s poverty level by 16%, from its current level of 22%. The cost to do this would be 2% of GDP, the same amount we currently spend in total on food, fuel, and fertilizer subsidies (Current Analyst, 2017).
Paradoxically, implementing UBI may be easier in India, where we can peg the transfer amount at low levels and still yield massive welfare gains. Additionally, the ESI point out that UBI could effectively end misallocation concerns and eliminate pressure on the government to separate the poor and non-poor by virtue of being universal. Since the mode of transfers are akin to direct benefit transfers (DBT), this reduces bureaucratic oversight. Moreover, UBI would also address the issue of out-of-system leakages.
However, an important consideration is affordability in the event that UBI is scaled up; according to recent estimates by the NIPFP, non-merit subsidies currently amount to 5% of GDP. Furthermore, tax concessions to companies amount to 6%. If a third of these concessions are foregone, combined with non-merit subsidies, that amounts to 7% of GDP – a substantial sum for UBI that is more than twice the combined amount currently spent on all anti-poverty programmes. Given our tax-GDP ratio, increasing taxation, and getting rid of wasteful programs are viable supplements to mobilize more funding.
An analysis by Carnegie India summarizes the proposals put forth by several eminent economists on the economic feasibility of UBI in %GDP terms, and which subsidies could be replaced for the same. This idea has also been supported by the IMF, who called for the adoption of a fiscally-neutral UBI to replace food and fuel subsidies.
This is not India’s first experiment with UBI. An 18-month basic income trial was conducted in Madhya Pradesh in 2010. Every man, woman, and child across 8 villages received a monthly cash transfer, while another village was used as a control group. The money was paid individually, initially as cash, and after three months was debited into their bank or cooperative accounts, without any conditions. The results were very similar to the experiment in Kenya. Additionally, there was an improvement in school attendance among children, as well as a rise in labour force participation, dismissing the economic moral hazard argument against UBI. More specifically, there was a marked shift from casual wage labour to self-employment, and a decrease in distressed migration.
Why isn’t there more support for a shift to the UBI model
Although UBI has been brought to the fore of the policy discussion in India, it may still be politically unfeasible. According to India’s Finance Minister, there is likely to be a continued demand for subsidies over and above UBI, which cannot be supported by the Budget. Furthermore, the most widely offered criticism of UBI is the economic moral hazard argument, suggesting that unconditional, no-strings-attached cash transfers will disincentivize labour.
However, the ESI dismissed this, citing a study in 6 developing countries in 2015 based on cash-welfare programs that found no evidence of financial aid of the UBI nature discouraging recipients from working or seeking employment. Another frequently used argument against basic income UBI is that it will encourage conspicuous funding, especially by male members, who traditionally handle money in India. The ESI addressed this argument by citing a study conducted in Madhya Pradesh that showed that farmers given free cash transfers re-invested it in their farms to cultivate their crops. However, there is little doubt that we need further evidence to be more confident in our advocacy for (or against) a basic income model.
Could UBI be the panacea for India’s current social security landscape?
McKinsey Global Institute estimates that just half of all public expenditure on basic services in India actually trickles down to the masses as real benefits, adding that 56% of the population lacks the means to meet the basic needs of food, energy, housing, drinking water, sanitation, health care, education, and social security. While several social protection schemes have been implemented by the government, with talks of a new universal coverage scheme in the pipeline as per the Annual Budget for 2018-19, India’s social security landscape is far from inclusive. Among other things, the Indian welfare state is a victim of poor design, poor targeting, and poor delivery. For instance, schemes are often designed for workers in the formal sector, despite an overwhelming majority of the workforce being in the unorganized sector. Similarly, targeting is done at the household level, resulting in exclusion of the underserved and marginalized, notably women.
UBI potentially solves the pressing issues faced by social security in India. By virtue of being universal, it eliminates any risk of leakage. By leveraging the JanDhan-Aadhar-Mobile (JAM) trinity, UBI can ensure efficient delivery. More importantly, UBI is targeted individually, making it a social security measure that could reach even the most marginalized sections of the population. Evidence from UBI pilots conducted in India and abroad, such as the ones discussed above, indicate that UBI potentially brings about positive outcomes of health, education, job creation, and women’s economic empowerment – all domains serviced by traditional social security.
Is UBI, beyond doubt, the way to go in terms of social security? No. Is India ready for Universal Basic Income? Perhaps not. We must, however, begin to explore the nuances of shifting to basic income, explore its alternatives, feasibility, and gather evidence to make an informed choice.
Shashank Sreedharan is a Research Associate at IFMR LEAD. He is a Public Policy graduate from the Watson Institute of International and Public Affairs, Brown University.