Universal Basic Income and the Indian Macroeconomy

By Shiv Hastawala

Universal Basic Income (UBI) is a concept that is being highly debated and discussed in India these days. Simply put, a UBI is a regular income paid to individual citizens of a country by the government without any conditions whatsoever.

For an economy like India where a majority of the population survives in harsh conditions with low living standards, such a concept deserves to be discussed. Would a UBI be beneficial for the economy? What would its effects be on output, employment, and inflation?

How would a UBI work in other countries?

In a research paper from 2002, writing in the context of the South African economy, Samson and others note the potential effects of a UBI. These include improved labour productivity, higher aggregate labour supply, increased private investment and increased spending by the poor. It was concluded that cash benefits shift the aggregate demand of the poor towards more labour-intensive, job-creating industries. This is because they increase the consumption of the poor whose composition is relatively labour-intensive, such as food and health care. This higher demand in labour-intensive industries raises labour demand and thus creates jobs.

In an article published in 2014, Scott Santens, writing in the context of the U.S. economy, investigated the inflationary aspects of a UBI and describes three situations. The first is that of an ‘unchanged demand’ wherein the UBI would just be the cash form of a food stamp. In such a case, the demand and price for goods like milk, whose daily consumption is somewhat fixed, would be unlikely to change. The second situation is that of ‘decreased demand’ where the demand for inferior goods such as bus rides would decrease leading to a decrease in their prices.

The third is a situation of ‘increased demand plus flexible supply’ wherein the demand for certain goods would indeed go up but any change in their prices would depend entirely on the state of capacity utilisation. This refers to the utilisation of machines and equipment used for production. If there is spare capacity then there is no case for prices to rise since the idle equipment could be utilised to produce more output at the going prices. However, if there is no idle capacity, prices could climb up since supply would not be able to catch up with rising demand.

The Indian scenario

Although the above serves as a benchmark for further analysis, the macroeconomic effects of a UBI on the Indian economy would be slightly different. This is because, unlike developed economies, the Indian economy is characterised by infrastructural bottlenecks, underdeveloped capital markets and the significance of both agriculture and the unorganised sector in terms of employment.

Aiding agricultural and savings

Given that a whopping majority of the Indian population is dependent on agriculture while drawing measly incomes from the same, a huge chunk of income goes to purchasing basic needs such as food. Thus, when agricultural prices rise, the part of income spent on food rises leading to lesser demand for manufactured and other products. This lack of demand then forces capital goods used for production to sit idle. A direct cash benefit like the UBI would increase the size of the income cake, thus providing a cushion for such uncertainties. This will ensure that other goods can be purchased once basics are taken care of. This increased demand then induces unused capacity to be utilized which pushes the economy towards achieving its potential output.

At the grassroots level, savings and investment decisions are made by the same individual because low-income households do not have access to financial markets and hence depend on their own savings. A UBI could increase their savings potential which could help accumulate capital assets like farming equipment, livestock, and raw material. This has been the case in the Madhya Pradesh UBI pilots. Such investments increase productivity and income of the low-income category which forms a majority of the workers and consumers. This then ripples across the economy via the multiplier.

Moving from the unorganised to organised sector

Around 94% of the labour employed in India works in the unorganised sector which is characterised by extremely low levels of productivity. Their desperate dependence on land as the only means of livelihood and the absence of wealth forces these workers to be stuck in this sector under the poorest of work conditions. A UBI would decrease their need to ‘cling to land’ since their incomes would effectively increase along with an increase in their potential for wealth accumulation. The resulting induced shift in employment from the unorganised to the organised sector would then expand GDP because the latter happens to be a high productivity sector.

How effective will this be?

As seen above, since India is a demand-deficient economy, an overall demand increase induced by a UBI would not initially raise the general price level since existing idle capacity would then be utilised to meet higher demand at the prevailing prices. This increased capacity utilisation would, in turn, raise employment throughout the economy, thus raising the level of incomes and expenditure. Inflation would set in only after the full capacity utilisation point, beyond which supply can not keep up with rising demand. By then, the economy would have found a new equilibrium with a higher level of savings and investment. In such a case, a sustained general price rise triggered by UBI is only a distant possibility.

Therefore, the idea of a UBI could potentially be beneficial for the Indian economy in terms of output, employment, and inflation.

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