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Is Universal Basic Income a Good Move for India?

By: Ace Chua, Tanvi Johri, Hu Si Ying

Research Head: Tanvi Johri

Editor: Praharsh Mehrotra

Illustration by Jasmine


Abstract


India has the world’s second largest population of 1.2 billion. It faces an imminent issue of poverty and income inequality with a Gini coefficient of 37.5% (World Bank, 2011). 60% of India’s population earns an average wage of US$2 per day, and over 30% of them have less than US$1.25 to spend per day. This is also worsened by India’s poor education quality, child labor and malnutrition. (SOS Children’s Villages Canada, n.d.). This article discusses how a universal basic income (UBI) scheme is able to help India’s low-income population in mitigating income inequality and poverty along with the implications to consider.


1. Introduction

Universal Basic Income (UBI) is a guaranteed regular income given by the government to its citizens universally and unconditionally. It aims to put spending decisions in the hands of citizens through cash transfers (Masih, 2019). UBI, in the case of India, gained traction due to the rising income inequality and the fear of technology replacing mundane jobs that the poor depend on for a livelihood. The discussion of implementing UBI in India has been centered around a specific group of people who are the lower income group in India. One can agree that it only makes economic and equitable sense for it to be targeted at a small segment of society, i.e. the poor. The inefficiency of the current welfare system sparked the debate of whether UBI should be implemented in India. Research shows that these programs end up benefiting individuals who are not poor at all. Most of them are “small, fragmented and plagued by administrative leakages” (Randhawa, 2019). Thus, UBI is looked upon as an alternative to overcome the failures of the current system.

2. Possible Benefits of UBI

The implementation of UBI can help streamline government spending. A UBI may be more cost-effective than India’s welfare programmes such as the Public Distribution System (for subsidised food), since these programs do not really help those that are actually poor. Replacing them with some form of UBI can help alleviate poverty, as cash grants give choices to the poor to spend on areas that they need rather than feeling compelled to consume subsidised goods regardless of value-addedness and quality (Randhawa, 2019).

Several benefits of UBI were identified through the 2010 UBI pilot tests in Madhya Pradesh, where each adult received 200 rupees and a child received 100 rupees per month. These amounts were raised to 300 and 150 respectively after 12 months. The benefits yielded includes improved living conditions, food security, education and productivity (Schjoedt, 2016).

Living conditions improved as people partially spent this income on home improvements. Assets held by people in the tribal village, who were among the poorest, increased, as more people were able to afford mobile phones, scooters or motorbikes. These assets are crucial devices that could allow villagers to gain access to job opportunities and market information, which could help increase their income. There were also significant improvements on food security and nutrition, where the proportion of households reporting sufficient income to meet food requirements has increased from 52% to 78% after 6 months of cash transfers. Being better able to afford nutritious food helps alleviate some of the malnutrition problem that plagues these poverty-stricken villages. Part of the income was also spent on education, especially for girls, and overall school attendance had increased. The effectiveness of cash transfers on education can be seen based on anecdotal evidence of parents having to take up loans and have the children work to pay for education once the pilot test was completed. The below figure shows the biggest improvement in school attendance occurred during this 2010 pilot test, represented by the first bar graph.

Figure 1: Source: Pathway’s Perspective


Despite criticisms of UBI that cash transfers disincentivize people to work and depend on government support, the pilot tests disproved the notion as the handouts gave villagers opportunities to earn their own income. For example, villagers were able to buy livestock, fertilizers and other inputs to create their own agricultural business, instead of working low wage jobs from employers they were indebted to. A shift towards a self-sustaining business allowed them to sell their products or feed themselves. The below figure shows a significant increase in the proportion of villagers switching from low wage jobs to farming, which helped them generate positive income (Schjoedt, 2016).

Figure 2: Source: Pathway’s Perspective

3. Economic Implications

Even though UBI is targeted at the poor and may prove to be more beneficial than other support schemes, there are a few implications that can impede India’s ability to ensure a successful UBI program for the poor. These implications range from fiscal constraint, impediment of development goals, inefficient targeting, inaccessibility and inherent issues with cash handouts.

To implement the UBI across India, the Government must be in a good fiscal position to fund it and one of the major sources of Government income is tax revenue. India has two major tax structures, in the form of a progressive income tax (Table 1) and an indirect goods & services tax (GST) at a standard rate of 18% (Invest India, 2019). However, the large informal sector in India (Ghatak, 2019), along with rife tax evasions (Jha, 2019), pose a challenge to the Government. With most of the tax revenue coming from GST, it may be inadequate in raising enough revenue for funding a UBI across India’s lower-income group. Moreover, there are many development schemes in India such as “National Rural Employment Guarantee Act, Sarva Shiksha Abhiyan, Swachh Bharat”, to name some (Mohanty, 2019). The UBI should not be at the cost of expenditure on infrastructure, health and education. This is meant for long-term, sustainable improvement in human capital, income inequality etc, which cannot be substituted by a cash transfer. Thus, a UBI scheme may slash spending from already nation-wide developmental programs, impeding long term economic growth. Another cause of concern is the inability to identify every households’ income. The lack of data on household incomes across India make it hard to identify which family is eligible for the UBI. This could inevitably leave out some who deserve the subsidies. Even if Economic Surveys are able to gather such data, they are not always accurate since incomes of poor individuals (who usually form the bulk of the informal sector), are rather volatile and seasonal. If UBI suffers from inefficient targeting, it can lead to the same problem of citizens abusing the system while leaving out the most vulnerable individuals, as seen in the traditional welfare programs (Randhawa, 2019). Other factors that may affect the effectiveness of India’s UBI, such as its large population and geographically inaccessible areas may render UBI difficult to implement. More importantly, there are some inherent issues with providing a cash handout. Firstly, it may reduce the labor supply since the poor get more dependent on the government for their livelihood and have a lesser incentive to work (although this may not happen as mentioned in the above section). Secondly, there could be unnecessary fund diversion on non-essential goods and services such as gambling, alcohol etc. 4. Recommendations and Conclusion


Having analysed the factors impeding the effectiveness of the UBI in India, there are certain steps India can take to ensure that UBI will provide the desired results. Firstly, tougher fines and stricter enforcement should be enacted to crackdown tax evasion. This will ensure that the Government does receive all of the tax revenue which can be used to finance the UBI scheme.

While UBI can streamline spending on welfare programs and hence help save the Government a few dollars, fiscal position is still a major concern. This is because even with UBI being implemented effectively, it needs to be accompanied with structural reforms to raise longer-term prospects for India (Randhawa, 2019). This is why the fiscal position of the Government is key to access before implementing a nation-wide UBI. Can the current funds sustain both the cash handouts and ongoing/new structural reforms? If so, India can most definitely reach economic development goals while tackling income inequality at the same time. Moreover, the Government must keep a constant check on whether funds are used properly. One way is to have a robust tracking system in place for individuals to record what were the funds used for.

In conclusion, the intent of the UBI scheme is to ensure a safe and secure future for the poor. The key performance indicator of this program would be reflected by the rate at which citizens “graduate” from the program and no longer fall below the poverty line (Randhawa, 2019). In its truest intent, UBI is definitely politically feasible and socially desirable and can be very effective. But desired results will only show if the Government has the fiscal ability to sustain the program, can efficiently target and reach the poor in inaccessible areas and is able to constantly ensure that the poor does not develop a dependent attitude or misuse the funds.


References

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