UBI Feasible?

Universal Basic Income (UBI) is seen by many as an alternative to the existing system of subsidies, which is often associated with systemic inefficiencies.

What is UBI?

A basic income is an income unconditionally granted to all on an individual basis, without means test or work requirement. It is a form of minimum income guarantee that differs from those that now exist in various European countries in three important ways:

  1. It is being paid to individuals rather than households;
  2. It is paid irrespective of any income from other sources;
  3. It is paid without requiring the performance of any work or the willingness to accept a job if offered.

IMF Report on UBI in India –

The latest Fiscal Monitor of the IMF, in its analysis, used fiscal space equivalent to the cost of the public distribution system and energy subsidies in 2011-12. It showed that this can finance an annual Universal Basic Income of Rs2,600 per person, which is equivalent to about 20% of that year’s median per capita consumption, with the estimated cost at about 3% of the gross domestic product (GDP). The Fund did not account for the subsidy reforms of recent years.

Arguments in favour of UBI –

  • A large proportion of the population in India still lives below the poverty line and a number of government programmes providing subsidies and support to the poor are marred by inefficiencies. There are leakages in the system, and often, people who actually need government support are left out. Therefore, it is argued that Universal Basic Income will overcome these problems by providing a basic income to all citizens.
  • The 2016-17 Economic Survey argued that Universal Basic Income is “…more feasible in a country like India, where it can be pegged at relatively low levels of income but still yield immense welfare gains”.

Arguments against UBI –

  • First, the biggest issue is that India doesn’t have the fiscal capacity to implement Universal Basic Income. For example, the Economic Survey calculations showed that a 75% universality rate with an annual Universal Basic Income of Rs7,620 per year at 2016-17 prices will cost about 5% of the GDP.
  • Second, Universal Basic Income can create distortions in the labour market. A steady, permanent and guaranteed income without any work is likely to affect labour mobility and participation.
  • Third, the nature of Indian politics can create complications. It is highly likely that political parties, in order to improve their chances in elections, would want to increase the amount of Universal Basic Income or try to bring back subsidies in some form or the other, which will have fiscal implications.

Way forward –

What India needs is not Universal Basic Income. It needs rationalisation of subsidies, better targeting and operational efficiency. It needs to move to cash transfers at an accelerated pace with the use of Jan-Dhan, Aadhaar and mobile.

As history has shown, the best way to pull people out of poverty is sustained higher growth. Therefore, rather than creating permanent doles like Universal Basic Income for the entire population, it is necessary to create conditions for higher growth which will decisively lift people out of poverty.

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