Time to introduce ‘Universal Basic Income’

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Time to introduce ‘Universal Basic Income’

The recent demonetisation has spurred the fears of decreased demand, i.e. low circulation of money supply as one of its effects, especially by the erstwhile hoarders of black money. Lower money supply can impact GDP growth by reduced consumption expenditure in the near term as there is a temporary liquidity crunch because of the government strictures. The government and the banking system might accumulate a huge sum of deposits (depends on how much old currency is not exchanged).
Example – Government had 16.5 billion notes of 500 rupees in circulation but after cancelling the legal tender, many would not come to the banks to get their notes exchanged due to the fear of penalties. The money hoarded by such people is the surplus for the Government and the banks. In a nut shell, Government has financed the Indian economy at the cost of black money hoarders.
Getting back to the topic, we are facing a serious threat of low consumption expenditure, the signals of which are already in the air. So, how can we fight this issue? The answer is ‘Universal Basic Income’.

What is Universal Basic Income (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.

Main features of UBI:
• It is Universal and not targeted. In the Indian context, this makes sense because of the less-than-satisfactory experience with targeting welfare services. This would not only be more appropriate; it will also reduce the burden of the bureaucracy in so far as it is engaged in identifying the deserving beneficiaries of any targeted programme.
• Another important feature is cash transfer in lieu of in-kind transfer. There are standard arguments in favour of cash transfers over in-kind transfers (food stamps or grains provided through the Public Distribution System) as they are supposed to be much less market-distorting than in-kind transfers.
• UBI is unconditional. Cash transfers are not tied to exhibiting certain behaviour, and the people are free to spend the cash as they want. An example of conditional in-kind transfer in India would be the mid-day meal scheme, where the meal—an in-kind transfer—is conditional upon attending school.

Why is this the right time for UBI?
• The estimated budgetary requirements for providing UBI to all adults (roughly 69% of the population) is in the range of 11% of the GDP amounting to Rs11,000 billion.
• One of the main stumbling blocks was the need to rationalise subsidies which accounted for 14.4 per cent of the total expenditure of the central government and use the savings thus generated to provide a UBI. But now, the fiscal space that has presented itself due to demonetisation is an opportunity that should be utilised and it is that rare occasion when the imperatives of economic theory (to buoy up consumer demand and start on the path towards a long-term rationalisation of subsidies) and political willingness coincide perfectly.

How to implement UBI at this stage?
• As on November 9, 2016, there were a total of 255 million Jana Dhana account holders of which roughly 60 million (23.5 per cent) were zero-balance accounts. As a first step in the provisioning exercise, a fourth of the anticipated liquidity gain (through demonetisation) should be transferred to these zero-balance accounts by the end of Q1 2017. This would mean an additional fiscal space of Rs 625 billion in the first year.
• Non-Plan subsidies (including those on food, fuel and fertilisers, was Rs 2,578 billion in 2015-16 (RE) of which 54 per cent was contributed by the food subsidy bill (Rs 1,394 billion). For starters the government could target the phased removal of the food subsidy bill. A plan to phase out the food subsidy over four years would mean that the government can aim to save at least Rs 350 billion in 2017-18 Budget.
• Once, the implementation is set in motion and people become aware of the advantages of the scheme, conditions such as Aadhaar seeding can be built on the initial framework to phase out ghost beneficiaries.

A gradualist approach will help recalibrate the UBI in a manner suitable to the challenges that can crop up in its implementation. If the present demonetisation exercise is the first step in the long road to a cashless economy, then transferring amounts for the UBI will be an assured progression in the journey. The monetary behaviour of individuals remains unchanged over very long periods of time. To actualise the move towards cashless transactions, the government has to encourage making transactions through their accounts using facilities such as RuPay, which are add-ons to the Jan Dhan accounts. Implementation of the UBI using the fiscal resources freed by demonetisation will be the manna that government provides for its needy citizens.

By | 2016-11-22T08:00:46+00:00 November 22nd, 2016|Categories: Blog, Economy, Governance, GS Paper 2, GS Paper 3|Tags: , , , , |0 Comments

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