Economic Survey 2016-17: Chapter-09: Universal Basic Income

In chapter 9, the Economic Survey 2016-17 has advocated for the idea of Universal Basic Income (UBI) saying it’s a powerful idea and would be more effective at combating poverty than existing state benefits.

Idea and Components

The idea of Universal Basic Income is based in the premise that a just society needs to guarantee to each individual a minimum income which they can count on, and which provides the necessary material foundation for life with access to basic goods and life of dignity. It would ensure that every person should have a right to basic income to cover their basic needs just by virtue of being citizens.

There are three components of UBI viz. Universality, Unconditionality and Agency.

Why UBI Needs Attention?

According to Economic Survey, there is a need to ponder over this idea because of various reasons as follows:

Social Justice

It is a test of a just and non-exploitative society. It promotes equality by reducing  poverty.

Poverty Reduction

Universal Basic Income may simply be the fastest way of reducing poverty.

Agency

• Our current welfare system, even though well intentioned, inflicts an indignity upon the poor by assuming that they cannot take economic decisions relevant to their lives.
• The circumstances that keep individuals trapped in poverty are varied; the risks they face and the shocks they face also vary.
• UBI liberates citizens from paternalistic and clientelistic relationships with the state by taking the individual and not the household as the unit of beneficiary.

Employment

It creates flexibility by allowing for individuals to have partial or calibrated engagements with the labour market without fear of losing benefits.

Administrative Efficiency

UBI is gaining currency because of the weakness of existing welfare schemes which are riddled with misallocation, leakages and exclusion of the poor and with adoption of JAM trinity this will make administrative more efficient.

Argument in favour of UBI

The arguments in favour of UBI are as follows:

Poverty Reduction

The argument in favour says that UBI can remove poverty and vulnerability in one fell swoop.

Choice

The UBI treats the beneficiaries as agents and entrusts them with the responsibility of spending the money as they wish.

Better targeting of poor

In UBI, all individuals are targeted and this exclusion error (poor being left out) is zero. Also the inclusion error (rich gaining access to scheme) is 60%.

Insurance against shocks

The income floor will provide a safety net against health, income and other shocks.

Improvement in Financial Inclusion

The payment transfers will encourage greater use of bank accounts, leading to higher profits for banking correspondents (BCs) and an endogenous improvement in financial inclusion. The increased income will release the constraints in access to credit.

Psychological benefits

A guaranteed income will reduce the pressures of finding basic living on daily basis.

Administrative Efficiency

UBI will replace the plethora of schemes with a single initiative thus, will be more efficient administratively.

Argument against UBI

The key arguments against UBI are as follows:

Wasteful expenditures

Households, especially the male members may spend this additional income in wasteful activities.

Constraints on labour markets

Such minimum guaranteed income will make people lazy and they would opt out of the labour market. This is not only a moral hazard but also will lead to reduction in labour supply.

Too much constraint on banking system

The current status of financial access among poor is such that a scheme like UBI will create too much stress on banking system.

Difficulty to wind up

Once introduced, this scheme will be very difficult to wind up in case of failure because of enormous political costs involved.

Market risks

Unlike food subsidies, which are price neutral, the cash may lose purchasing power and is subject to market fluctuations.

Problems with existing welfare programmes

The survey has highlighted two main problems of the current welfare programmes viz. misallocation of resources and leakage in the scheme. Regarding misallocation, the survey points out that the poorest areas of the country often obtain lowest share of the government resources when compared to their richer counterparts. This is primarily due to the fact that the allocation to districts are often a function of the district’s ability to spend them– richer  districts  have better administrative capacities to effectively implement schemes which result in more resource allocation to them. The consequence of misallocation is exclusion error.  If a state or a district with more poor is allocated very little resources, then it is almost certain that some deserving households would be excluded. For instance, the states of Bihar, Madhya Pradesh, Rajasthan, Orissa and Uttar Pradesh account for over half the poor in the country, these states access only a third of the resources spent on the MGNREGS  in 2015-16. This almost certainly implies that some deserving individuals are left out. An estimate of the exclusion error from 2011-12 suggests that 40 percent of the bottom 40 percent of the population are excluded from the PDS.

How can UBI overcome these Issues?

The UBI can solve the misallocation problem to districts as follows:

• Beneficiaries are simply required to withdraw money from their accounts as and when they please, without having to jump through bureaucratic hoops.
• Focusing on universality, UBI reduces the burden on the administration further by doing away with the tedious task of separating the poor from the non-poor

UBI can also help to curb out the of system leakage as follows:

• UBI reduces out of system leakage because transfers are directed straight to the beneficiaries of bank accounts.
• The scope for diversion is reduced considerably, since discretionary powers of authorities are eliminated almost wholly

It can help in checking Exclusion error as follows:

• Given the link between misallocation and exclusion errors, a UBI that improves allocation of resources would mechanically bring down exclusion error.

UBI and Psychological benefits

The World Development Report (2015) argues that individuals living in poverty have

• A preoccupation with daily hassles and this results in a depletion of cognitive resources required for important decisions;
• Low self-image that tends to blunt aspirations;
• Norms that may require investments in social capital to the detriment of private opportunities.

UBI act as a  potential psychological benefit by addressing the problem faced by an individual according to world development report.

How Universality can remain but at the same time exclude rich?

If universality has powerful appeal, it will also elicit powerful resistance. It is, therefore, important to consider ideas that could exclude the rich . Below, is a list of four guideline to exclude rich:

• Define the non-deserving based on ownership of key assets
• Adopt a ‘give it up’ scheme wherein those who are non-deserving chose to opt out of the programme just as in the case of LPG
• Introduce a system where the list of UBI beneficiaries is publicly displayed
• Self-targeting: Develop a system where beneficiaries regularly verify themselves in order to avail themselves of their UBI.
  • This is based on the assumption that the rich, whose opportunity cost of time is higher, would not find it worth their while to go through this process and the poor would self-target into the scheme.

How to implement UBI gradually ?

By giving Choice to persuade and to establish the principle of replacement, not additionality:

• Rather than provide a UBI in addition to current schemes, it may be useful to start off by offering UBI as a choice to beneficiaries of existing programs.
• In other words, beneficiaries must be allowed to choose the UBI in place of existing entitlements

However this raises concern of being administratively cumber some.

UBI for women:

• UBI for women can, therefore, not only reduce the fiscal cost of providing a UBI (to about half) but have large multiplier effects on the household.
• Giving money to women also improves the bargaining power of women within households and reduces concerns of money being splurged on conspicuous goods.

Universalize across groups:

• Another approach is to phase in a UBI for certain vulnerable groups – widows, pregnant mothers, the old and the infirm – first.
• Previous studies show that leakages in pensions are already low

Phasing  out gradually will help to weigh the cost and benefit at each and every step

Conclusion

If, as appears to be the case, that thinkers on both the extreme left and right have all become its votaries, then UBI is a powerful idea whose time even if not ripe for implementation is ripe for serious discussion.