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Insights into Editorial: A UBI to step up economic reform

 

 


Insights into Editorial: A UBI to step up economic reform


 

 

Summary:

The idea of universal basic income (UBI) is being welcomed by socialists and communists across the world. The basic idea of a UBI is that everybody should be given a basic minimum income as an entitlement and not as compensation for work.

  • Even libertarians, generally wary of free riders and government handout programmes, agree that in the 21st century it would be unbecoming of civilized society to let people die of hunger and malnutrition simply because they could not find a job.

 

What is Basic Income?

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.

 

What are the main arguments against a universal basic income?

  • It would reduce the motivation for work and might encourage people to live off assured cash transfers.
  • It is simply unaffordable. As it is estimated paying a basic income equivalent to the poverty line, to each and every adult in India, would entail a cost of 11% of GDP, which is way above the 4.2% of GDP that the government currently spends on explicit subsidies.
  • It is also argued that unconditional cash transfers might raise wages due to the decline in the supply of casual labourers.
  • There is also question of whether a shift towards it should be a substitute for all existing subsidies or whether it should complement the existing ones.

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Way ahead:

UBI alone is not sufficient for the overall upliftment of poor. Two distinct sets of reforms are needed:

  1. Broad-based economic reforms that would strengthen entrepreneurship, remove barriers to job creation, and increase the returns to human capital investments by the poor.
  2. Specific reforms to allow the poor to gain better education and health.

 

What else needs to be done?

  • An initial UBI should be offered by the centre but its renewal (or increase) for a second year should be made conditional on the fulfilment of actual reforms identified in advance.
  • While the UBI amount would be determined by the Centre, individual states would need to initiate the UBI-for-reform programme with the exact co-funding mix to be negotiated.
  • To ensure initial fiscal space, UBI funding would be covered by converting an existing mix of Central and state subsidies, transfers, or expenditure.
  • New tax revenue from the resulting expansion of the formal sector could be added to the funding mix to help make UBI financially, and politically, viable.
  • As an initial pilot, a first UBI offer by the government could be conditioned on a limited set of reforms—say, passage of labour reforms that would help move the poor out of the informal sector and into formal sector jobs.

 

Conclusion:

A UBI handout by itself would not solve the two fundamental problems the poor face in India—low income-earning opportunities and inadequate quality of human capital services consumed by them. Where entrepreneurship and job creation continue to face formidable challenges, and public sector failures in education, health and sanitation severely degrade the poor’s expenditure on human capital, a UBI will prove insufficient or even wasteful. This is not because, as many fear, the poor would spend it unwisely, but because, without wider reforms, the poor remain handicapped in their ability to “buy” themselves out of poverty, whether through entrepreneurship or investments in their human capital. Worse, a UBI handout could reduce the political incentive for these reforms.

Also, the context for a UBI in India is very different from that faced in more developed countries, where a valuable natural resource or a highly advanced productive sector may be leveraged to sustain a UBI. In contrast, the value of a UBI for India has to be evaluated in terms of creating the conditions for its own redundancy—by enabling the poor in India to step out of the “low-reform, low-income trap”. Besides, the real value of a UBI for the poor in India rests on our ability to solve the economic problems and political incentive challenges.