Universal Basic Income Can Be Hugely Disruptive If Not Handled Properly

Far from the UBI schemes proposed in advanced economies, in India it's a question of whether the Centre can juggle its finances and find a better way of delivering welfare.

The idea of offering a universal basic income (UBI) scheme to all of India’s poor citizens was formally articulated by the head of Niti Aayog over the weekend in Davos, where the world business and political elite met to drum up some optimism in an otherwise declining global economy. Amitabh Kant, CEO of Niti Aayog, told CNBC TV18 that providing UBI is being explored by the NDA government. The idea itself is not new as it has been debated in the context of the sharply rising inequalities and unemployment around the world. However, the concept of UBI received a fresh lease of life in India after the Modi government delivered the shock of demonetisation on November 8. The government nurses a deep sense of guilt over the massive income shock as well as the job losses currently being seen in the informal sector and wants to deliver something that will alleviate the suffering of the poor.

The real danger is that the government may come up with a UBI scheme without thinking through the specifics of a policy design that will suit Indian conditions. For starters, the idea of UBI emerged in recent times in advanced economies where inequalities are deepening structurally and the quality of employment is deteriorating as technology and automation replace quality labour inputs in manufacturing and services. Politicians with sharp survival instincts have understood that global capitalism may have reached a stage where productivity will be driven largely by automation and a lot of surplus labour may actually need not have work. And if high technology driven productivity can generate big surpluses why not share that with the people at large, goes the logic.

Some social scientists even suggest that a society which generates huge productivity and prosperity from automation can envisage a future characterised by the Marxist utopia, a post-capitalist stage, where leisure time of labour is totally freed and an enlightened population is largely engaged in its own creative pursuits, free from the alienation of being a cog in the wheel of large manufacturing processes. While advanced capitalist societies may be able to dream of such a future for themselves, India is still a very poor country and possibly several decades away from achieving a middle to high per capita income of $15,000-$25,000 annually.

So UBI in Europe or a country like Japan will have a totally different meaning because these societies take for granted things like universal healthcare, education, housing which India will take decades to achieve. Our policy makers are still grappling with executing universal food and nutrition security!

In a recent article, economist Jean Dreze has put out a mild warning that our policy makers may be tempted to abandon the state’s primary responsibility of providing universal education and healthcare and expect the poor citizens to meet those expenses from a UBI. Right-wing economists typically argue that the state is inefficient in delivering subsidies for health, education, food, fertiliser and therefore these subsidies must be delivered directly as cash transfer via an Aadhaar-seeded bank account. Can the government abdicate its responsibility to deliver basic welfare by simply putting cash in the bank accounts of the poor? Is UBI a substitute for free education and primary health care infrastructure provided essentially by the state? This is the key question which cannot be wished away. Dreze argues economists from the left and right support the idea of UBI but for different reasons.

Right-wing economists implicitly argue that after providing UBI, the state need not increase its expenditure on education and health by another 6% to 8% of GDP to reach the benchmark set by the advanced developing economies. Those on the centre and left say the state must continue to fulfil its obligation even after providing UBI. They say UBI must essentially operate like a social security payment in India.

There is also difference of opinion on how to fund UBI in the Indian context. Conservative economists say this must be done without unduly expanding the fisc. They argue it can be done partly by collapsing the funds allocated for MNREGA and food security into UBI. This will not work simply because the PDS system works very well in states like Tamil Nadu, Kerala, Orissa and these states may not agree to dismantle them. Dismantling existing systems without a proper transition may end up in a massive disruption, much like demonetisation!

Mercifully, reversing food security laws or legislated employment schemes will need Parliamentary approval.

One simple illustration can tell us how complex this exercise can be. As per the latest socio-economic and caste survey, 90% of India’s population belong to families where the main income earner gets no more than Rs.10,000 a month. At this income level, a family of five, would be accessing all manner of subsidies currently being delivered by the government. So one can roughly add another Rs. 5000 to this family’s real income via a whole range of explicit and implicit subsidies.

So, the effective total income of the family at the highest end of this bracket is Rs.15,000 a month. If the implicit and explicit subsidies are removed and a UBI of an equivalent Rs. 5000 is given, the total income of the family doesn’t change. Assuming the leakages of the earlier system are plugged, perhaps an extra Rs. 1000 could get delivered to this family. This is what is proposed by economists like Pranab Bardhan who says implicit and explicit subsidies together amount to 9% of GDP a year. This is nearly $200 billion or Rs 13 lakh crore. But implicit subsidies include hidden concessions on college education, public transport, primary health, electricity for agriculture etc.

The key political economy question is: can the government persuade 90% of the population to give up these implicit subsidies in favour of UBI? This could potentially be more disruptive than what we saw after November 8.

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