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UBI: Universal Basic Income; A Frugal understanding

The recent economic survey (FY1617) has brought in the social security concept for India, terming it as ‘Universal Basic Income’ (UBI). The Randomwalks team went through the same to bring out the key discussion points for ease of understanding the concept, the advantages, challenges & the road ahead as outlined in the survey. Hope you find this interesting:

  1. The Concept: Providing very basic financial help to every targeted person (based on coverage) on a monthly basis. It is like a guaranteed income to be paid on a monthly basis without any strings attached to it.
  2. Coverage: Poor people, maybe below poverty line or any related measure that the Government may adopt. But it needs to be a very clear & unbiased selection.
  3. Amount: Gov needs to decide but rough calculations (from the survey) pegs it around 5400 per year
  4. The Advantages:
    1. Universal financial inclusion: With JAM (Jan Dhan, Aadhar, Mobile) this becomes relatively easier to implement
    2.  Social security: A minimum sustenance allowance for all needy people, poverty alleviation
    3.  Freedom to make a choice: The recipient makes a choice on best way to utilize the fund, which in turns gives him freedom to choose and hence better self respect
    4. Counters the misallocation issues with current subsidy mechanisms: Current subsidies have significant percentage of ‘inclusion error’ (people who are not supposed to get but enjoying it), similarly ‘exclusion error’ (people who are supposed to get but being deprived of the same) and ‘leakage’ as well (read it more as misappropriation). PDS has correct targeting of 28% while MGNREGS is relatively better at 37%.
    5. Equality across states/districts etc: Current allocation mechanisms for various reasons are mostly skewed. So many relatively richer states/ districts having a greater pie of the subsidies (e.g. contributes 20% to target segment while consumes more than 20% of the subsidy) and vice versa.
  5. The Challenges:
    1. Moral Hazard: With easy money, people will stop working causing productivity loss. The counter? The Survey quotes several studies which found this correlation not being established in other countries where this has been implemented. Also the amount is small and hence there will be efforts needed to augment it by more labor
    2.  Misuse by the paternalistic society: Will the males of the family start drinking or get into bad habits because of some money being thrown to them? Again such correlation has not been found valid by different studies
    3. Fiscal prudence? Will it increase the burden for the state? It will depend on how this being devised. At the rate mentioned earlier, it would cost 4.2% of GDP. There is already a plethora of subsidy program for middle class and the rural poor. The cost to exchequer is somewhere around 2.07% of GDP for fertilizers, Petroleum, food; 1.05% of GDP for middle class & so on. The rationalization of these cross set of subsidies, plugging leakage/ errors in many of these schemes can sponsor most of the UBI amount but not all subsidies can be subsumed under UBI. Hence there will be additional net expense that needs to be factored in after detailed evaluation. This can be set at a fixed %age to GDP
    4. Access to banking channels: The ability to use these funds will depend on accessibility to banking channels. Hopefully with Small finance banks, Payments bank, Aadhar enabled payments led by JAM, impact of this issue can be controlled
  6. Conclusion: Implementation of a scheme like UBI will need further detailed studies, statistical analysis, and healthy discussion beyond political considerations. At the end a strong consensus needs to be built before being rolled out and also the usual socio-political nexus needs to be addressed effectively to ensure a proper administration of this scheme

 

Sources:

  1. FY1617 Economic Survey report of GOI, Ministry of finance

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