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Possibility of India Introducing Free Money for All

Published Date : Feb 20, 2018

This write up is to raise alertness of the business community that sometime in the near future, there is a possibility of India introducing a new policy to tackle poverty by distributing free money to all citizens.  Here I want the readers to understand the trending thought in the world – that of Universal Basic Income (UBI), which can impact overall demand for goods and the pattern of living and earning incomes.

Arvind Subramanian, Chief Economic Adviser to the Government of India, has predicted that at least one or two of the country's states will implement an Indian UBI – or "free money" as some like to call it, within the next two years, i.e. by 2020.  Subramanian observed at a recent press conference, “There has been a lot of discussion on UBI over the last year. The discussions are going on even at the present”.  In India's Economic Survey of 2016-17, a chapter was devoted to explaining the concept. Even the London Economist backed the idea for India. As recently as January this year, even the International Monetary Fund (IMF) made a strong case for India adopting a fiscally neutral UBI by eliminating both food and fuel subsidies.


What is UBI?

UBI is a form of social security guaranteed to citizens and transferred directly to their bank accounts. to meet their basic necessities of life.  It is a periodic cash payment unconditionally delivered to all citizens on an individual basis. It is not an entitlement but a right by virtue of being a citizen of a country. UBI is a step towards a more equal society, as it would promote social equity, reduce poverty directly, and reduce risks related to unemployment, health, etc, by providing a safety net. In India’s context the most important benefit would be in terms of addressing misallocation, exclusion and leakages which grapples plethora of schemes run by government to root out poverty and inequality. Misallocation is due to administrative incapacity and inefficient delivery. Exclusion is a natural consequence of misallocation and Leakages are due to a big and complex delivery system. UBI being delivered universally in bank account would address all the three problems - - misallocation, exclusion and leakages.


Now UBI Is Being Discussed Seriously

UBI is now firmly in mainstream international political discussions. Political parties, activist groups and now even think tanks such as the right-of-centre Adam Smith Institute are taking the policy seriously. Although some advocates may see this as a simple solution to unemployment and automation, this threatens to obscure the fact that UBI would be part of a broader political programme with its own particular agenda.

If UBI is to be realised, political economists suggest that we must understand it as one of a set of progressive policy proposals that can help transition us to a more just and sustainable economic setup. The makeup of a particular UBI model is open for design which can be debated and considered depending upon the profile of a community's population and suitability for the country as a whole. The 2010 Nobel Laureate in economics Sir Chris Pissarides, speaking in a panel discussion in Germany advocated UBI as a solution to the inequality that arises from both globalisation and the rise of robots and Artificial Intelligence (AI). “We should not try to deal with inequality by stopping these global processes, because these have the capacity to bring more prosperity to the world,” he said. “We should welcome expansion of trade and the opening up of India and Africa, and improve R&D to bring robotics into production. After all, if there aren’t enough jobs for us all to do, we can take more leisure. "

Much of the current focus on UBI is due to the increased use of automation in the workplace. As automated systems render more and more workers obsolete, UBI has been floated as a way to provide them with the money needed to afford basic necessities.

UBI may be garnering a lot of attention right now, but experts continue to disagree on the potential impact of such a system. Proponents assert that it could drastically boost the economyeliminate poverty, and give people more time for leisure to pursue other interests. On the other side, UBI detractors claim the system could make people lazy and encourage them to be unemployed.


Trials have begun in some cities of the world

In the US, Hawaii became the first state to pass a bill in support of UBI. In 2017, Stockton, California, has launched a basic income experiment. Although not a strict UBI, the state of Alaska, in the United States, since 1982, provides all its citizens, including children, a permanent dividend from mining income. Each person received $1,884 in 2014 and $2,072 in 2015.

In an European Social Survey, 34,604 participants across 18 European countries, for the first time, were asked whether, overall, they would be “in favour of” or “against” a ‘basic income scheme’ – that operates under the following conditions: monthly payment to cover essential living costs, replacing other benefits, no compulsion to work, and the scheme is paid for by taxes.

The results, published in 2016, showed the ‘Eastern Europe’ countries such as Russia, Slovenia, Poland, and the Czech Republic tended to be generally more in favour of the scheme. Conversely, the countries falling within the ‘Social Demographic’ grouping such as Sweden, Norway, Iceland, and Netherlands tended to be generally less in favour of the scheme. The countries within the ‘Christian Democratic’ grouping – Germany, France, Austria and Belgium – plus the UK and Ireland, showed a more even split, generally in favour of or generally against, whilst Israel and Switzerland were treated as their own categories, with the former either “in favour” or “strongly in favour” of the idea, and the latter, at the other end of the scale, either “against” or “strongly against” the idea.    Already on trial, Finland and Scotland in Europe are pursuing it in some form or other. However, Switzerland voted against a proposal to provide a basic income of 2600 francs (Rs 1.7 lakh) per month to every Swiss and foreigner who had resided in the country for five years, The Guardian reported in June 2016. 


Finland's Experiment 

One year on from its launch in January 2017, the world remains fascinated by Finland’s groundbreaking universal basic income trial: Europe’s first national government-backed experiment in giving citizens free cash, according to a report in the Guardian of January 18, 2018. 

But amid an unprecedented media attention, the experts who devised the scheme are concerned it is being misrepresented. “It’s not really what people are portraying it as,” said Markus Kanerva, an applied social and behavioural sciences specialist working in the prime minister’s office in Helsinki.  "This is really about seeing how a basic unconditional income affects the employment of unemployed people” only and is not a full-blown UBI trial at all, cautioned Kanerva. He asserted: "We’re just trialling one kind of model, with one income level and one target group.”


India's Case

Although the basic idea of UBI is not new for India—the erstwhile Planning Commission had worked on it in the early 1960s—it has attracted significant attention in the recent past. In 2017, more than 80 Indian politicians, academics and experts attended a discussion held by the Institute for Human Development to discuss the possibility of introducing UBI.  This was after a report about the success of recent pilot studies suggesting that UBI could eradicate the widespread poverty in the country.  Also, the discussants were aware of researched findings that India’s current system of targeted welfare benefits and price subsidies is wasteful and inefficient. Yet, there was much disagreement among economists and politicians. Some on the left claim this UBI frees people from poverty, opens up opportunities and can save the country money in the long-term while many on the right argue it increases dependence and is unaffordable.

Proponents like Professor Pranab Bardhan of the Department of Economics at the University of California, Berkeley, believe it is time to seriously consider experimenting with UBI.  According to him, in India, apart from its anti-poverty potential, UBI can also be a substantial measure to improve autonomy (say, of adult women, three-quarters of whom do not earn income) and dignity by giving workers an escape ladder from socially despised occupations (scavenging, waste-carrying, prostitution, etc).  He believes that some people, otherwise favourably disposed to the idea of UBI, are opposing UBI primarily for reasons of political expediency.

Professor Bardhan argued: “The most recent estimates (made at the National Institute of Public Finance and Policy) suggest that (central plus state) subsidies that mainly go to better-off people (‘non-merit subsidies’) amount to about 5% of GDP. In addition, the central budget alone shows ‘revenues foregone’ (primarily tax concessions to companies) coming to about 6% of GDP. Even if one-third of these revenues foregone are made available for this purpose, added to the non-merit subsidies, it comes to 7% of GDP potentially available for UBI, which is a substantial sum, more than twice the total amount currently spent on all anti-poverty programmes." Some resources may also be released by terminating some of the particularly wasteful welfare programmes.

Moreover, Bardhan argues for increased taxation of the rich especially those owning real estate and high value properties. We have zero taxation of agricultural income, long-term capital gains in equity markets (which the 2018 Budget has proposed to tax), and of wealth and inheritance – this is at a time when our wealth inequality is mounting. He thinks a UBI of less than a thousand rupees per person per month is fiscally affordable. He recommends continuing to spend a part of the extra revenues on public goods like health, education and infrastructure. He asserts that bureaucratic and political attention needs to be focussed more on public goods and welfare services that are universal – like UBI, universal healthcare, etc – away from the structures of patronage distribution to particular groups or individuals.

Nevertheless, Bardhan cautions: "One should have no illusion about the difficulties in the political process for implementing UBI. But one thing going in its favour is that it attracts support from people in different parts of the political spectrum, which may someday generate a winning coalition." As an experiment, he suggests, UBI may begin only with women, maybe in urban areas until banking services spread to remote areas and in states where current welfare measures are particularly leaky.

“An UBI would outperform the PDS and energy subsidies along three key dimensions of coverage, progress and generosity,” said the IMF in its Fiscal Monitor that was released in October 2017.  “A UBI would actually benefit the poor more for the same Budgetary costs. India may want to ponder this option,” said Vitor Gaspar, IMF Director of Fiscal Affairs Department, India.

The Economic Survey 2018, prepared by Chief Economic Adviser (CEA) Arvind Subramanian and his team, restated the need to usher in direct income support in the farm sector instead of providing subsidies. The report finds that climate change may result in significant reduction of annual agricultural income.

In India, public debate on cash benefits remains contentious. On one side are advocates of food subsidies, wishing to extend the Public Distribution System to 68% of the population, as planned in the National Food Security Bill. Critics believe it will worsen corruption, cost a vast amount, provide low-quality food and be unsustainable. On the other side, advocates of cash transfers have been accused of wanting to dismantle public services and cut social spending. The real problem is that existing policies have left over 350 million people, about 30% of the population, mired in poverty, even after two decades of high economic growth.

Based on a survey on misallocation of resources for the six largest Central Sector and Centrally Sponsored Sub-Schemes (except PDS and fertilizer subsidy) across districts, the Economic Survey points out that the districts where the needs are greatest are precisely the ones where State capacity is the weakest. This suggests that a more efficient way to help the poor would be to provide them resources directly, through a UBI.

Exploring the principles and prerequisites for successful implementation of UBI, the Survey points out that the two prerequisites for a successful UBI are: (a) Functional JAM (Jan Dhan, Aadhar and Mobile) system as it ensures that the cash transfer goes directly into the account of a beneficiary and (b) Centre-State negotiations on cost sharing for the programme.

The Survey says that a UBI that reduces poverty to 0.5 percent would cost between 4-5 percent of GDP, assuming that those in the top 25 percent income bracket do not participate. On the other hand, the existing middle class subsidies and food, petroleum and fertilizer subsidies cost about 3 percent of GDP. The Survey concludes that the UBI is a powerful idea whose time even if not ripe for implementation, is ripe for serious discussion.

Added benefits would include increase in financial access due to increased volume of transaction. There are concerns that UBI would lead to increase in conspicuous consumption and dropout from labour market but studies have found no evidence in this regard. However, survey chalks out legitimate concerns. The success of UBI hinges on success of JAM and still 1/3rd of adults don’t have bank account. The state and Centre need to agree on proportion of funding by each. Finally, taking away all schemes and benefits in lieu of UBI may not be politically feasible. The survey talks about floating the UBI scheme in a gradual manner as a way forward.

Opponents to the idea of UBI, wonder: Is UBI the best way to eradicate poverty in India? There are strong economic and political reasons why India cannot opt for UBI, at least in the present circumstances, they suggest.  Firstly, they believe that the cost at around 5 % of GDP is too high and observe that politically, it will be extremely difficult to roll back subsidies in order to create the fiscal space for UBI. Secondly, they think that income without any work is likely to affect labour mobility and participation. Thirdly, in their view, the political class always has this temptation to declare premature victories and give away fiscal gains by announcing freebies and more subsidies before crucial elections.

They argue: "What India needs is not UBI. It needs rationalization of subsidies, better targeting and operational efficiency. It needs to move to cash transfers at an accelerated pace with the use of Jan-Dhan, Aadhaar and mobile. This will help reduce costs and spare resources for capital spending to augment growth. They suggest making an attempt to save costs with better targeting, which will lift people out of poverty.

India’s finance minister Arun Jaitley said that although he is favourably inclined to a basic income programme, it might not be politically feasible in India.  He ruled it out for the present because people will continue to demand existing subsidies even after an UBI, which would be unaffordable for the Indian economy, reported Livemint in June 2017. Another challenge arises from the fact that a high proportion of Indians use welfare systems such as the PDS; with use growing from 27% of all households purchasing cereals from the PDS in 2004-2005 to 52.3% by 2011-12, according to a NITI Aayog study. Therefore, any new system would have the ensure that all eligible beneficiaries can access the new programme.


India's Pilot Experiment in Madhya Pradesh

In the context of the above contentions, Guy Standing, a professor at the School of Oriental and African Studies, University of London, implemented a basic income pilot programme in villages in Madhya Pradesh (MP) from June 2011 to November 2012.  They were funded by UNICEF, with Self Employed Women's Association (SEWA) as coordinator. Results were presented at a conference in Delhi on May 30-31 2013, attended by the Deputy Chair of the then Planning Commission and the Minister for Rural Development, who was in charge of cash transfer policies. In eight villages in Madhya Pradesh, every man, woman, and child was provided with a monthly payment of, initially, Rs 200 rupees for each adult and Rs 100 for each child paid to the mother or guardian; these were later raised to 300 and 150 respectively. A similar scheme in a tribal village was also implemented, where for 12 months every adult was paid Rs 300 a month, every child 150. Another tribal village was used as a comparison. The money was paid individually, initially as cash and after three months into bank or cooperative accounts. Worthwhile lessons for National and state authorities were learned if they are to roll out direct cash benefits across the country.

In the pilots, villagers were not allowed to substitute food subsidies for cash grants. The designers of the pilots believe basic income grants will work optimally with good public services and social investment, and that they would operate better if implemented through an institutional representation. So, as a test of this claim, in half the villages selected, SEWA was operating, while in the other half it was not.

An evaluation survey that studied the basic income grants over eighteen months found a majority of  the recipients did not prefer subsidies (covering rice, wheat, kerosene and sugar), and as a result of the experience of basic incomes more came to prefer cash to subsidies. Ten results stood out:

1. Many used money to improve their housing, latrines, walls and roofs, and to take precautions against malaria.

2. Nutrition was improved, particularly in scheduled caste (SC) and scheduled tribe (ST) households. Perhaps the most important finding was the significant improvement in the average weight-for-age of young children, and more so among girls.

3. There was a shift from ration shops to markets, made possible by increased financial liquidity. This improved diets, with more fresh vegetables and fruit, rather than the narrow staple of stale subsidized grains, often mixed with stones in the bags acquired through the shops of the PDS, the government-regulated food security system.

4. Better health helped to explain the improved school attendance and performance, which was also the result of families being able to buy things like shoes and pay for transport to school. It is important that families were taking action themselves.

5. The scheme had positive equity outcomes. In most respects, there was a bigger positive effect for disadvantaged groups – lower-caste families, women, and those with disabilities. Suddenly, they had their own money, which gave them a stronger bargaining position in the household. Empowering the disabled is a sadly neglected aspect of social policy.

6. The basic income grants led to small-scale investments – more and better seeds, sewing machines, establishment of little shops, repairs to equipment, and so on. This was associated with more production, and thus higher incomes. The positive effect on production and growth means that the elasticity of supply would offset inflationary pressure due to any increased demand for basic food and goods. It was encouraging to see the revival of local strains of grain that had been wiped out by the PDS.

7. Contrary to the sceptics, the grants led to more labour and work. But the story is nuanced. There was a shift from casual wage labour to more own-account (self-employed) farming and business activity, with less distress-driven out-migration. Women gained more than men.

8. There was an unanticipated reduction in bonded labour. This has huge positive implications for local development and equity.

9. Those with basic income were more likely to reduce debt and less likely to go into greater debt. One reason was that they had less need to borrow for short-term purposes, at exorbitant interest rates of 5% a month. Indeed, the only locals to complain about the pilots were moneylenders.

10. The policy has transformative potential for both families and village communities. The whole is greater than the sum of the parts. Unlike food subsidy schemes that lock economic and power structures in place, entrenching corrupt dispensers of BPL (Below Poverty Line) cards, rations, and the numerous government schemes that supposedly exist, basic income grants gave villagers more control of their lives, and had beneficial equity and growth effects.

The reasons for this success: A cash transfer could give beneficiaries greater freedom to spend the money on what they deem important. A PDS of in-kind transfers could reduce choice of food. Rising income of households was more likely to result in dietary diversity, (for example through increased milk consumption) for those that did not have Above Poverty Line or Below Poverty Line cards, as cardholders were more likely to depend on cheaper cereals which were part of the PDS, the NITI Aayog study found. Further, "the transparency of a cash transfer would also reduce corruption. Everyone would know what everyone is supposed to be receiving," said Guy Standing, the researcher who was part of the MP basic income experiment. Also, proving conditionality to become eligible for transfers can be an additional burden on the poor, with many opting out because they are unable to secure the necessary documents, such as proof of income or proof of an institutional delivery, Standing added.

Following is a summary chart of arguments for and against UBI:


Macro-Economic Impact of UBI:

Given that over 60% of the Indian population is dependent on agriculture while drawing measly incomes from the same, a huge chunk of income goes to purchasing basic needs such as food. Thus, when agricultural prices rise, the part of income spent on food rises leading to lesser demand for manufactured and other products. This lack of demand then forces capital goods used for production to sit idle. Shiv Hastawala of Indian Institute of Management, Lucknow, derives from the above that "a direct cash benefit like UBI would increase the size of the income cake, thus providing a cushion for such uncertainties so that other goods can be purchased once basics are taken care of. This increased demand then induces unused capacity to be utilized, which pushes the economy towards achieving its potential output."

At the grassroots level in India, savings and investment decisions are made by the same individual because low-income households do not have access to financial markets. They have to depend on their own savings. UBI could increase their savings potential, which could help accumulate capital assets like farming equipment, livestock, and raw material, as has been the case with the Madhya Pradesh UBI pilots. Such investments increase productivity and income of the low-income category which forms a majority of the workers and consumers. This then ripples across the economy via the multiplier effect.

Most of the labour employed in India works in the unorganized sector which is characterized by extremely low levels of productivity. With desperate dependence on land as the only means of livelihood and the absence of wealth forces, these workers are stuck in this sector under the poorest of work conditions. UBI would decrease their ‘clinging to land’ since their incomes would effectively increase along with increasing their potential for wealth accumulation. The resulting induced shift in employment from the unorganized to the organized sector would then expand GDP because the latter happens to be a high productivity sector.

Since India is a demand-deficient economy, an overall demand increase induced by UBI would not initially raise the general price level since existing idle capacity would then be utilized to meet higher demand at the prevailing prices. This increased capacity utilization would in turn raise employment throughout the economy, thus raising the level of incomes and expenditure. Inflation would set in only after the full capacity utilization point, beyond which supply cannot keep up with rising demand. By then, the economy would have found a new equilibrium with a higher level of savings and investment such that a sustained general price rise triggered by UBI is only a distant possibility.  

Similarly, In the South African economy, researchers noted that the potential effects of UBI include improved labour productivity, higher aggregate labour supply, increased private investment, and increased spending by the poor. They concluded that cash benefits shift aggregate demand towards more labour-intensive, job-creating industries such as food and healthcare, because they increase the consumption of the poor primarily in food and healthcare related goods. Thus, it can be seen that UBI could potentially be beneficial for the Indian economy in terms of output, employment, and inflation.

- By Mr. Krishna Monie