Universal Basic Income (UBI): No need for Universal Basic Income, it brings perverse incentives

What’s in today’s article?

• Why in News?
• The Idea of UPI and its Appeal
• How UBI Works?
• Global Precedents
• The Criticisms
• Possible Alternative and Way Ahead

Why in News?

• According to the Chief Economic Adviser (CEA), the Indian economy is now on “auto-pilot” mode and will grow steadily in the range of 6.5% to 7% till 2030, even without further reforms.
• He also said that the concept of Universal Basic Income (UBI) is not necessary for India since natural economic growth would take care of the country’s many aspirations.

The Idea of UPI and its Appeal:

• India has made considerable progress in bringing down poverty from about 70% of the population at the time of independence to about 22% in 2011-12 (Tendulkar Committee estimates).
• However, the effectiveness of the targeted schemes run by central and state governments have always been in question.
  • Targeting is seen as being both inefficient and inequitable, a licence for corruption.
  • For example, the poor and deserving crowded out of BPL card ownership and the rich reaping undeserved benefits.
• UBI envisages a social safety net that seeks to assure a dignified life for everyone. The Economic Survey 2017 devoted an entire chapter to its merits.

How UBI Works?

• The five broad features of such schemes are:
  • Payments at periodic regular intervals (not one-off grants), without requirement of work or willingness to work,
  • Payments in cash (not food vouchers or service coupons),
  • Payments to individuals,
  • Universality, and
  • Unconditionality.
• Typically, it would require subsumption of other subsidies and allowances in order to free up resources so that a particular amount can be directed to people on a periodic basis.
  • There are about 950 central sector and centrally sponsored sub-schemes in the country, which accounted for about 5% of GDP by Budget allocation.
  • The top 11 schemes (PDS, Urea subsidy, MGNREGS, etc) accounted for about 50% of the budgetary allocation.
  • If the states were included, the number of schemes would be even larger.
• In 2019, Sikkim has indicated that it will do away with most subsidies before launching its UBI scheme.

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Global Precedents:

• Finland concluded a two-year experiment on its effects on unemployed citizens, which commenced in 2017.
• The government of Ontario, Canada, had announced a plan to test a kind of unconditional income guarantee for up to three years.
• Some cities in the Netherlands have launched municipal-level trials.
• Barcelona in Spain has tested several potential changes to its anti-poverty programmes, including unconditional cash payments.

The Criticisms:

• Will further lead to inequalities: None of the places where UBI has been tried have levels of income disparity that exist in India.
• Cash transfers could be counterproductive: This is due to –
  • Unproductive spending, reduction in labour force, rise in inflation, moral hazard (Gandhiji – free money will make people lazy), etc.
  • Conditional social assistance pinpoints those who are the most vulnerable.
• Perverse incentives: Such schemes dissuade people from seeking income-generating opportunities.

Possible Alternative and Way Ahead:

• Nyuntam Aay Yojana (NYAY): Ahead of the 2019 Lok Sabha elections, the Congress promised a minimum income support programme, under which Rs 72,000 will be transferred to the poorest 20%/5 crore families in the country.
• Way ahead: Until a consensus on such schemes is established, support should be confined to those who may not be able to participate in economic activities and bring them to a point where they can meaningfully engage in the economy.

Q1) What is the Tendulkar committee?

A committee was formed by the government of India in 2005 to report on methodology of estimation of poverty. According to the committee, the number of the poor in India in 2004–05 rose from 27.5% of the total population to 37.2%.

Q2) Which will be the first India state to implement Universal Basic Income (UBI)?

Sikkim will be the first state in India to roll out the UBI, with the ruling party Sikkim Democratic Front (SDF) including it in its manifesto ahead of the state’s Assembly election.

Source: No need for Universal Basic Income, it brings perverse incentives: CEA | TH | IE