Chapter 09 : Universal Basic Income – Highlights of Economic Survey 2016-17

Union finance minister Arun Jaitley tabled the Economic Survey 2016-17 in Parliament during the first day of the budget session. Here are the major highlights from Chapter 9 of Economic Survey 2016-17.

What is universal basic income?

• Universal Basic Income is a form of social security paid to individuals, not households, and it is paid to everyone. That’s how it becomes universal.
• It can be paid in kind (such as food or services) or in vouchers or can be a direct transfer into bank accounts to help reduce leakage.
• The government will offer about $15 a month (1,000 rupees), and only to families below the poverty line (BPL).
• It is paid at regular intervals, say monthly, not as a one-off grant.
• It is unconditional and paid without a requirement to work or to demonstrate willingness-to-work.
• Finland and Scotland are planning pilot runs. Switzerland rejected the plan.
• The virtue of this arrangement, it is claimed, is that it would eliminate poverty and yet leave some over to actually raise public investment.
• UBI is not framed as a transfer payment from the rich to the poor. Its basis is rather different. UBI gives concrete expression to the idea that we have a right to a minimum income, merely by virtue of being citizens.

Components of UBI

UBI has three components:

1. universality
2. unconditionality
3. agency (by providing support in the form of cash transfers to respect, not dictate, recipients’ choices).

Why should we think about UBI?

Social Justice: UBI is, first and foremost, a test of a just and non-exploitative society.

Poverty Reduction: Conditional on the presence of a well-functioning financial system, a Universal Basic Income may simply be the fastest way of reducing poverty.

Agency:  The poor is offered choices to determine what should he/ she consume as cash transfers are made.

Employment: They allow for more non-exploitative bargaining since individuals will no longer be forced to accept any working conditions, just so that they can subsist

Administrative Efficiency: In India in particular, the weakness of existing welfare schemes  enhances the case for UBI.

State capacity: UBI is not a substitute for state capacity: it is a way of ensuring that state welfare transfers are more efficient so that the state can concentrate on other public goods

When the trinity of Jan-Dhan, Aadhaar and Mobile (popularly referred to as JAM) is fully adopted the time would be ripe for a mode of delivery that is administratively more efficient.

Insurance Against Risk And Psychological Benefits

Poor households (in fact even many of those above poverty) are often faced with shocks such as bad health  job loss  etc. A study shows that slightly more than 50 percent of rural households across India face one or more forms of shock, with the most prominent such as crop loss, water borne diseases, loss of property, cyclones, drought, etc.

The Conceptual Case Against UBI

From an economic point of view there are three principal and related objections to a universal basic income.

1. UBI reduces the incentive to work – The levels at which universal basic income are likely to be pegged are going to be minimal guarantees at best; they are unlikely to crowd incentives to work.
2. Should income be detached from employment? Any society where any form of inheritance or accepting nonwork related income is allowed, already detaches income from employment. So, receiving a small unearned income as it were, from the state should be economically and morally less problematic than the panoply of “unearned” income our societies allow.
3. Concern out of reciprocity :  If society is indeed a “scheme of social cooperation”, should income be unconditional, with no regard to people’s contribution to society? The short answer is that individuals as a matter of fact will in most cases contribute to society. In fact, UBI can also be a way of acknowledging non-wage work related contributions to society, for example, homemaking contributions of women are largely unacknowledged economically,this can be acknowledged through UBI.
4. Promote conspicuous spending : Detractors of UBI argue that, as a cash transfer programme, this policy will promote conspicuous spending or spending on social evils such as alcohol, tobacco etc. There is a general perception that cash transfers get spent on these ‘temptation goods’. This is indeed a crucial point especially if UBI is expected to replace other in-kind programs such as PDS. The NSS 2011-12 data points out that these goods form a smaller share of overall budget/consumption as overall consumption increases This provides an indication that an increase in income from UBI alone will not necessarily lead to an increase in temptation goods consumption

Why Should we go for UBI? What are the problems with the existing programmes of poverty reduction?

The Budget for 2016-17 indicates that there are about 950 central sector and centrally sponsored sub-schemes in India accounting for about 5 percent of the GDP by budget allocation. The problems with the existing programmes are

Misallocation

• The poorest areas of the country often obtain a lower share of government resources when compared to their richer counterparts.

• Several districts which accounts for larger share of poor receives lesser amount. On the other hand some other districts comprising of large share of the poor receive more than-proportional share of the spending.

Why misallocation occurs? : One major explanation for misallocation is state capacity – resources allocated to districts are often a function of the district’s ability to spend them; richer districts have better administrative capacities to effectively implement schemes.

Consequence : A natural consequence of misallocation is  that genuine poor will be unable to access benefits of poverty eradication programmes.  For instance, consider the states of Bihar, Madhya Pradesh, Rajasthan, Orissa and Uttar Pradesh: despite accounting for over half the poor in the country, these states access only a third of the resources spent on the MGNREGS in 2015-16.  This almost certainly implies that some deserving individuals are left out.  An estimate of the exclusion error from 2011-12 suggests that 40 percent of the bottom 40 percent of the population are excluded from the PDS.

How can a UBI overcome the issues faced by present welfare schemes?

Misallocation to districts with less poor

• The UBI, by design, should effectively tackle issues related to misallocation. Beneficiaries are simply required to withdraw money from their accounts as and when they please, without having to jump through bureaucratic hoops.
• The simplicity of the process also implies that the success of a UBI hinges much less on local bureaucratic ability than do other schemes.
• By focusing on universality, UBI reduces the burden on the administration further by doing away with the tedious task of separating the poor from the non-poor.

Out of system leakage

• Conceptually, a UBI reduces out of system leakage because transfers are directed straight to the beneficiaries’ bank accounts.The scope for diversion is reduced considerably, since discretionary powers of authorities are eliminated almost wholly.
• UBI’s expanded coverage will likely impact out of system leakage since the state is answerable to a larger section of its citizens.
• Given the fewer avenues for leakages, monitoring a UBI would be easier than many other schemes.

Exclusion error: By virtue of being universal, exclusion errors (error occurring when genuine poor doesn’t benefit from scheme implemented for them) under the UBI should be lower than existing targeted schemes

Better Targeting

• An immediate and intuitively appealing solution to the fiscal costs of UBI is to make it a targeted basic income scheme, attempting to guarantee a basic income to only the poor and the deserving.
• However, India’s record of targeting welfare programmes to the poor has been suspect. Recognizing this, the government of the day attempted to measure poverty using an easily identifiable list of criteria and a simple scoring methodology through the Socio-Economic Caste Census (2011).
• Simultaneously, acknowledging the inherent problems with targeting, individual states- like Tamil Nadu and Chhattisgarh – universalized access to the PDS and a few other government schemes.
• The National Food Security Act (2013), in a clear break away from targeting to a minority of the population, mandated access to the PDS to nearly 70 percent of all households, choosing to exclude only the identifiably well-off.
• This gradual move will lead to  higher coverage and lower leakages.
• Technology can be the game changer in better targeting.

Financial inclusion and UBI

According to Financial Inclusion Insights (FII – 2015),while ownership of bank accounts has increased to about 2/3rd of all adults in India, active use has increased to about 40 percent.

Geographically, most of the country has over 50 percent of adults owning banking accounts.

How to improve financial inclusion?

Improving financial inclusion is both a demand and supply side challenge.

Demand side : On the demand side, there is a need for behavioral change on the part of account holders so that they use their accounts more often,

Supply Side : On the supply side, banks need to find it profitable to provide access to banking services. Increasingly, banks have been making use of BCs to provide last mile access to banking. The profitability is highly dependent on the volume of transactions per BC, and one can model scenarios where a UBI can lead to increased financial inclusion through an increased number of transactions.

Access to Formal Credit  : A UBI can potentially also unlock credit constraints in the form of a higher income. As one moves along the consumption spectrum, the proportion of farmers taking informal loans falls and formal loans take over.

How will we determine UBI amount?

• The process of determining a UBI amount is not a one-time exercise: as the UBI is a cash transfer, its ‘real’ value tends to be determined by inflation in the economy.
• It is, therefore, important to index it to prices such that the amount gets revised periodically.
• Politics can play a huge role in determining the exact amount each time it is up for revision and so it is important to set up a sufficiently politically neutral mechanism to do so. Setting UBI as a constant share of the GDP  overcomes this complication.

Guiding Principles for Setting up a UBI

Universality in principle, quasi universality in practice

If universality has powerful appeal, it will also elicit powerful resistance. In that light and keeping in mind fiscal costs, the notion of transferring even some money to the well-off may be difficult.

How to exclude well off from UBI?

Below, is a list of four by which we can exclude the rich from UBI

1. Define the non-deserving based on ownership of key assets such as automobiles or air-conditioners or bank balances.
2. Adopt a ‘give it up’ scheme wherein those who are non-deserving chose to opt out of the programme
3. Introduce a system where the list of UBI beneficiaries is publicly displayed
4. Self-targeting: Develop a system where beneficiaries regularly verify themselves in order to avail themselves of their UBI – the assumption here is that the rich, whose opportunity cost of time is higher, would not find it worth their while to go through this process and the poor would self-target into the scheme.

Gradualism

A key advantage of phasing would be that it allows reform to occur incrementally – weighing the costs and benefits at every step.

There can be different approaches of gradually adopting a UBI. The eventual goal of each approach, however, is to inform the path towards a de facto UBI.

Rather than providing a UBI in addition to current schemes, it may be useful to start off by offering UBI as a choice to beneficiaries in place of existing programs.

• It gives people agency, not only in that they have greater choice, but importantly because they have greater power in negotiating with the administrators who are currently supposed to be giving them benefits. For example, the dealer knows that if he diverts the rice for his own purposes, he faces the threat of exit – beneficiaries will switch to a UBI. Designed in this way, UBI could consequently not only improve living standards; it could also improve administration (and cut the leakage costs) of existing programs.
• However, there are at least two concerns with the process listed above: one, by allowing the UBI as a choice over current entitlements, it reinforces all the current problems with targeting. This also ensures continuity of the misallocation problem. Another problem is that this would be administratively cumbersome.

UBI for women

• A UBI for women can, not only reduce the fiscal cost of providing a UBI (in the form of higher social benefits) but have large multiplier effects on the household. Giving money to women also improves the bargaining power of women within households and reduces concerns of money being splurged on conspicuous goods.
• The UBI could also factor in children in a household to provide a higher amount to women.
• This addition, though, has three potential problems – one, it may not be easy to identify the number of children in a household; two, it may encourage households to have a greater number of children; and three, phasing out boys from beneficiary list once they reach a certain age (say 18 years) may not be easy to monitor and undertake.

UBI for certain vulnerable groups

• Another approach is to phase in a UBI for certain vulnerable groups – widows, pregnant mothers, the old and the infirm – first.
• This would serve as a means to support the most vulnerable and these are easily identifiable groups of individuals.
• Previous studies show that leakages in pensions are already low and while the maternity benefits pilots suffer from implementation problems, there is some evidence to show that they have helped smooth over medical costs for the poor.  However, as things stand today, there exist exclusion errors in both these schemes. These groups of persons are less likely to have access to bank accounts and are further away from the JAM frontier.

Prerequisites for UBI

JAM

• Crucial to the success of the UBI is effective financial inclusion. Nearly a third of adults in India still do not have a bank account and are likely to be left behind.
• These are also likely to belong to the poorest social groups – women, SCs, STs, the ageing and the infirm – who benefit most from state-funded subsidies.
• In terms of JAM preparedness, considerable ground has been covered rapidly, but there is quite some way to go.
• While Aadhaar coverage speed has been exemplary, with over a billion Aadhaar cards being distributed, some states report authentication failures. Failure to identify genuine beneficiaries results in exclusion errors. It is not clear if a universal cash transfer will necessarily result in lower leakages.
• The success of the UBI hinges on the success of JAM.

Centre-State Negotiations :

• The UBI amount will be a crucial factor in ensuring the success of such a programme.
• A key federal question will be the centre-state share in funding of the UBI.
• This would, like the GST, involve complex negotiations between federal stakeholders. Initially, a minimum UBI can be funded wholly by the centre.
• The centre can then adopt a matching grant system wherein for every rupee spent in providing a UBI by the state, the centre matches it.

Conclusion

If, as appears to be the case, that thinkers on both the extreme left and right have all become its votaries, then UBI is a powerful idea whose time even if not ripe for implementation is ripe for serious discussion.

Reference : Economic times

Also Read : Top 10 Key Highlights of Economic Survey 2016-17 for UPSC Aspirants

Also Read: Chapter wise highlights of Economic Survey 2016-17

Chapter 01 – Economic Outlook and Policy Challenges

Chapter 02 – The Economic Vision for Precocious, Cleavaged India

Chapter 03 – Demonetization: To Deify or Demonize?

Chapter 04 – The Festering Twin Balance Sheet Problem

Chapter-05 – Fiscal Framework: The World is Changing, Should India Change Too?

Chapter 06 – Fiscal Rules: Lessons from the States

Chapter 07 – Clothes and Shoes: Can India Reclaim Low Skill Manufacturing?

Chapter 08 – Review of Economic Developments

Chapter 09 – Universal Basic Income

Chapter 10 – Income, Health, and Fertility: Convergence Puzzles

Chapter 11 – One Economic India

Chapter 12 – India on the Move and Churning

Chapter 13 – The ‘Other Indias’ – Highlights of Economic Survey 2016-17

Chapter 14 – From Competitive Federalism to Competitive Sub-Federalism