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Is UBI the Way to Remove Poverty in India?

Programmer, Freelance
Nov 3, 2017 12:57 PM 4 min read

How to solve Poverty in India? Is UBI the answer?

The Union Budget of 2016-17 witnessed the revival of the Universal Basic Income (UBI) scheme, which had been on the backburner for over a decade. In a radical bid to reduce poverty and inequality, UBI attempts to cover the basic needs of every individual by transferring a uniform stipend to all citizens, poor or rich at regular intervals.


According to the Ministry of Finance, guaranteeing all citizens enough income and ensuring that their basic needs are covered would promote social justice and will potentially be a more efficient alternative to granting public subsidies. The budget, thus defines UBI as a potent way to achieve Mahatma Gandhi’s objectives of “wiping every tear from every eye”. The scheme has received mixed responses since its announcement earlier this year.


High rate of population growth, greater inequality and the looming prospect of job losses due to automation are some of the reasons that have led India to consider the idea of UBI. Even with several subsidies and welfare programs in place, rampant corruption and leaks in bureaucracy ensure that the actual money doesn’t reach its beneficiaries.


Although UBI seems like an effort in the right direction, there are multiple factors which need to be considered before it is taken to the next level. Elements such as what amount of money satisfies the criteria of ‘basic income’, how to ensure that people most-in-need benefit from it, and what duration is appropriate must be thoroughly investigated before putting across a plan of action.


Following a detailed survey, INR 7,620 per year was suggested as the ideal UBI number. Though this number is less than the minimum wage (INR 176 per day) and is well short of what is required to lead a life of leisure, it would cut absolute poverty in India from 22% to 0.5% according to Arvind Subramanian, the current Chief Economic Advisor to the Government.


What would be the source of this money? Subramanian states that the UBI scheme can be put in place only after withdrawal of existing welfare projects. He however does acknowledge that it is comparatively easier to introduce new programs rather than withdraw existing ones. Essentially, the money needs to be realigned from prevailing welfare schemes to UBI.


The most important aspect is finding an efficient distribution model to setup UBI. The chosen model should simplify the administrative structure and eliminate various levels of bureaucracy to translate benefits directly to the intended. Unconditional cash transfer (UCT) is one of the models that was proposed early on.


Incidentally, there were two pilot projects launched in Madhya Pradesh by UNICEF and SEWA (Self-Employed Women’s Association) to study the effects of income grants on people. As a part of this study, payments of INR 300 and INR 150 was made to adults and kids respectively. The results were positive, and they determined that basic income grants could be a vital part of 21st century social reform system.


It was also claimed that universal schemes could be less expensive when compared to targeted schemes. Another approach was conditional cash transfer (CCT) which essentially meant that a certain specified behaviour was expected from the recipient. One of the prominent examples of CCT is the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) where one takes up a job card and gets a daily wage in return.


The task here would be to ensure that the ‘conditions’ are meaningful from both the government and citizens’ perspective. Both approaches have limitations of their own. UCT runs the risk of moral hazard as utilization of money depends on an individual’s priorities. CCT on the other hand involves a greater level of bureaucracy and hence poses a risk of siphoning of funds and corruption.


However, the benefits of UBI cannot be side-lined simply because of the complexities involved in its implementation. A social security scheme for all will enable better reasoning amongst the youth. It will empower the poor by giving them more control over their money and most importantly will ensure that nobody goes to sleep with an empty stomach.


While Switzerland last year rejected a similar proposal in a referendum to guarantee every adult citizen and long-term resident 2,500 Swiss francs, UBI has already been implemented in Finland as a social experiment for a duration of 2 years. This was done on a very small scale where 560 Euros were distributed to 2000 randomly selected Finns. The main aim of the experiment was to determine if the age-old social security system can be simplified further to provide a stronger incentive for finding employment.


With a lot of kinks to be ironed out, it is still very soon to talk about the full-fledged execution of UBI in India. Moreover, the recently announced Bharatmala and recapitalization schemes could add duress on the government’s already tight fiscal deficit. Incorporating UBI without ample investigation of its financial impact and implementation considerations could prove to be an economic liability.


However, with the International Monetary Fund (IMF) strongly backing UBI as a ‘fiscally neutral’ scheme expected to outperform existing subsidies and increase coverage of lower income group by 20% - it will surely grant political mileage ahead of 2019. For a government known for pushing economic policy on political considerations, this may serve as another electoral tool after all.