Think Universal Basic Capital
30, Jan 2019
Prelims level : Mains level : GS 3: “Indian Economy, issues related to planning and mobilisation of resources, growth, development and employment.”
- Universal Basic Income is a periodic, unconditional cash transfer to every citizen in the country. Here, social or economic positions of the individual are not taken into consideration. The concept of universal basic income has three main features.
They are as following:
- UBI is universal in nature. It means UBI is not targeted.
- The second feature of UBI is cash transfer instead of in-kind transfer.
- The third feature is that UBI is unconditional. That means one need not prove his or her unemployment status or socio-economic identity to be eligible for UBI.
Need for UBI:
- As a form of social security UBI will help in reducing inequality and eliminating poverty. Thus, it ensures security and dignity for all individuals.
- As human labour is being substituted by technology, there will be reduced wage income and reduced purchasing power. UBI will compensate for reduced purchasing power.
How UBI works?
- Under UBI, only those with zero income will receive the full benefits in net terms.
- For those, who earn additional income over the basic income, the net benefits will taper off through taxation.
- So even though the basic income is universal, only the poor will receive the full benefits.
Impacts of UBI to the Government?
- There would be drastic changes in the way government spends its revenue generated from taxation and other sources.
- Currently, Government spends its revenue on various services as well as on subsidies.
- UBI would mean that government may move away from service delivery and empower its citizens to access services through cash transfer.
Advantages of UBI:
- First, UBI would give individuals freedom to spend the money in a way they choose. In other words, UBI strengthens economic liberty at an individual level. This would help them to choose the kind of work they want to do, rather than forcing them to do unproductive work to meet their daily requirements.
- Universal Basic Income would be a sort of an insurance against unemployment and hence helps in reducing poverty.
- UBI will result in equitable distribution of wealth. As explained above, only poor will receive the full net benefits.
- Increased income will increase the bargaining power of individuals, as they will no longer be forced to accept any working conditions.
- UBI is easy to implement. Because of its universal character, there is no need to identify the beneficiaries. Thus, it excludes errors in identifying the intended beneficiaries – which is a common problem in targeted welfare schemes.
- As every individual receive basic income, it promotes efficiency by reducing wastages in government transfers. This would also help in reducing corruption.
- Considerable gains could be achieved in terms of bureaucratic costs and time by replacing many of the social sector schemes with UBI.
- As economic survey points out, transferring basic income directly into bank accounts will increase the demand for financial services. This would help banks to invest in the expansion of their service network, which is very important for financial inclusion.
- Under some circumstances, UBI could promote greater productivity. For example, agriculture labourers who own small patch of land and earlier used to work in others’ farm for low wages, can now undertake farming on their own land. In long term, this will reduce the percentage of unused land and helps in increasing agriculture productivity.
Disadvantages of UBI:
- A guaranteed minimum income might make people lazy and it breeds dependency. They may opt out of labour market.
- There is no guarantee that the additional income will be spent on education, health etc. there are chances that the money will be spent on ‘temptation goods’ such as alcohol, tobacco, drugs etc.
- Given the large population size, the fiscal burden on government would be high. Also, as Economic Survey 2016-17 noted, once implemented, it may become difficult for the government to wind up a UBI in the case of failure.
- If the UBI is funded by higher taxes, especially by the indirect taxes, it will result in inflation. This, in turn, will reduce the purchasing power of the people and lowers the value of the amount transferred.
- A ‘guaranteed minimum income’ might reduce the availability of workers in some sectors which are necessary but unattractive and raise the wages of such works. For example, the wages of agriculture labour might increase due to non-availability of workers willing to work in others’ farm.
Challenges in Implementing UBI:
- According to World Bank, in India, there are only 20 ATMs for every one lakh adult population. Nearly one-third of the Indian adults remain unbanked. With such a state of financial service infrastructure and financial inclusion, it would be difficult for the people to access their benefits.
- Financing the ‘guaranteed minimum income’ would be another challenge. There are chances that UBI would become an add-on to existing subsidies rather than replace them.
- UBI is a powerful idea whose time even if not ripe for implementation is ripe for serious discussion. UBI can help in wiping tears form all eyes, which Mahatma Gandhi dreamed of, but it would also have serious consequences in form of Uncompensated reward harming responsibility and effort; Effect on macro-economic stability of country; and Recognizing exit problem in India, UBI may become another add-on government programme, which would have come to mind of Mahatma Gandhi.
What’s in the Editorial?
- A simplistic universal basic income will not solve the fundamental problems of the economy
The Real Deal:
- India’s GDP is growing quite well, though there are disputes about whether it grew faster under the present or previous governments. There can be no dispute though that India needs to do much better to improve overall human development, in which it continues to be compared with countries in Sub-Saharan Africa. Even its poorer sub-continental neighbours are improving health and education faster. Benefits of India’s economic growth must trickle down much faster to people at the bottom of the pyramid: to poorer farmers, landless rural labour, and hundreds of millions of workers living on the edge in low-paying, ‘flexible’ forms of employment with no social security.
- Economists seem to be offering three solutions to the economy’s structural problems. One, that there is no problem. Two, more privatisation. And, three, a universal basic income (UBI) to be provided by the state.
Ground still to be covered
- Many economists are juggling with statistics to prove that the Indian economy is doing quite well. It is providing enough jobs, they say. And, statistically, poverty has reduced a lot. However, even these economists admit that a lot more must be done to improve education and health care, and to address the persistent informality and small scale of enterprises that are providing most of the employment in the country.
Thoughts of Global Leaders about Business:
- An ideological solution, accompanied with evidence that the government is unable to provide them, is more privatisation of public services. As U.S. President Ronald Reagan said, government is not the solution, it is the problem. However, the private sector is structurally not designed to provide affordable public services equitably. Milton Friedman, who too is often cited, said, the business of business must be only business. Businesses must be run with a profit motive. They cannot take on the burden of subsidising citizens who cannot pay for their services.
Present Scenario of Global Economy:
- Structural forces within the global economy have been driving down wages and creating insecure employment while increasing the mobility of capital and increasing incomes from ownership of capital. Thomas Piketty and Oxfam have also drawn attention to increasing economic inequalities around the world. ‘Industry 4.0’, which has not yet spread too far, is expected to worsen these problems.
- An economic consequence of declining growth of wage incomes will be reduction of consumption. Which will create problems for owners of capital and automated Industry 4.0 production systems. For, who will buy all the material and services that these systems will produce? Therefore, the UBI has appeared as a silver bullet solution.
- It will be an income provided to everybody by the very state that the capitalists say should get out of their way, and to whom they are unwilling to pay more taxes.
Does UBI answers some basic questions if confronts:
- The beauty of a ‘universal’ basic income, its proponents say, is that it avoids messy political questions about who deserves assistance. It also side-steps the challenge of actually providing the services required: education, health, food, etc. Just give the people cash: let them buy what they need. However, if the cash will not provide citizens with good quality and affordable education and health, because neither the government nor the private sector is able or willing to, this will not solve the basic human development problems that must be solved.
Views of Policy makers:
- Some economists who were proponents of UBI, such as Arvind Subramanian, the former Chief Economic Adviser to the Government, have begun to dilute their simplistic concept of UBI to make it financially and politically feasible.
- They propose a QUBRI (quasi-universal basic rural income), targeted only at poorer people in the rural areas. Their scheme is no longer universal. First, it will exclude the not-so-poor in rural areas as morally it should. Political questions about who should be included will have to be addressed. Second, it will not cover the masses of urban poor working for low and uncertain wages.
- Therefore, some other schemes will have to be drawn up for the urban sector, and entitlement and measurement issues will have to be addressed for these schemes too. All the schemes, rural and urban, could be cash transfer schemes, which Aadhar and the digitisation of financial services will facilitate. However, this still begs the question about how to provide good quality public services for people to buy.
- A simplistic UBI will not solve the fundamental problems of the economy. An unavoidable solution to fix India’s fundamental problems is the strengthening of institutions of the state to deliver the services the state must (public safety, justice, and basic education and health), which should be available to all citizens regardless of their ability to pay for them. The institutions of the state must be strengthened also to regulate delivery of services by the private sector and ensure fair competition in the market. The building of state institutions, to deliver and to regulate, will require stronger management, administrative, and political capabilities, not better economists.
Economic inequality matters:
- Some economists say that inequality does not matter so long as poverty is being reduced. In fact, some even say that inequality is necessary to reduce poverty. So long as the people have bread, why should they complain if the rich are eating more cake, they imply.
- However, economic inequality does matter because it increases social and political inequalities. Those with more wealth change the rules of the game to protect and increase their wealth and power. Thus, opportunities for progress become unequal. This is why economic inequality must be reduced to create a more just society.
The Problem with Present economic System:
- In the present economic system, people at the top can make more profits by driving down prices and wages for people at the bottom. They may then recycle a small portion of their profits back as philanthropy, or corporate social responsibility. Or, if they were willing to, which they are not, pay the state more taxes to provide services, and even a UBI, to people at the bottom. Tiny enterprises have very little clout compared with large capitalist enterprises; and individual workers have little power compared with their employers. Therefore, terms of trade remain unfair for small enterprises, and terms of employment unfair for unorganised workers. The solution is the aggregation of the small into larger associations, cooperatives, and unions. Aggregations of small producers, and unions of workers, can negotiate for more fair terms.
An alternative approach:
- A better solution to structural inequality than UBI is universal basic capital, or UBC, which has begun to pop up in international policy circles. In this alternative approach, people own the wealth they generate as shareholders of their collective enterprises.
- Amul, SEWA, Grameen, and others have shown a way. Some economists go further and also propose a ‘dividend’ for all citizens, by providing them a share of initial public offerings on the stock market, especially from companies that use ‘public assets’, such as publicly funded research, or environmental resources.
- Three better solutions to create more equitable growth than the ones on offer are: one, focus on building state capacity beginning with implementation of the recommendations of the Second Administrative Reforms Commission.
- Two, strengthen the missing middle-level institutions for aggregation of tiny enterprises and representation of workers. Three, the creativity of economists could be better applied to developing ideas for UBC than UBI.