Is free money desirable? Mahatma Gandhi had argued against free money or charity, arguing that it makes people lazy and they drop out of the labour market. The Economic Survey 2016-17 presented in parliament Tuesday, a day ahead of the general budget presentation, however argues that a Universal Basic Income (UBI) could be a replacement for the current in-kind socio-economic development programmes like PDS and NREGA, as they mostly miss the targets. Given the link between misallocation and exclusion errors, a UBI that improves allocation of resources should mechanically bring down exclusion error, argues the report. Furthermore, by virtue of being universal, exclusion errors under the UBI should be lower than existing targeted schemes.
Instead “cash transfers (conditional and unconditional) raise the income of households for each unit of labour it already supplies and so can afford to reduce labour without necessarily affecting the household’s income”, states the Economic Survey.
Authored by a team headed by Finance Ministry Chief Economic Advisor Dr Arvind Subramanian, the report argues that rather than provide a UBI in addition to current schemes, it may be useful to start off by offering UBI as a choice to beneficiaries of existing programmes. 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 for the state to make good its promise – sometimes mandated by law – to support the most vulnerable. Furthermore, these are easily identifiable groups of individuals.
What would a UBI potentially cost? If a target poverty level of up to 0.45 percent is chosen and the 2011-12 consumption level is computed for the person who is at that threshold, then the income needed to take him/her above Rs 893 per month, which is the poverty line in 2011-12, will come to Rs. 5,400 per year. Further scaling up that number for inflation between 2011-12 and 2016-17, the total would come to Rs 7,620 per year for 2016-17. Assuming that the well off are excluded from the UBI provision, the economy-wide cost is expected to be 4.9 percent of GDP.
Given the amount of cash that will flow through the system under the UBI and the fungible nature of money, one could imagine a perverse equilibrium where the UBI results in greater capture by corrupt actors. Indeed, it is an open question if a UBI today will necessarily work better than simply universalizing other in-kind transfers it replaces, the Economic Survey admits. This, once again, reiterates the role of a transparent and safe financial architecture that is accessible to all – the success of the UBI hinges on the success of JAM (Jan Dhan, Aadhar and Mobile).
To plug leakages and to ensure no deserving beneficiary is excluded, the report moots developing 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. This process, the report notes, however goes against the proposed universal nature of the programme. Given the number of people living in abject poverty and millions living without social security of any kind, UBI or any other programme that ensures better life without taking them out of labour force may be worth looking at, the economic cost permitting.