The latest trend in development policy is universal basic income (UBI). The idea of UBI has become fashionable recently in developed countries to alleviate stress caused by the unemployment resulting from automation and globalization. In developing countries, it solves a different problem. The leakages from targeted welfare transfers caused by low state capacity and corruption can be solved by replacing the flawed schemes with a single income transfer available to all. UBI is being sold as the solution to all developmental and social problems, but it is far from perfect. While there are many problems with UBI—in its current form—for India, the most important one is that it takes the pressure off politicians to undertake the structural reforms required to unshackle economic growth.
UBI seeks to eliminate all other welfare benefits and entitlements, which are prone to mis-targeting and leakage, and replace them with a single, clean direct cash transfer offered to everyone. This has some clear benefits. Most importantly, there is no need to evaluate the eligibility criteria, and therefore, there is far lesser discretion in the hands of politicians and bureaucrats. While other kinds of subsidies can create distortions in the market, UBI is a very clean welfare instrument. But the success of UBI depends on actually eliminating all other schemes and using those resources towards the UBI. One of UBI’s great advocates, former chief economic adviser Arvind Subramanian has pointed out that there are 950 welfare schemes administered by the Union government and, many more, if one adds state government schemes. These can potentially be scrapped and replaced by a single UBI.
The Indian politicians’ versions have obviously missed the most fundamentalelement of UBI and botched it conceptually. Instead of replacing welfare schemes with UBI, they intend to add UBI, or in some cases a quasi-universal basic income (QUBI), to the existing schemes. This is most clear in the case of the agrarian crisis, which is caused by the many regulations robbing farmers of their economic choices. Scrapping these regulations would actually help farmers increase productivity, and even help them exit farming. However, politicians have responded by upping subsidies, announcing loan waivers and now, adding QUBI to the mix.
The Bharatiya Janata Party, which championed UBI in the economic survey, has failed to take steps to evaluate the existing welfare schemes that will be replaced by UBI. Opposition-controlled states, such as Telangana and Odisha, have most recently announced QUBI schemes, but the existing subsidies to farmers remain untouched. The Congress, in its version of the UBI—minimum income guarantee—has explicitly said that it will not replace all the existing welfare schemes, but instead, attempt to rationally combine UBI with the most crucial subsidies. Once a welfare scheme or subsidy is announced, it is almost impossible to rescind. So, what we have in India, is a proliferation of schemes, to which they may soon add the very fashionable UBI. As economist Thomas Sowell famously said: “The first lesson of economics is scarcity: There is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
This brings up the other major problem with UBI—the enormous fiscal burden on taxpayers. If UBI, as conceptualized in developed countries, provides a basic living income to all households, then the Indian state simply cannot afford it with its small tax base and young demographic. Subramanian (along with economists Josh Felman, Boban Paul, M. R. Sharan), has instead suggested a more fiscally tenable QUBI—to transfer ₹18,000 annually ( ₹1,500 per month) to eligible rural households. Even this modest sum—not paid universally, but to those who need it the most—is costly. The estimated cost of this QUBI is 1.3% of the GDP, most of which would be financed by scrapping other farmer subsidies and rural welfare schemes. However, no political party wants to follow prudent economics. They intend QUBI to supplement existing schemes without scrapping them, causing the fiscal burden to get out of hand.
The biggest problem with the current focus on UBI in India is that it takes the pressure off the political class to genuinely support structural reforms. After the 1990s, India’s reform agenda has all but ceased, and India is only witnessing a proliferation of regulations, subsidies and welfare schemes. Every government announces new pet schemes, while changing the names of existing ones, and the Indian economy chugs along.
While post-liberalization India has lifted approximately 130 million out of poverty, it still has a long way to go. Schemes, such as UBI, if implemented well, can relieve financial stress and vulnerability, but the real solution to poverty is sustained economic growth. India knows from experience that structural reforms in agriculture, land, labour and capital are essential to unleashing the next bump in growth. Focussing on double-digit growth through reforms would do far more for the poor than simply renaming schemes and adding new transfers.
Indians want opportunities and jobs, not transfers. Politicians on the other hand, want voters to have dependence on welfare transfers such as UBI so as to garner votes. QUBI, and eventually UBI, may be here to stay—just like every other scheme that preceded them.