IAS Economics Note: Universal Basic Income

Updated On -

May 24, 2019

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Mansi Topa

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Universal Basic Income is one of the important topics in Economic Surveys. As complete one chapter is dedicated to UBI, why it is needed, how to implement it and what are the challenges faced in implementation.

So we will try to give you conceptual view of Universal Basic Income through this article. It will be helpful for the aspirants preparing for IAS

Universal Basic Income

Universal Basic Income/unconditional basic income/Citizen’s Income/basic income guarantee/basic income/universal demogrant is a form of social security payment in which all citizens or residents of a country receive an unconditional sum of money periodically, either from a government or some other public institution, in addition to any income received from elsewhere.

In UBI, Social or Economic positions of the individual will not be taken into consideration.

The Universal Basic Income concept has five main characteristics. They are as following:

  1. Periodic: UBI is paid at regular intervals, not as a one-off grant.
  2. Cash payment: UBI is paid in an appropriate medium of exchange, allowing those who receive it to decide what they spend it on. UBI is not, therefore, paid either in kind (such as food or services) or in vouchers dedicated to a specific use.
  3. Individual: UBI is paid on an individual basis—and not, for instance, to households.
  4. Universal: UBI is paid to all, without a means test.
  5. Unconditional: UBI is paid without a requirement to work or to demonstrate willingness-to-work.

How does UBI function

As per UBI scheme in India, only those individuals with zero income will receive the full benefits in net terms. For those individuals, who earn additional income over the basic income, the net benefits will lessen through taxation. Therefore, even though the basic income will be universal, only the poor will receive the full benefits of UBI.

Why Universal Basic Income?

As UBI is a form of social security, it will help the government in reducing inequality and eliminating poverty, therefore, ensuring the security and dignity for all the individuals. As human labours are being substituted by technology, there will be less wage income and low purchasing power. UBI will thus compensate for reduced purchasing power.

Advantages of UBI

  • Universal Basic Income will act as an insurance against unemployment and hence will help in reducing poverty.
  • UBI will give individuals freedom to spend the money according to their wish. In other words, UBI will strengthen the economic liberty at an individual level which will help individuals choose the kind of work they want to do, rather than forcing them to do unproductive work to meet their daily requirements.
  • UBI would result in equitable distribution of wealth.
  • Increased income will increase the bargaining power of individuals, as they will no longer be forced to accept any working conditions given by their employers.
  • UBI is easy to implement. Because of its universal character, there is no need to identify the beneficiaries. Thus it rules out errors in identifying the intended beneficiaries which are a common problem in targeted welfare schemes.
  • Since every individual will receive basic income, it will promote the efficiency by reducing wastage in government transfers.

Disadvantages of UBI

  • Given the large population size of India, the fiscal burden on the government would be high. UBI might become difficult for the government to wind up in the case of failure.
  • A guaranteed minimum basic income can make individuals lazy and it will also breed dependency.
  • There is no assurance that the additional income given to individuals will be spent on education, health, etc. there are chances that the money can be spent on alcohol, tobacco, drugs, etc.
  • 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 individuals and lowers the value of the amount transferred.
  • An assured minimum basic income may reduce the availability of workers in some sectors which are necessary but unattractive and raise the wages of such works.

Importance of UBI to the Government

At the present time, Government spends its revenue on different services as well as on subsidies. Providing UBI would mean that government may move away from service delivery and entitle its citizens to access services through cash transfer. There will be substantial changes in the government’s way of spending its revenue generated from taxation and other sources.

Challenges in Implementation of UBI?

As per World Bank Report, there are only 20 ATMs for every one lakh adult population in India. About 1/3 of the Indian adults remain unbanked. With such a state of financial service infrastructure and financial inclusion, it will be difficult for the people to access their benefits through UBI.

Financing the assured basic income would be another challenge. There are chances that UBI might become as an add-on to existing subsidies rather than replacing them.

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UBI and ‘JAM Trinity’

JAM or Jan Dhan-Aadhaar-Mobile is a new scheme from the Government of India under which citizens are motivated to open a zero balance account and link their account to Aadhar Number. Currently, there are as many as 26.5 crore Jan Dhan accounts across the country which covers 21 percent of the country population. Of these 26.5 crores accounts, 57% are Aadhaar seeded. More than a billion Aadhaar cards have been distributed. When the trinity of Jan-Dhan, Aadhaar, and Mobile is fully adopted, a more efficient mode of delivery would be available. JAM system would be used to provide funds to each individual directly into his or her account.

The main problems in ‘JAM Trinity’ are as follows:

  • A large number of Jan Dhan accounts are inactive.
  • Nearly 1/3 of the Indian adults remained unbanked.
  • Issues in mobile network connectivity, especially in rural India.

Economic Survey 2016-17 Report about UBI

The Economic survey 2016-17 believe that in practice any program cannot strive for strict universality. So survey proposes some alternatives.

  • The first alternative proposed by committee is that the survey targets bottom 75% of the population of the country and this is termed as ‘quasi-universality’. The cost for this quasi-universality is calculated to be around 4.9 percent of GDP.
  • The second alternative will target women, who generally face worse prospects in employment opportunities, education, health or financial inclusion. An UBI for women can reduce the fiscal cost of providing an UBI to about half. Giving money to women also reduces the concerns of money being used on other stuff.
  • Third, to start with an UBI for certain vulnerable groups such as widows, pregnant mothers, the old and the infirm.

But, if any one of the above alternatives is implemented, it will also face the problem of ‘exclusion error’ in the identification of beneficiaries. Efficiency will be reduced.  Most importantly, UBI will not remain ‘universal’.

*The article might have information for the previous academic years, please refer the official website of the exam.