UBI: A solution to poverty or a disincentive to work?

Universal Basic Income (UBI) has again been in the news, thanks to a statement from the Chief Economic Advisor (CEA) ruling out its implementation in India on the grounds that it could create “perverse incentives”, a euphemism for its potential to breed laziness and indolence in people. The CEA further stated that there is no moral or economic necessity at this juncture to adopt UBI.

It is necessary to understand UBI and its many forms if one is to appreciate the concerns of the CEA. In its pure form, UBI is an income sufficient for subsistence, provided by the State to all its citizens, irrespective of their income or work status, and it is this form of UBI which often attracts criticism. There are however, many variants of UBI, which either restrict its universality or impose conditionalities, which find greater appeal.

UBI is a social welfare measure, and unlike conventional social security, which protects individuals and households from disruptions to their earnings capacities caused by health, unemployment, maternity and other issues, UBI is preemptive, as it is not contingent on any event arising, and provides an amount to everyone without any questions asked.

UBI has been considered earlier in India, notably in 2017, when the then CEA had spelt out the need to have UBI. Although this was not followed up, the debate surrounding UBI refused to die down, especially as the principal Opposition party, the Congress party, announced in 2019 that it would implement a variant of UBI, a minimum guaranteed income, if it came to power. Several other parties too have spoken out in favour of UBI or its variants.

There are several reasons why UBI appeals to policy makers around the world. Its simplicity and efficiency appeals to many – after all, what could be better than putting money directly in peoples’ accounts and avoiding tortuous bureaucratic processes, with their propensity for leaks and scams? Another compelling attraction of UBI is its capacity to remove poverty in the shortest possible time, and create a more equal society. Not the least attraction is the fact that UBI, or cash transfers, is politically rewarding because of its immediacy.

Against these benefits are ranged questions of cost, its tendency to reduce motivation to work, its sustainability in the long run and several others. These are genuine concerns, and which may have led to resistance to its adoption in its pure form. However, the inherent features of UBI and undoubtedly its political attractiveness are such that it has not deterred many parties from embracing it in its watered down avatars.

What we have been witnessing lately is targeted cash transfer schemes, which are essentially, fixed amounts of money paid periodically to identified segments, such as women and unemployed youth, and not unlike UBI. Several States have launched such schemes with a view to pulling the poor out of the poverty trap as quickly as possible. The efficacy of these schemes is yet to be evaluated, in view of their recency, and time will tell whether they serve their intended purpose.

Many developed countries are positively inclined towards UBI, because of growing automation and lack of job opportunities, and indeed, several countries such as the Scandinavian nations, USA, Canada and some others have implemented some form or the other, of UBI. The CEA has rightly pointed to the fact that conditions in India are different, and we have the possibility of growing at high rates for many years to come, and absorb the workforce in gainful employment. Adherents of UBI however state that this could be a slow process and take many years for an already large workforce to be absorbed. They further add that poverty levels remain high, despite some notable improvements in the last 15 years, and UBI presents the best way to lift people out of poverty quickly.

Many States, as mentioned above, have taken the plunge and gone ahead with cash transfer schemes. It is not clear whether the schemes are financially sustainable or not, and the answer could differ from State to State, but all the States which have implemented these schemes are quite confident of avoiding any financial problems arising on account of these schemes. This is a fertile area for research because if studies do show that such schemes can be implemented without financial strain, they could pave the way for a more widespread adoption of UBI. If not, they could raise red flags in time.

(The author is former chairman of Pension Fund Regulatory and Development Authority (PFRDA))