Basic income support: Part of it can be in form of vouchers for food, healthcare, education

Published: July 18, 2020 7:30 AM

Instead of making it universal, make it an income supplement for MGNREGA-covered households, or a support to plug the lack of round-the-year employment.

A UBI promotes equality and provides a backstop for those who lose jobs or fail to get one.

By Rajarshi Ghosh

There is an opinion among many policymakers that Universal Basic Income (UBI) should be a supplement to, or replacement of, all social safety nets. The global economic contraction induced by Covid-19 has prompted this thought in India and elsewhere. Supporters of basic income often believe an unconditional safety net can help people out of poverty, by giving them the time to apply for jobs or learn essential new skills. This is seen as increasingly important in the age of automation, which contributes to unemployment. With the coronavirus pandemic exacerbating the weaker sections’ financial struggles, the Spanish government has decided to implement what it is calling a national minimum income, ensuring that people in around 1 million low-income households get roughly $500 a month in income. The plan aims to reach 2.3 million people, and is expected to cost the government about 3 billion euros a year.

The spread of Covid-19 has fundamentally shaken economies, and people are beginning to question existing economic models: This pandemic has highlighted the existing levels of both injustice and inequality worldwide, which continue to increase. Covid has led to lockdown of many economies, national and local, to a contraction in demand and increasing unemployment and salary-cuts. So, bolder steps are needed, not only to protect people from such catastrophe but also to avoid continued recession.

With demand contraction, contract labour, many people who work in the informal sector as well as some formal sector employees are without jobs. This treatment of labour vitiates the social contract between business and labour whose interests are not separate but aligned. In such a situation would a food safety net, as is being used by India, help? It is a pure grant of five kg of cereals and one kg of lentils per family per month for eight months in 2020. Without doubt, this direct, in-kind transfer of food is useful, but the leakages in the system need to be checked to eliminate any slips between implementation and intent. Would UBI be better? We will try to find out here.

A UBI promotes equality and provides a backstop for those who lose jobs or fail to get one. It could remain as a safety net, but not as an alternative to employment generation. Jobs remain the backbone of a healthy economy, and our focus should be on deepening and widening the labour market. Moreover, for most people, work is an important part of life and money without effort would erode their self-esteem. In such a situation, the MGNREGA could prove a good available solution.

The MGNREGA—guaranteeing 100 days of work each year to rural Indians—is the largest social protection programme in the world, in terms of the number of households covered. Since 2006, it has been expanded to cover all districts in India, providing work to 60 million rural households and 12 crore workers, @ two workers per household today. But there is unevenness in outcomes across the country. MGNREGA implementation depends on the supply of work, rather than the demand for it. Supply is determined by differences in state capacity and intention, and local power relations. Improving employment outcomes requires understanding the demand-driven aspects of MGNREGA through a focus on local-focussed studies and funding, and tracking of outcomes.

Even so, MGNREGA guarantees just 100 days of work, which can be extended to 150 days in times like these. Round-the-year, uninterrupted jobs are not easily available in Covid times. Consumption demand remains a constraint. People have not been able to step out and buy; even though restrictions are being gradually lifted, the uncertainty over future income is holding them back. Because of this, as also other compelling reasons, industry has been hesitant to borrow and spend. In such a situation, what can provide a safety net as well as encourage people to spend and revive demand?

A need-based basic income that can either supplement MGNREGA’s 100-150 days of guaranteed work, or support for 365 days to those who do not have any job, would perhaps be a better option. This could be following Hughes theory of modest basic income @minimum wage per adult per household, totalling about `6,000 per adult per month. It is only $160 per household, assuming 2 adults in a household are benefitted, compared to $500 that Spain’s giving. But, would it really encourage people to spend?

With direct transfer of food, UBI may not be needed. But, when the food support is replaced by income support, it would lead to spending and boost demand as well as provide the needed safety net. But it may not ensure 100% spending and induce people to spend some and save some out of fear of an uncertain future. This is the famous paradox of thrift, which leads to reduced boosting of demand. In such a situation, basic income support in the form of spending vouchers would not only take care of the economy but also give a thrust to the Keynesian multiplier.

Assuming two adults per family, and one gets Rs 6000 in cash and the other gets vouchers worth Rs 6,000 divided proportionally among food and other essential expenditure like medicine, healthcare and education, the money flowing back to the economy would be much higher than a plain UBI, as vouchers have to be spent and some of the cash would be spent on items not covered by the voucher, giving a huge push to the Keynesian multiplier and reviving aggregate demand.

The author is Head, economic affairs and policy, Indian Chamber of Commerce. Views are personal

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