Transferring money to people

Although an old idea, Universal Basic Income (UBI), in recent years has gained significant momentum. UBI, in layman’s term, can be defined as an unconditional monetary transfer by the government to its citizens. The crippling economic structure attributed to Covid-19 has brought this idea once again in limelight as unemployment and financial hardship spread across the globe. Often the transfer figure matches the poverty line, reducing the portion of people below poverty line almost instantly. Supporters believe that UBI has the potential to grease the wheels of the economy while increasing the demand side consumption and decrease the growing inequality.

Alaska has been following such a program since 1982 where every resident, including children, gets $1,000 to $2,000 a year. The Alaska Permanent Fund paid each resident an average of $1,606 in 2019, all out of oil revenues and it was found that three-fourths of recipients save it for emergencies.

Meanwhile, in 2010, the government of Iran started a UBI trial, that transferred citizens around 30% of the median income every month. It was observed that poverty and inequality reduced. Additionally, people used it to invest in their businesses that led to the growth of small enterprises.

In India, the idea of UBI appeared with the 2016-17 Economic Survey. The survey outlined a design for a ‘quasi’ UBI, suggesting ₹7,620 per year to 75% of the population. According to Carnegie India, for the aforementioned transfer amount, the cost of this quasi-universal basic income would be around 4% of India’s Gross Domestic Product ( GDP ).

Private consumption, investments, government expenditure and net exports-imports are the leading indicators through which an economy’s GDP is calculated. For India’s case, private consumption contributed to around 60% of its GDP. Hence, a steep fall in consumption, attributed to a loss of wages during the lockdown imposed to contain the contagion, has been a worrying sign. A report by International Monetary Fund projects global growth in 2020 to be pegged at -3.0%, the worst since the Great Depression. In the midst of a consumption slump, India is projected to grow at 1.9%. To revive the economy, and get production back on track, economists have time and again spoken about the need to deliver the money directly into people’s hands and UBI can be one potential tool through which this can be done.

However, it must be noted that if the government tends to such an approach, a concomitant increase in production must take place. If a section of citizens receives a basic income, it would instantly spring up the demand, increasing inflation. In the present scenario, a small rise within the window of controllable inflation will be favourable; however, if authorities aren’t able to assure an increased supply, higher prices would again make the essentials unaffordable to those at the bottom of the income pyramid.

Challenges

Implementation at large scale will always be a mammoth challenge. A clear definition of people eligible under the ‘quasi-UBI’ will be necessitated. Corruption and malpractices have time and again hollowed government policies drafted to benefit the poor. Subsidies designed for the needy end up being usurped by the rich whereas Jan Dhan Accounts experienced high activity right after demonetisation. Moreover, even after identification, getting money into people’s hands can be an arduous task. Despite a push to increase financial penetration by ramping up Jan Dhan Yojana accounts, usage of these bank accounts has remained significantly low. World Bank’s World Findex Survey noted a prominent rift between the opening of such bank accounts and actual usage. Hence, not only identification but efficient and transparent delivery of such cash transfer into the hands of needy will also have to be checked.

While money directly into the hands of needy at this time of economic slump may definitely uptick consumption, a continuous transfer even has the potential to inflate the economy and raise inflation, if supply is not increased. Hence, the government will have to be watchful of production lest what may be a guaranteed income for people, it would not raise their standard of living.