Modi’s Universal Basic Income Gambit

According to the MSN news, the Modi government is preparing to introduce a universal basic income (UBI) scheme before next year’s general election.

The government will transfer a certain amount into the bank accounts of citizens who are unable to earn an income.

The Centre has been facing a relentless Opposition onslaught over a slew of issues, including agrarian distress and unemployment.

The BJP suffered reverses in assembly polls held in three Hindi belt states in November and December.

What will be the impact of this scheme on the Indian economy? To understand that, we need to first understand what this universal basic income (UBI) is. Once that is understood, it is easy to see its impact on the economy.

What is UBI?

Just like Narendra Modi, many liberal politicians in USA are also running the 2020 Presidential election campaign on the platform of UBI. The democrat candidate Andrew Yang defines UBI in this way:  The idea is that all citizens receive a set amount of money from the government to cover food, housing, and clothing, without regard to income or employment status. This minimum stipend can be supplemented with wages from work. Basic Income Earth Network defines UBI as A basic income is a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement.

After understanding what UBI means, it is time to see its impact.

Theoretical Arguments

UBI is yet another socialist income redistribution welfare scheme like any other that we already have in place in India. Because of this fact, it faces similar problems as all other such welfare schemes.

First, the income redistribution scheme such as UBI faces a huge challenge of financing. India is a country of highest number of unemployed people in the world. There are millions of unemployed people in India. Providing a monthly basic income to these millions will requires billions and trillions of rupees, which the traditional ways of taxation and market borrowing can never raise. In the absence of funds, Modi government will be tempted to use the RBI currency printers. They will simply ask the RBI to monetize their deficit and fund the UBI scheme by creating inflation. This inflation will devastate the Indian economy defeating all intended goals of UBI scheme. A short term benefit to some will result into long term ruin and death for most.

Second, as with any government welfare scheme which relies on income redistribution this scheme will also provide incentive for unemployed people not to seek another job. The basic human nature is that they don’t like to work. If given chance people will like to enjoy leisure. If they don’t have to work to earn their livelihood then they will not work. This will, in fact, exacerbate the very problem of unemployment that the UBI scheme is trying to solve! Not only this, the hard working people, who will now be paying higher taxes in the forms of both direct tax and inflation, will have a disincentive to continue to work hard. When those productive tax payers will know that whatever income they are going to earn will be simply taxed away by the government at higher rates and will be given to unproductive unemployed people, they will refrain from doing any hard work. As is already happening, most wealth generating people will leave India en-mass for some better foreign destination. And once these wealth generators are gone from India, India will become even poorer than what it is today.

Empirical Evidence

As we saw above, many countries like USA, Canada and Finland etc., are already experimenting with the idea of UBI. So what is the empirical evidence coming from these countries about the effectiveness of this so-called social welfare scheme? As discussed by Erin Winick, the year 2018 proved to be a rough year for UBI scheme. Both Canada and Finland refused to extend this program and in the end closed it.

Conclusion

The Indian prime minister Narendra Modi is now desperate to win reelection, after facing defeat in three important Hindi speaking states, and so he is thinking of playing this dangerous gambit of UBI to save his political career. As both theory and historical evidences show, Universal Basic Income Scheme, if implemented, is going to be another disaster like demonetization and GST.