India should look at conditional transfer of cash, not UBI

With the idea of Universal Basic Income (UBI) catching the popular imagination despite its emphatic rejection by the Swiss last year, one sees in India too the beginning of a serious discussion whether a universal basic income would be a suitable alternative to the unmanageable welter of subsidies and welfare schemes which are in place today.

Proponents of UBI in India state that it would streamline the welfare mechanism, reduce bureaucratic hurdles and corruption that plague the current system while effectively combating poverty.

There are merits to this argument: the Indian public distribution system (PDS), for example, is in shambles in many states. Corruption and institutionalised pilferage, along with bureaucratic mismanagement, have led to many of the poor being denied access to food. Further, even those who receive rations complain that the quality of food is abysmal. Similarly, MNREGA —the Indian government’s largest welfare scheme — is also believed to be marred by corruption and leakages.

However, despite the drawbacks, UBI does not appear to be a plausible alternative. First, the proposed system in India is hardly universal; it aims to only cover individuals adjudged to be below the poverty line. This makes sense from a fiscal perspective: India’s population is too large to meaningfully support everyone with a basic income. However, this leaves the system vulnerable to corruption. Just as in the case of PDS, we could have many poor households excluded from the scheme while some better off families get access to the basic income through bribery or nepotism.

Second, the system seeks to blindly implement a Western idea in the Indian context. Facing increasing automation, many European countries considered UBI a palliative measure to ease the pain of increasing unemployment as industries adopted technologies that replaced labour. Indeed, Finland launched its pilot basic income scheme to combat this problem.

India, however, does not face this issue yet. The formal part of the Indian economy is dominated by services, a labour intensive sector. In fact, there remains a severe shortage of personnel in critical government sectors as well. This points to the fact that unemployment in India is not due to some Schumpeterian transformation that has made labour obsolete. Instead, it is a reminder of how lack of education and skill has prevented large sections of the youth from being absorbed into the labour force. Providing a basic income, while a short-term fix, may disincentivise skill building and education amongst the unemployed. This would, in the long run, hurt the goal of poverty alleviation.

Finally, rolling out a basic income scheme does not imply that the existing welfare programs could or would be phased out. Both politicians and bureaucrats alike would want to maintain the status quo of the “scheme raj”, the former for votes and the latter for bribes. But the fact remains that UBI is an expensive proposition; supporting the existing welfare programs while simultaneously providing a basic income would be fiscally well-nigh impossible.

Instead of looking at Europe, whose problems differ markedly from our own, we should instead focus our attention on the welfare strategies of developing nations. Brazil’s Bolsa Familia —literally ‘Family Allowance’—could serve as an ideal example of how a relatively poor nation could implement an effective welfare system.

Launched in 2003 as an amalgamation of various other existing Brazilian schemes, the new program was also a cash transfer program. The difference here was that the cash transfer was not unconditional, as in the case of UBI. Instead cash was transferred to parents on the condition that they would get their children vaccinated and send them to school. While a few critics have accused the program of discouraging work and running up a fiscal deficit, these claims are largely unfounded in facts.

There is evidence to suggest that being part of the Bolsa Familia program has had no significant impact on the labour supply decisions of the enrollees. Further, numerous studies attest to the significantly positive impact of the program on school enrolment and children’s health outcomes. Even the World Bank — an institution historically known for imposing market fundamentalist “structural reforms” on developing nations — has appraised the program as a success.

So, can we replicate the Brazilian model in India? Keep in mind that the Indian state is no stranger to the idea of conditional cash transfers. The Janani Suraksha Yojana (JSY), launched in 2005, is a centrally sponsored cash transfer scheme that aims to incentivise pregnant women to give birth in hospitals, nursing homes or clinics rather than their homes. By promoting institutional deliveries, the scheme aims to reduce the maternal mortality rate in India. But while the scheme has been successful in raising the number of institutional births, the maternal mortality rate has not been affected greatly. This is because poor medical facilities nullify the advantages of institutional births.

This means that for an Indian Bolsa Familia to work, the state would have to invest heavily in health and education, while simultaneously transferring cash to poor families on condition that they send their children to school and avail vaccination facilities. The upside is that such a scheme would serve to meet both the short-term goal of immediate poverty alleviation and the long-term goal of economic growth and development through gains in human capital. If rigorously tested and carefully implemented, such a scheme could provide far more extensive benefits over an expensive basic income program.

(The author is a student of Economics at Colby College in the United States)