A bold initiative or madcap idea?

As studies in Finland, Ireland and Kenya have shown, Congress' promise of Rs 1 lakh to below poverty line women may not just be an experiment in populism

When the Congress party (INC) announced its intention to offer unconditional cash transfers of Rs 1 lakh/ annum to a woman in each of India’s poorest families, I did some random calculations as a thought experiment. The last census was 13 years ago, and there’s an ongoing fierce debate about what the poverty line is. So the assumptions that follow may bear little resemblance to reality. Also, of course, the INC may not come to power, and hence, be unable to fulfil its promises.

Assume India has a population of 1,400 million, which works out to about 300 million families. Again, for argument’s sake, assume the bottom decile — the 30 million poorest families — qualifies for the handout. That’s Rs 3 trillion a year, or about 1.7 per cent of nominal gross domestic product (GDP). This would make it, by far, the largest universal basic income (UBI) scheme ever contemplated.

In terms of social welfare budgeting, it does not seem like an especially large amount. For context, around 65 million families received “some” work under the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) in 2021-22, at a cost of Rs 1.2 trillion. Activists say around Rs 2.7 trillion would be required for MGNREGA if the full 100 days of work was provided to all those eligible. 

India has a per capita income of roughly Rs 1.5 lakh/ annum, which is, of course, calculated on the basis of (an assumed) 1.4 billion population. The UBI would, therefore, hand out 67 per cent of the per capita income to 30 million. The poorest state, Bihar, has a per capita of slightly under Rs 50,000, and the 30 million recipients would have even lower incomes. Hence, it may be assumed the UBI would more than double the spending power of recipients.

It makes sense, both politically and behaviourally, to target women for the UBI. Politically, of course, it is an attempt to target the female voter. Behaviourally, there are multiple investing studies that indicate women are better at handling money — they are less likely to have a drinking habit, and less likely to be big risk-takers.

In South Asia, these characteristics may be emphasised more, going by the experiences of Grameen Bank in Bangladesh and microfinance institutions in India. Women are more likely to try to build a business that will yield sustainable income if they are given small loans.

As mentioned above, the biggest UBI schemes have been tiny in comparison. The largest involved around 20,000 residents of rural Kenya, a nation with 56 million inhabitants. (Some Kenyans received UBI for longer periods, others for shorter). Finland and Ireland have also experimented with UBIs. Finland (population 5.5 million) gave 2,000 people small sums in a pilot UBI study, and Ireland gave struggling artists (a very small subset of the population) UBI to encourage them to focus on art rather than hunting for living wages. The Kenya and Finland exercises had control groups of similar demographics who did not receive UBI. 

Extrapolating from those studies to draw conclusions on how UBI would work on gigantic scales is likely to be error-prone. What we do know is that UBI in the above cases did seem to generate some employment, and helped alleviate misery by substantially improving the quality of life.

People did not drink the money away and they didn’t splurge on otherwise unaffordable luxuries. Studies claim to consistently find that recipients did not reduce work effort, or spend the money on alcohol or tobacco or other drugs. There were documented improvements in terms of food security and educational attainment, investment in small businesses and long-term earnings. This significantly improved long-term living standards, psychological well-being, and possibly, life expectancy. Given the lack of scale, inflationary impact was not noticed — this is one of the areas where there could be a question mark if there are 30 million recipients.

It doesn’t seem like a madcap scheme — just a logical extension to Keynesian measures like MGNREGA. Intuitively, drawing on what we know from Grameen and the MGNREGA experience, there could be positive outcomes from a large UBI across the poorest decile (or quintile) in India. People would probably invest in small businesses and such a scheme may expand the market for services and products catering to the bottom of the pyramid.