March 2019

Idea Cost and Solution of Universal Basic Income in India

Cost of Universal Basic Income in India

Idea of Universal Basic Income has been floating around in the world for quite sometime. It has started gaining traction in India as well because a national political party has proposed Universal Basic Income of Rs.321/- per day to every unemployed person of the country if the win Parliamentary Election 2019.

Let us delve into the details of cost and impact of this proposal on the economic health of this country. According to, India's labor force participation in 2018 was 52.5%, which on the population of 1.284 Billion population, works out to be 674.1 Million or 67.41 Crore. Unemployment Percentage stood at 6.1% in 2018 which is highest in recent past and works out to be 41.12 Million. In 2018, workforce employed in agriculture sector in India stood at 42.5%, which works out to be 287.84 Million. This number can very well be put under underemployed workforce.

According to a report published in Times of India on February 5, 2018, workforce engaged in sectors other than agriculture but falls under unorganized sector stood at 111.1 Million on 11.1 Crore. Out of this number 60% are employed in it, which brings the actual number at 66.66 Million. So, roughly 354.50 Million of 35.45 Crore people can be brought into the category of underemployed.

Low skilled workers earned average Rs.10,900/- per month, though it may be lesser in rural areas. Proposed Universal Basic Income is Rs.321/- per day to unemployed people. If we work it out on annual basis, then total immediate cost will be Rs.475183 Crore or USD 67.31, which is 2.28% of India's GDP of USD 2948 Billion. But this is just one side of the picture. A big chunk of workforce who are underemployed will gradually start leaving the work and opting for proposed Universal Basic Income. This has the potential to take away Rs.4096610 Crore or approximately USD 580 Billion and it works out to be 19.86% of GDP of 2018. Let’s bring in one more perspective.

Since most of the low skilled workers are engaged either agriculture or manufacturing sector, this proposed UBI will pull down efficiency and productivity are of both the sector. Moreover, this proposed amount being not huge enough to encourage capital expenditure at family level, this will only increase consumer expenditure especially in food. Drop in supply and increase in demand will have magnifying impact on food inflation.

Challenges of Creating Employment

India’s unemployment rate was 6.1% and GDP grew at 7.3% in 2018. A simple thumb rule is, if GDP grows by 1%, it creates additional job by 0.5%. So, to cover up this job gap of 6.1%, GDP needs to grow at least by additional 12-12.5% immediately, which is not possible. India produces around 65 Lakh graduates and 15 Lakh Post Graduates every year. Moreover, it add around 1.2 Crore workforce in the market every year, which is roughly 2% of present workforce participation.

 It means, to cover this job demand growth, India’s GDP needs to grow by at least 4% from the present level. To cover the job demand growth, India’s GDP is required to grow between 11-12%. To cover the gap of additional 3% from this present gap of 6.1%, GDP needs to grow further by 1 to 1.5% for next 6-7 years. So, we can conclude that, solve the India’s job demand problem, GDP needs to grow by 13.5-14% for a period 7-8 years, after that it can settle for 11-12%, nothing less. 

If we add the underemployment problem, the situation will become quite sever and looking at micro and macroeconomic environment, this is an impossible feat for any government. Actually, the socialist economy we chose to become after independence made us a risk-averse nation and we as a nation become the country of job seekers. To consolidate our financial and social position, we kept adding degrees to individual kitty. We kept adding slabs to make our position higher and make it difficult for others to reach, but we remained committed to be servant and subservient someone or other. Entrepreneurship is the only option and the environment should be made conducive for it. “Ease of doing business” comes later; government should focus on “ease of starting business” and “ease of sustaining business for initial years”. Parents also need slow down in chasing this engineering and seven figure salary dream for their ward. They must not set the value of life in terms of money only. 

Land Reform as a solution

India’s total workforce is around 675 Million, out of it, 42.74% or 288.11 million are employed in agriculture, 23.79% or 160.37 million are employed in manufacturing sector and 33.48% or 225.69 million are engaged in service sector. Agriculture sector contributed 15.87% of GDP, which in real terms for 2018 will stand at USD 468.85 Billion. Manufacturing sector and services sector contributed 29.73% and 54.40% respectively for the same year which in real term will stand at USD 876.44 Billion and USD 1603.71 Billion. If we extrapolate these numbers, then we find out the productivity of a person employed in agriculture sector and manufacturing sector stood at USD 1623.85 and USD 5465.17 respectively against USD 7105.86 of service sector. 

We all know that more than anything else, the size of land holding and land holding pattern of the country are biggest bottleneck of increasing agriculture productivity. According to Agriculture Census, operational land holdings in India are 138.35 million hectare with an average size of 1.15 hectare. Out of total holdings, 85% belongs to small and marginal farm categories with less than 2 hectare. This size is hampering the mechanization of agriculture in big way hampering not only production but overall productivity as well creating income and social disparity, which often forces workforce to abandon field and move to urban areas in search of employment, creating even bigger problem of underemployment. Though small scale industries can help in solving the employment problem to some extent, but large industries are required for capital formation, job creations at all levels and have multiplier effect on the nation’s economy. But establishing big industry has been facing the biggest challenge of land acquisition. Since this issue is connected with small and marginal farmers, it gives huge political opportunity any political party. Singur in West Bengal is latest prime example of challenges of land acquisition in the country. More than anything else, education and transparency in dealing are two prime steps which should be taken by the government. Since size of landholding is very small per farm household and their dependency is huge on that small land, parting away with it becomes more of a emotional challenge than financial challenge. The fear of going broke completely can be aroused in the owner’s mind. Second challenge is the circle rate. Normally, lands are registered at very low value in government records than what actually it has been sold. If the circle rate is very low than “prevailing market rate”, then obviously it will create a problem because government compensation will depend on the circle rate and not on the “prevailing market rate”. In every business transaction, all the parties look for something extra, so, if there are employment opportunities or the opportunity to provide services which can be given to locals, either after training them or by without training, then it must be discussed in advance and in transparent manner with complete agreement. And all of it needs to be told to the land owner in no unclear terms and in fact it must be the part of information which should be inculcated to every Indian like it has been done in the case of polio immunization or similar drive. This will not only help manufacturing sector but agriculture sector as well. Increased production will mean increased productive participation, increased productivity, increased income in the hands of workforce and new employment opportunities.

Unemployment Challenge Of India

Economists classify "Unemployment" into three categories; frictional, cyclical and structural. 

Frictional unemployment is least of economists worry because it occurs due to incessant movement of workforce from one location to another or due to different stages of life cycle or students leaving job to pursue higher studies or woman leave the job for child birth. 

Cyclical unemployment is much more serious problem and it occurs when economy dips into recession. This kind of unemployment macro-economists world over has spent most of the time trying to solve. 

In the increasingly technological age, third type of unemployment occur and that is structural unemployment and this needs much more attention now a days. This kind of unemployment occur when there is a mismatch between available jobs in the market and workers skill. Structural unemployment often results when technological change makes someone's job obsolete. Structural unemployment also occurs when there is a mismatch between location of job openings and location of job seeking workers. 

Now, if we look at the Indian job market, we can find the mix of cyclical and structural unemployment patterns. Though if we mix economics with politics in the discussion, then we may not get the right answer and solution. 

Indian economy has been going through quite a roller coaster ride since economic liberalization in 1992-93. Economic liberalization exposed Indian to new kind of economy and that service sector economy. Everything was going on well but dot-com bust post 2000 gave a big jolt to world economy and India could not remain untouched. Though this dot-com bust was largely concentrated to USA, but when US economy sneezes whole world’s economy catch cold. 

Economy picked up steam once again but 2007-08 subprime crisis of US market again shook the financial and job market world over. Estimated cost of this crisis for this planet earth stood somewhere around USD 15 Trillion and 80 Million job.

Almost every country pumped in billions of dollars into their economy to keep it afloat and drive consumption to drive manufacturing to drive job creation. Before India could recover from the jolt of US Subprime crisis, series of corruption cases against the then incumbent government started surfacing and that led to complete policy paralysis. It, in turn hurt the investment and business scenario very badly. 

In 2014, new government took over with new hope to revive the economy. Business scenario again started looking up but two decisions in quick succession gave a big jolt to the economy running on cash. Now each side can give the opinion for and against these two decisions and both can be right.

Apart from all this, India became the hotbed of technology based economy. By the beginning of this century, we were struggling to get the proper electricity and landline phones even in big cities and by 2004-05 we had cheapest call rates and by 2016, we had the cheapest data rates. 

Before organized retail could even find its foothold, e-commerce changed the market dynamics completely. 

While half of the workforce was still lumbering in the muddy fields, India joined the league of countries adopting technology at super speed. India couldn't have left one and chosen other but challenges posed by mix of both needs to be studied, understood and solved carefully, without playing politics around it. New generation is not illiterate as their earlier generation of 70s or 80s of last century were. Social media and digital world has ensured one thing is that everything mentioned here gets recorded and indexed by one platform or other. So, there will be no escaping for anyone in coming five years time. Division on religion or caste lines won't work because technology will bring more transparency and newer generation will be more educated. So, political rhetorics won't work for long.

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