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UBI or Helicopter Money: The Way Forward for India

The National Human Rights Commission of India (NHRC), in its response to the UN Human Rights Commission, has mentioned that the Central government is actively considering the implementation of universal basic income (UBI) in the country. This comes after the recommendation of the Universal Periodic Review (UPR), a process that observes the human rights condition of the UN member states, to the Indian government to continue studying the feasibility of UBI.

The idea of the government supporting its citizens, who otherwise are not able to support themselves for whatever reason, is an ancient one. An article in Investopedia describes how this idea was present even during the time of the hunter-gatherer society. But in an intellectual sense, the idea picked up steam in the 20th century. Initially, the idea of a basic income for all the citizens of the society was only propagated by the intellectuals on the left side of the spectrum. But given the uncertainty brought on by automation, the idea is now accepted by the intellectuals residing on the other side of the center too. 

The COVID-19 pandemic has again brought the idea to the forefront, where many policymakers are considering the idea’s feasibility in their respective countries. Unemployment has reached peak numbers in many countries, which has pushed the most vulnerable in society below the poverty line. There is also the problem of decreasing demand as, during uncertain times, people prefer to hold on to their money. Referring to people’s decisions during uncertain times, Timothy F. Geithner, US Secretary of Treasury during the 2008 financial crisis, said in his book “Stress Test” that rational individual decisions can have catastrophic collective outcomes. It is these collective outcomes only that UBI aims to prevent. 

Although the idea of UBI seems to be particularly new and untested in India, there is another monetary concept that India has been flirting with for some time now. The concept is famously called helicopter money. The idea was first introduced by the economist Milton Friedman in 1969 and was popularized by Ben Bernanke as a suggestion to Japan to fight deflation. The concept is easy to grasp. The central bank of the country will just print the money and credit that amount to the central government’s account and the government will then disburse that amount to the people, no strings attached. The recipients can spend the money on whatever they want. They are not even under the obligation to spend the money. The original motive behind helicopter money was to fight deflation, but now it is also considered to increase the income of people. 

One difference between helicopter money and UBI is that UBI is a payment structure for life, whereas when Milton Friedman proposed the idea of helicopter money, he only suggested a one-time payment. But both of them have one thing in common—  they both increase the income of the recipient. 

To make it completely clear, India has never opted for helicopter money, but India does have some schemes which are like helicopter money. Schemes like National Social Assistance Program (NSAP) and the most recent PM-KISAN scheme are some schemes that serve the same purpose as helicopter money, even if the process involved in the two types of schemes is different. The government does not print money to finance these schemes, but in the end, these are purely income enhancing schemes and people can spend the money without any conditions. 

As mentioned already, many countries have considered implementing something like UBI, even if it means just a one-time payment, and not a permanent for-life payment structure, the decision still has huge implications. The main question is whether these schemes are successful, and have they been able to prove their efficacy. 

In the Indian context, the NSAP scheme has proved to be very effective in increasing output, raising employment, and most importantly, increasing the income of the beneficiaries. A study published in Institute for Human Development calculates the multiplier effect of the scheme. The GOI spent ₹ 6188 crores on the scheme in the year of 2011-12. NSAP was responsible for raising the output by a factor of 3. This means that spending ₹ 6188 crores on the scheme has increased the output to ₹ 18558 crores. The money that was received by the people was used to spend money on various goods, through which the government earned money as tax revenue. The government got ₹ 1020 crores as tax revenues due to the scheme, which is 16% of the initial expenditure. The scheme led to an increase in employment opportunities significantly. According to the findings of the study, the scheme led to the employment of 13,43,000 people. 

Another scheme like helicopter money is the recently implemented PM-KISAN scheme. The scheme was announced in December 2018 and was implemented in 2019. It aims to give ₹6000 to farmers in three equal instalments. As the scheme is relatively new, there have not been enough studies done on the economic effects of the scheme. There is still one study that surveyed 1406 beneficiaries to observe their consumption behaviour. By the time they took the interview, only two instalments had been given out by the government. The study was published in the International Food Policy Research Institute. 

There is no mention of how much money was spent out of the money received, but the researchers did find that if the instalment was given during agricultural season, more than 50% of the farmers used that money on agricultural activities. These activities may include moving to a crop with better yield. The study showed that after getting the money, 57% of the farmers used modern paddy cultivars in 2019, up from 53% in 2015. Farmers can also get their crop insured to hedge their bet against unforeseen circumstances. The behaviour was different during agricultural offseason. In the second instalment, 39% of the farmers spent their money on consumption, and only 23% of the farmers spent the money on agriculture. The other type of expenditures by farmers being in education and health. 

Evidence from Other Countries : After the implementation of the North American Free Trade Agreement (NAFTA), the Mexican government decided to provide some kind of monetary concession to the farmers who will experience a loss in income due to agricultural products coming in from the USA and Canada now. It was called Program for Direct Assistance in Agriculture (PROCAMPO). There was a study done by Elisabeth Sadoulet which also focused on calculating the multiplier effect of the scheme. The study observes that the scheme was responsible for “creating large indirect effects through multiplication of liquidity received”. They calculated the multiplier for the households to be in the range of 1.5 to 2.6. 

January 2019 saw the end of a two year pilot on UBI conducted by the government of Finland. The Finnish government chose 2000 unemployed people and gave them a monthly amount of 560 euros for two years. The findings, when published by the government, revealed that the beneficiaries were happier than other unemployed people. They were also well-fed than others. Apart from this, the scheme is also reported to have a positive psychological effect on the recipients due to the reduced burden of finding a job. But on the other hand, the results also showed that the scheme did nothing to reduce unemployment. 

In the Indian and Mexican cases, we witnessed high multipliers. Large multiplier effects could mean that there was a gap between what the beneficiaries desire and what they could get based on their financial situation. This gap was bridged by the payments given out as they helped in easing the constraints by providing easy liquidity. The fact that farmers rely on the government to fulfil their liquidity needs also points towards the failure of the financial institutions to give out loans to them. 

Given the success of these helicopter money-like schemes in Indian and elsewhere, many economists have suggested that the government should ramp up spending on these schemes, as it is good for the GDP and for raising people’s income. This includes spending on both conditional and unconditional transfers. 

Coming back to the issue of UBI, in May 2017, OECD released a policy brief on feasibility of UBI. The paper suggested abolishing all the present social security schemes to finance UBI, even then some countries can fall short and might need extra revenue to finance a scheme as big as this. The best way to do that will be to either decrease the amount given out or increase the tax revenue. Decreasing the amount given might mean that some people will get less money in this scheme than they were getting from previous subsidies, which will not be politically feasible. On the issue of raising tax revenues, most of the OECD countries already have a very high tax to GDP ratio (in some cases even 50%), and despite this, the exchequer might not be able to finance a fully rolled out basic income scheme. India’s tax to GDP ratio is at a dismal 10.9%, which means India is at a much worse footing than some of the rich countries to be implementing a scheme like this. 

Given all of this, it seems more feasible for the government to stick to its existing schemes. There are a lot of knowns and unknowns that UBI will bring with itself and it is best if the government does what it has been doing for a long time and goes for the already tested schemes. 

Dhairya Nagpal is a second year student at Jindal School of Government and Public Policy. 


One response to “UBI or Helicopter Money: The Way Forward for India”

  1. As I understand, an increased GDP to tax ratio is a prerequisite even before thinking starting the UBI program in India. And thus India needs to expand its current social welfare schemes.

    But what is a feasible GDP to tax ratio that is a benchmark dependent on the population before a scheme like UBI can be implemented?


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