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Universal Basic Income: Would Direct Cash Transfer (DCT) to Jan Dhan (PMJDY) accounts increase demand?

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Adrit Chaturvedi
I am an engineering undergraduate student at IIT Delhi

With the merit-recognition of Development Economics and its promoted means to uplift the poor, there have been scholarly suggestions of public policy which are direct applications of its subject matter. One such policy is that of a universal basic income, i.e., government-guaranteed income to individuals and households. In literature, [Banerjee, Niehaus, Suri; 2019] noted- “there are good reasons why UBI may actually contribute to the growth process in poor countries.” Specifically, within the policy structure of India, there exists a provision of what is called, ‘Direct Cash Transfer’ or DCT.

It is recognized as a form of a larger scheme named, ‘Direct Benefits Transfer’ or DBT; in other words, DCT is a form of DBT where the benefit is cash. Moreover, with the extension of PMJDY accounts to all unbanked individuals, DCT to PMJDY accounts is a pragmatic policy. So, the suggestion is seemingly easy to understand- the government shall transfer cash, which is not a payment for specific goods or services, to the bank accounts of poor individuals depending on the households they constitute. A fascinating theme of this policy is that the individual is free to use this money however they may choose. Quantitatively, it would take the following form- i.e., a suggestion by Abhijit Banerjee -500 rupees per person; so 2500 rupees for a family of five. 

While this suggestion is for the whole nation, we would seek to address the elements of the state of the Indian economy in general and that of Bihar specifically. The choice of Bihar is a theoretical contraction of a ‘Poor Country’ to a ‘Poor state’. Bihar has the lowest NSDP- Net State Domestic Product -per capita of all states in India, i.e., 30167 rupees in 2018-19 at 2011-12 prices; national level is at 92565. Moreover, Bihar has the lowest Annual Inflation rate for CPI, i.e. 1.25 in October 2019; the national level is at 4.62. Further, Bihar sees the second-highest inter-state and international emigration every decade. These indicators strongly signal poverty in Bihar.

However, a peculiar reality of Bihar exists in its rural-urban divide of the economy. We recently noted the lowest inflation rate in Bihar; however, urban Bihar’s inflation rate is higher than the All India urban inflation rate, 5.39 and 5.11 respectively. It may now be apparent that rural Bihar’s inflation ought to be highly discounted to All India rural inflation rate so that Bihar- rural and urban combined -tallies to the lowest in the country. Needless to say, such is the case- rural Bihar’s inflation rate is 0.55 as opposed to 4.29 of rural all India.

As we noted earlier that the individual has the freedom to use the cash transfers according to their will, we would seek to understand the individuals’ tendencies to use this money in various ways. Hence, at this point, we would like to emphasize two essential themes of the Indian economy- migration and savings- which, in our opinion, is highly relevant to India generally and Bihar specifically in regards to DCT. The proportion of India’s population which are migrants by the place of birth happens to be very high. 

In 1991, 27.4% of the population were migrants; In 2001, 30.6% of the population were migrants; In 2011, 37.6 per cent of the population were migrants. Interestingly, the proportion of migrant males in 2011 is the same as it was in 1991, i.e., ~ 23%. However, the proportion of women migrating has significantly increased, i.e., 32% in 1991 through 45% in 2001 to 38% in 2011- -it is not just the proportion, migrant women have been greater than migrant men absolutely. So, women migration increased by 65 per cent from 1991 to 2011. It is also observed that the leading cause of migration is not work/employment but marriage, which stood at 46% of all migration in 2011. 15.4 crore women in 2001 were migrants due to marriage and, in 2011, this number rose to 20.6 crores.

The proportion of this class of women is similar, i.e., 65-70 per cent. So, as of 2011, 66 per cent of women in India have migrated from their place of birth due to marriage. In Bihar, specifically, as Bihar Economic Survey notes, 75% of all migration occurs due to marriage, i.e., 63% more than the all India level, of which 98 per cent are women; only ~3% of the migration was due to work. After UP, Bihar is the largest source of migrants and has the lowest net migration to the state. It is also important to note that only roughly half of the migrants have migrated between rural areas. 

Concurrent to the rise in migration, and migration due to marriage, there has been an increase in household savings- as noted by Prof Vaidyanathan in his book India Uninc. Since its lowest level in the 1950s, the Gross Domestic Savings (as a percentage of GDP) has grown from 8 per cent to its highest level in the 2010s, i.e., 34.6 per cent. Particularly, 22% of the GDP was household savings. In other words, every year, a fourth of the country’s production is essentially household savings. In terminology, ‘household’ includes private unincorporated businesses as well; this indicates that the savings of real households and investments of small businesses are a very large producer of our national income. Regarding the form of household savings, as of 2011-12, two-thirds of the Household savings are physical and the remaining third is physical. Moreover, according to RBI’s ‘Report of the Household Finance Committee’ of 2017, 88 per cent of an investor’s wealth is in physical forms of gold or real estate.

We can suspect, at this point, that Bihar (and other poor states alike) is observing a phenomenon where unmarried rural women migrate to urban Bihar or outside Bihar for marriage. Where, they set up households and drive up household savings; as opposed to doing the same in rural Bihar. Moreover, these households are high savings households- mostly in gold or real estate- i.e., which largely contribute to the GDS and further the GDP. More generally, in essence, the potential drivers of economic growth in India- i.e., unmarried young women who eventually become housemakers and save -move out of rural areas to either urban places within the state or outside of the state at substantial rates. In Bihar, this is particularly true with a significantly higher rate than that of other states.

If DCT to PMJDY accounts were to be used substantively as a universal basic income, the financial saving account of the individuals would be immediately increasing. Pertaining to the observations we drew above- i.e., a household’s inclination to save in physical assets and unmarried rural woman’s to migrate by marrying elsewhere -there is a substantial probability that the cash is used to simply buy physical assets, such as gold, or as funds for the marriage of the unmarried woman in the household. In other words, in terms of theoretical speculation of incentive, a rural household seems more inclined to use direct cash transfers to build up physical savings and as means to migrate and/or for funds for the marriage of the daughter(s), than the consumption of retail goods.

However, if development economists are able to conclusively submit that in an economy that is driven by household savings and itself assumes high migration, individuals/households would procreate households in rural areas with a guaranteed income, the conclusion may change. 

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Adrit Chaturvedi
I am an engineering undergraduate student at IIT Delhi

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