Financial Inclusion and Poverty Reduction - Universal Basic Income

Financial inclusion refers to the availability and accessibility of financial services, such as banking, credit, insurance, and savings, to all segments of society, including the poor and low-income groups. The objective of financial inclusion is to provide individuals and households with the necessary tools and resources to manage their finances, improve their economic situation, and reduce poverty. 

Financial inclusion can help in poverty reduction in the following ways: 

Access to banking services: Financial inclusion provides access to basic banking services, such as savings accounts, loans, and credit. This can help individuals and households to manage their finances better, save money, and build assets. 

Financial literacy: Financial inclusion also provides financial education and literacy programs to help people understand how to use banking services and products effectively. This can help individuals and households to make informed financial decisions and avoid financial traps and scams. 

Access to credit: Financial inclusion provides access to credit, which can help individuals and households to start or expand small businesses, invest in education and health, and improve their livelihoods. 

Risk mitigation: Financial inclusion also provides access to insurance services, which can help individuals and households to manage risks associated with illness, accidents, and natural disasters. This can help them to avoid falling deeper into poverty. 

Note: The table above is not exhaustive and there may be other ways in which financial inclusion can help reduce poverty in rural and urban areas. 

 Universal Basic Income 

• Universal Basic Income (UBI) is a form of social security where every adult citizen, irrespective of their income, receives a fixed amount of money from the government on a periodic basis. 
• UBI is an unconditional cash transfer that is deposited directly into the beneficiary's bank account, aimed at augmenting their purchasing power in the open market. 
• The term 'universal' in UBI implies that it is meant for every citizen of the country, but in reality, it may not include the rich and middle-class families. 
• The Interim-Budget of 2019 allocated about ₹12 lakh crores for various schemes, out of which ₹3.3 lakh crores were allocated for subsidies. 
• However, schemes and subsidies often suffer from inclusion and exclusion errors. Inclusion errors occur when non-poor or well-to-do families receive benefits, which is also known as the "free-rider" problem. Exclusion errors occur when real poor families do not receive the benefits they are entitled to, leading to wastage of resources. 
• Leakage is another issue with schemes and subsidies, where a significant amount of money (around 20-36%) allocated for schemes like PDS and MNREGA is lost to corruption by middlemen and bureaucrats. 

UBI and Poverty 

• Despite significant progress in poverty reduction, around 22 percent of the population in India still lives below the poverty line, according to the Tendulkar Committee report of 2011-12. 
• Poverty alleviation programs often face criticism for significant leakages, making UBI a more efficient alternative. 
• UBI empowers individuals by providing economic liberty, allowing them to choose the kind of work they want to do and reducing the need for unproductive work to meet daily requirements. 
• UBI can help reduce inequality and eliminate poverty, ensuring security and dignity for all individuals. 
• Basic income transfers can promote greater productivity, such as enabling agriculture laborers to undertake farming on their own land, leading to increased productivity and reduced unused land. 
• The direct transfer of basic income into bank accounts can also increase the demand for financial services, leading to investment in the expansion of the service network and aiding in financial inclusion efforts. 

Economic Survey 2017 on UBI 

• A safety net can prevent people from experiencing deprivation and destitution. However, the Public Distribution System (PDS) may suffer from issues such as leakage and diversion.  
• Providing financial assistance directly to those in need to purchase goods from the open market could be a better solution.  
• The Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) is not ideal because it may lead to a shortage of farm laborers and is plagued by corruption and mismanagement.  
• Some people may face unfavorable circumstances due to factors such as their birthplace, caste, or economic status, while others may experience unexpected events such as natural disasters or personal tragedies that result in financial difficulty.  
• Universal Basic Income (UBI) could aid them in overcoming these difficulties and realizing their aspirations. PAN cards are already linked to bank accounts, making it possible to exclude wealthy and middle-class individuals from the program with relative ease. Therefore, implementing UBI should not be overly challenging.