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Universalizing a Basic Income for the Informal Sector

Written by Rahul Rajasekar [i] and Aisiri Raj [ii]

[i][ii] Third Year, BA. LLB. School of Law, Christ University 

Source: Picasa

Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.


The informal sector in India can be characterized by those who are dependent on daily wages for their survival and livelihood (International Labour Organization, 2002). They don’t have access to job security as a majority of them are employed on a seasonal or conditional basis. They are also left out of the social security schemes undertaken by the government. COVID-19 that led to a nation-wide shutdown has adversely affected the informal sector, hitting the self-employed, domestic workers, contract, and migrant labourers the worst.

Market failure as a result of COVID-19

While the formal economy includes businesses and corporations that can sustain themselves through offsets and government bailouts, the pressing issue that needs to be addressed by the government is to find ways to rebuild the lives of people engaged in the informal sector, whose livelihood is based on direct cash circulations (Paul, 2019).

The pandemic brings unique problems to the economy such as high transaction costs of running a business due to the imposition of safety guidelines along with a reduced demand for goods due to the decline in the purchasing power of people (Singhal, 2020).

In addition to this, there is a general averseness of the population to spend their money on non-essential goods (Singh, 2020). Therefore, to cut down on their expenses, employers have temporarily or permanently laid off employees or have reduced their pay (Shekhar & Mansoor, 2020). Employers are not under an obligation to offer these workers any job protection due to the nature of their employment.

Bringing in the Government

To alleviate unemployment in the informal sector, the government has announced two distinct schemes in the form of direct cash transfers and in-kind schemes. The non-cash transfer schemes are generally through food distribution programs, increasing the minimum wage, lowering interest, and increasing credits of loans while the direct cash transfers are provided under the PM Kisan Yojana (Indrani, 2020) and the Garib Kalyan Scheme (Parashar, 2020).

The problem with schemes announced during the pandemic, such as an increase in minimum wages for the MGNREGA workers (Mit & Mahapatra, 2020) is that it aims at increasing the purchasing power of an individual in the informal sector (Edwin, 2020) under an assumption that they would be able to work and keep their jobs in a pandemic economy. Similarly, the food security scheme only concentrates on providing free grains and pulses but does not include other necessities (Economic & Political Weekly, 2020) such as vegetables or meat. Although increasing the credit draft limit on loans reduces the burden to repay in such circumstances, the majority of those in the informal sector do not have bank accounts(Gupta & Nair, 2020) and even if they did, usually have a limited understanding of banking schemes and capabilities to access them in person (T & Amarjothi, 2016).

The government’s policies must aim at mitigating the harms that the workers in the informal sector face to make them economically better off and achieve a Pareto superior position.[1] In these circumstances, alternatives such as the PM-Kisan Yojna and the Pradhan Mantri Garib Kalyan Yojana, which are direct cash transfer programs, provide a much efficient solution to the problem (Standing, 2014). The concept of direct cash transfers is the foundation of a Universal Basic Income. It is unconditional periodic cash payments provided on an individual basis as opposed to a household basis, in an economy irrespective of their employment status (Stanford, Basic Income Lab, n.d.).

The prime benefit of a universal basic income is that it provides individuals with a financial source and security (Das, D & Özler, 2005) that would not have been available due to the pandemic.

Individuals now have the ability to decide the means of utilizing the cash (Kapur, Mukhopadhyay & Subramanian, 2008) as the pandemic disproportionately harms the routine of those in the informal sector.

Extending the scope of existing cash transfer schemes

The above-mentioned government cash transfer schemes, although effective, are limited to a few domains or a specific target audience (Sekhar, 2019) and don’t address the urgency of the needs of those in the informal sector (Bindhu, 2020). Unlike Basic Income, it does not provide them with an agency to engage in economic transactions by placing them at the center of the government welfare policy, as the government determines what they should have access to. This prevents them from accessing the goods that would suit them the best in such a situation.

Universal Basic Income is a shift from traditional cash transfer mechanisms that are seasonal or conditional in nature to a one-time cash transfer of a substantial amount. It is necessary to allot more money in such schemes (Duflo & Banerjee, 2020) in order to make a positive difference in the lives of the people who are a part of the unorganized sector. Universalizing an income for those who are not beneficiaries of any of the existing schemes ensure that they do not fall out of the government’s purview and are not left at the mercy of the policies and programs that are concentrated on helping establishments only at the expense of informal workers.

The lack of safety nets in the informal sector has adverse implications on its workers and the pandemic changes their material circumstances and increases their living expenditures.

A scheme of such a measure will only be effective if it takes into account the diversity of each household in the country such as the number of children, the presence of senior citizens along with dependent members. This income must reach every individual who is affected by the pandemic and not just the breadwinner of the family.


[1] “Pareto Superiority refers to an economic transaction wherein at least one person in the world is better off and no one is worse off. It's also known as Hicks-Kaldor efficiency.” Richard Posner, Economic Analysis of Law (1986)


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