Indian Economy: News and Discussion (Jan 1 2010)

[vina]

All you Incometaxwallahs now you have a target to
recover Shart Term Capital Gains From

. Get that from the shorts!

Ek Sherni Aur Sau Langoor! Chikmagalur, Bhai Chikmagalur! . It is the same old story!

[geeth]

New Delhi: BJP leader Sushma Swaraj on Tuesday told Finance Minister Pranab Mukherjee that the government should announce schemes for the people based on needs and not on "lucky numbers".

Referring to Mukherjee's Budget speech in Lok Sabha yesterday in which he had said that he has announced various schemes for the agriculture sector with an outlay of Rs 300 crore each as "three was his lucky number", Swaraj said "schemes should be announced based on needs and not lucky numbers."

She said Mukherjee's decision to provide a mere Rs 300 crore for major schemes related to pulses and edible oil indicated a "lack of vision" on part of the government.

"Three is your lucky number, therefore, you are number three in the party after Congress President Sonia Gandhi and Prime Minister Manmohan Singh ," she said.

The Leader of the Opposition in the Lok Sabha said another example of government's lack of vision was the decision to provide fertilizer subsidy to people living below poverty line.

"A person in BPL category will not have a land to cultivate. What will he do with the fertilizer...will he eat it," Swaraj quipped.

The BJP leader was addressing a programme organised by FICCI here.

http://www.samachar.com/Announce-scheme ... gbfhj.html

Aaaaahaa! What a budget!!

[geeth]

Smoke ’n mirrors


Early in his Budget speech, finance minister Pranab Mukherjee spoke of praying to Lord Indra for a bountiful monsoon and to the Goddess Lakshmi as it was a good strategy to diversify risk. To that list of deities he needs to add, more so since he said 3 was a lucky number, Sonia Gandhi’s National Advisory Council (NAC) since his amazing expenditure compression (restricting growth to just 3.3% over 18.8% in 2010-11) will go for a toss if the NAC doesn’t roll over and die. It’s an impossible call even if that happens since the 3.3% growth is lower than even the 5% inflation the Budget assumes for 2011-12! Mukherjee spoke of introducing the Food Bill the NAC has been adamant about, but has made no allowance for this—indeed, his food subsidy Bill is projected to fall marginally to R60,573 crore as compared to the R80,000 crore estimate for the Food Bill by the NAC and the PM’s Economic Advisory Council’s more realistic R92,000 crore. Which means that Mukherjee either plans to unleash a whole set of delivery reforms—he says the Nandan Nilekani UID-led cash transfers will be in place only by March 2012—or the Budget is in serious danger of going offtrack, much like Ms Banerjee’s last Friday.

Though the Budget has many reforms, the deficit is really the key as the first thing that got the markets all excited on Monday was the R3.4 lakh crore government borrowing target. The target is understated as it doesn’t include R15,000 crore of advances from RBI and R15,000 crore of recoveries from states, but the real determinant is the deficit—the higher it is, the higher the borrowings, and the greater the pre-emption of funds by the government. One of the keys to a lower fiscal deficit in 2010-11 (5.1% of GDP as compared to the budgeted 5.5%) was one-off events—the 3G auction fetched R70,000 crore more than budgeted for (that’s 0.6% of GDP) and revising the GDP from R69,34,700 crore to R78,77,950 crore alone reduced the deficit from 5.5% of GDP to 4.8%—so, Mukherjee’s real fiscal deficit, sans the extra 3G revenues, is 5.7% as compared to the 4.8% it should have been. Neither event will re-occur this year.

None of this is to say the Budget doesn’t have major positives. Corporate tax levels, as Mahesh Vyas points out, have fallen from 35.9% when the UPA first came to power to 32.1% today and limits for FIIs investing in India Inc’s bonds have gone up substantially; the dates for issuing banking licences have been brought forward; allowing foreigners to invest in mutual funds directly is a great opportunity; infrastructure has got a much-needed boost by allowing money to be raised through SPVs, and lowering withholding taxes among others. Greater sops for housing will energise the real estate sector, a major determinant on GDP growth.

That the finance minister has not even given a new time-table for the introduction of GST is disappointing, though he plans to introduce the constitutional amendment Bill in the current session and says the differences with states have been narrowed down considerably. A whole set of reforms are on hold, to be worked out through committees and groups of ministers, though the timeline is not spelt out. This includes one on expenditure reform, on cash transfers, on innovation—a Group of Ministers on environment should please industry no end as it means there will be a larger group looking at their concerns instead of just Jairam Ramesh deciding. Various financial sector Bills are to be introduced, on insurance and pensions for instance, and it does look as if they’ll get passed this time around. Again, a big positive for reforms.

The way the markets reacted to the Budget in a sense tells the story best. As the finance minister spoke of his borrowing targets, of his expenditure reduction and the various market-friendly measures, the Sensex rose by 484 points. Later, as the impossibility of some of the targets became obvious, the markets retreated, ending the day up 122 points. The markets found it difficult to believe that, in a government so focused on the aam aadmi, the Budget would be allowed to reduce subsidies by 13%, or that petroleum subsidies could fall 40% from R38,386 crore in 2010-11 to R23,640 crore in 2011-12 at a time when oil prices are expected to soar in the near future (even if the finance minister doesn’t include the R1 lakh crore the oil PSUs will shell out on his behalf in 2010-11 and more in 2011-12, the lower figure does look curious).

Whether markets continue to rise over the next few weeks, as the finance minister hopes they will given the plethora of market-friendly measures, will depend of whether they are focused on the Budget’s maths or whether they’re convinced a fresh burst of reform is in the offing.

http://www.samachar.com/FE-Editorial--S ... idggg.html

[geeth]

More money for vote banks



The genesis of Monday’s Budget speech by finance minister Pranab Mukherjee lies in the All India Congress Committee (AICC) plenary meeting at Burari in Haryana. An embattled Congress, facing inflation and corruption charges, had decided to affirm its faith in the aam aadmi, the farmer, and in not removing any bit of the fiscal stimulus that had helped India weather the financial downturn.

Thus, Pranab Mukherjee had no difficulty announcing a R1 lakh crore rise in the credit to be made available to farmers through additional pumping of liquidity in the banking system, a 3% interest subvention for those farmers who repay loans on time—making the effective rate of interest 4%—and an increase in R3,000 crore worth of government equity in Nabard. This was perhaps the biggest idea of this Budget.

The idea of five states going in for polls in the next two months too appeared to be playing on the finance minister’s mind. Therefore, anganwadi workers got a 100% increase in wages from R1,500 to R 3,000 per month, keeping nearly 22 lakh women in rural India. Self-help groups, a huge constituency in states like Tamil Nadu, one of the five states to go to polls in May, will get R500 crore, and microfinance will get a boost with the creation of an India Microfinance Equity Fund with an infusion of R100 crore in Sidbi. Nearly 3 lakh handloom weavers would benefit from a R3,000 crore infusion in 15,000 handloom cooperatives across the country.

The Congress’s core constituency of minorities, tribals and Dalits also got their mention in the Budget. The Aligarh Muslim University centres in Murshidabad, West Bengal, and Malappuram, Kerala, (again, poll-bound states) will get R50 crore as grant, as would other universities in poll-going states. Scholarships for tribals under the age of matriculation have been announced, aimed at nearly 40 lakh students. It has to be seen in the context of a renewed emphasis on winning back the tribal vote in Orissa, Chhattisgarh and Jharkhand.

One category missing out is the middle class, which had also voted for the UPA in 2009 and 2004. That could be a constituency to be addressed in the 2014 Budget, perhaps.

The only item in the Budget, apart from the wage hike for anganwadi workers, that got bipartisan support was the announcement that development funds for Maoist extremism-hit areas would have to be spent after extensive consultation with local MPs.

While the agenda for the rest of the Budget session is heavy on reform-oriented legislation, the Budget speech by Pranab Mukherjee was an attempt to bring back the focus on that winner of an election slogan from 2004, “Congress ka haath, aam aadmi ke saath.”

http://www.samachar.com/More-money-for- ... cagdg.html

[Vipul]

Budget: the story behind the numbers.

It took less than a couple of hours for the stock market to figure out that the projected improvement in the fiscal deficit to 4.6% of gross domestic product (GDP) is unlikely to happen. The Sensex ended the day lower than where it was at the start of the budget speech. The bond markets, too, after an initial rally prompted by the government borrowing figure being lower than expected, gave back some of its gains.

What is in the numbers that is so unsettling? First, consider that growth in total expenditure is projected at 3.4% for 2011-12, compared with 18.7% growth in 2010-11. Since the budget assumes that nominal GDP will increase by 14% in 2011-12, growth in government expenditure is far below the increase in nominal GDP. Given the government’s track record, curbing expenditure to such an extent is extremely unlikely.

How has the government been able to show such a low level of expenditure? The finance minister says that subsidies in 2011-12 will be lower by Rs. 20,583 crore than the amount spent on subsidies in the current fiscal. Though oil prices are high, the petroleum subsidy is lower by almost Rs. 15,000 crore. Although the government plans to introduce a right to food Bill, it has kept the food subsidy figure flat. Even the fertilizer subsidy is budgeted at a lower level. Apart from subsidies, guess how much this government for the ‘aam aadmi’ is spending under the head “social security and welfare”? Budgeted expenditure is Rs. 3,401 crore in 2011-12, while they spent Rs. 18,427 crore this fiscal. Either the ‘aam aadmi’ tag is hot air, or the numbers are bound to go up.

What about capital expenditure? The outlay for total capital expenditure in 2011-12 is lower than in 2010-11, but the finance minister says that part of the revenue expenditure is for the creation of capital assets. Taking that into account and after adjusting for capital expenditure on defence, the rate of growth in capital expenditure works out to 23.5%, which is good. Unfortunately, the budget does not give the amount of grants for creation of capital assets in 2009-10, so we do not know what the growth rate has been this fiscal and whether the projected growth rate is achievable. Interestingly, the increase in total capital expenditure, without taking the grants for creation of capital assets into consideration, was a huge 44.6% in 2010-11. By that reckoning, although the 23.5% growth looks impressive, it’s actually quite a deceleration from government capital expenditure in the current fiscal.

Consider also that, in spite of such a huge growth in government capital expenditure in the current fiscal, the trend on gross fixed capital formation this year hasn’t been encouraging. According to the third quarter GDP numbers, growth in gross fixed capital formation has been decelerating steadily—it was 25.7% in the first quarter, 17.8% in the second and a mere 6% in the third quarter.

On the receipts front, the projection of growth in tax revenue for 2011-12 is 17.9%, well below this fiscal year’s growth of 23.5%. With a nominal GDP growth of 14%, that should be achievable.

The rally in the markets on Monday was, therefore, a relief rally, relief that the finance minister has, at least, done no harm. As the heroic assumptions behind the budget projections for 2011-12 sink in, even the relief may fade away.

The government says that GDP growth next fiscal is going to be around 9%. This fiscal, growth is expected to be around 8.6%. The Reserve Bank of India (RBI) has been saying, ad nauseam, that demand conditions are so strong that interest rates need to be raised. But if the government says that growth next year will be 9%, doesn’t it mean that the interest rate hikes are not working and that monetary policy needs to get even more restrictive in future? By insisting that growth will be 9%, the government may be making things even more difficult for RBI.

[Theo_Fidel]

The young today can mostly take care of themselves. The section I worry about is the 300+ million over age 35 with no skill but manual labor. They must be brought into the productive economy somehow. Without them we will always be/feel like a poor country, even in 2050.

http://blogs.wsj.com/indiarealtime/2011 ... _news_blog

India’s Richest Man Worries About Other India

“There can be no peace if a billion-plus people are discontented,” said Mr. Ambani speaking in Delhi at the annual meeting of the Federation of Indian Chambers of Commerce & Industry. “The India story is unsustainable…without including these millions in our progress.”

The magnate, whose businesses cover the gamut from oil and gas exploration to grocery shops, urged fairly similar prescriptions for uniting India to what we’ve heard already: better education, industrialization and an improved rural economy.

He agreed that India needed to become an economy that draws a quarter of its gross domestic product from manufacturing, but said that India should go in for a certain kind of manufacturing.

“I genuinely believe India is very good at complex manufacturing,” said Mr. Ambani, “And this really can employ a bulk of our people.”

[ShauryaT]

Another one by Bibek Debroy.
The list is long

The budget projects 14 per cent nominal GDP growth in 2011-12. That’s lower than the almost standard 14.5 per cent. If growth is going to be 9 per cent, a figure also endorsed by the PM’s Economic Advisory Council, GDP deflator-based inflation is 5 per cent. That’s too low. Inflation is no longer a food price issue. It extends to manufacturing and petroleum products too. Thus, a GDP deflator-based inflation of 6.5 per cent is more likely and the budget probably tacitly accepts slowdown in growth to 8 per cent, if not 7.5 per cent.

...

The budget must become irrelevant. Taxes and expenditure must both become predictable and standardised, with no yearly variations. Once that happens, budgets can become public documents, debated in public before the Finance Bill is passed. That’s what happens in many developed countries. Unlike transient vagaries of Indra, we then rely on a more permanent Lakshmi. But for that to occur, FMs must let go and eliminate discretion.
....

Not only are we reluctant to let go of discretion in taxation, we are reluctant to let go on expenditure too. The public expenditure efficiency case would have been far more convincing had there been a ZBB (zero-based budgeting) of schemes and ministries/ departments and if we had been told what was found when 62 government departments undertook the Programme Monitoring and Evaluation System. Does the Centre need to decide salaries of Anganwadi workers, regardless of location?

It’s not that there are no trees in this budget — there is self-certification for customs, there are infrastructure debt funds, amendment to the Stamp Act, FII investment in mutual funds and budgetary reporting for SC and tribal sub-plans. There are 13,889 words in the budget speech. It meanders and loses focus. It is not clear what the big picture is. The wood is so large, sprawling and extensive that one tends to miss the trees. But perhaps that is what was intended.

[ShauryaT]

But it would be a mistake to assume that all of Capital Expenditure goes towards acquisition. As a rough yardstick, only three-fourths of the capital expenditure budget goes towards capital acquisition. Out of that acquisition budget, 60% would already be due out as payment for committed liabilities. That leaves around (0.40*0.75=0.30) i.e. 30% of the capital budget available for new defence purchases

these assumptions are as heroic as those of Modern Portfolio Theory..How does he know what the composition is for this year? I would in fact expect bulk of the payments for the big ticket items in pipeline (Gorshkov, Phalcon, the new Krivaks) to have happened...Depending on the scheduling in any given year, the composition would change..

The author most likely got it from this report.

>>However, most of the enhanced Budget — nearly Rs. 35,000 crore — would go towards “committed liabilities of the past few years”, said the officials. Govt to hike defence budget

[Ambar]

Thus, Pranab Mukherjee had no difficulty announcing a R1 lakh crore rise in the credit to be made available to farmers through additional pumping of liquidity in the banking system, a 3% interest subvention for those farmers who repay loans on time—making the effective rate of interest 4%—and an increase in R3,000 crore worth of government equity in Nabard. This was perhaps the biggest idea of this Budget.

Yet again, the tax paying middle-class of India has been left holding the bag. No amount of credit to the farmers can result in higher yields and better productivity. It'll just sweep more savings into kitty of NPAs as much of these farmer loans are never repaid. And 'right to food' ? Really? We were all thought that we have to work hard to earn our bread, guess thats a wrong principle to hold. Let the middle-class be doomed with 20% food inflation, 'right to food' will ensure more vote bank freebies.

[somnath]

The author most likely got it from this report

Likely..But to extrapolate on the basis of a single year's "recurring liability" estimate a "typical" trend, as also the fact that only 75% of the budget is "used" - its a bit rich...Richest of course is the estimate of high turnover....

Yet again, the tax paying middle-class of India has been left holding the bag. No amount of credit to the farmers can result in higher yields and better productivity. It'll just sweep more savings into kitty of NPAs as much of these farmer loans are never repaid. And 'right to food' ? Really? We were all thought that we have to work hard to earn our bread, guess thats a wrong principle to hold. Let the middle-class be doomed with 20% food inflation, 'right to food' will ensure more vote bank freebies

Ambar-ji, that is incredibly insensitive to say, and above all, economically daft as well...First of all, you are completely wrong in assuming that availability of credit isnt important for farming - it is perhaps the single most important variable (aside of the monsoons) - study after study has brought that out....Second, we found out during the WTO negotiations on agriultural tariffs that the net subsidy afforded to Indian farmers is incredibly low, ia minute fraction of the percentage (mind you, percentage, not amount) given to farmers in the West...Last, the author makes an absolute ass of himself by arguing against equity infusion in NABARD - NABARD is essentially a refinance (for rural banks/institutions) cum regulatory-cum-consulting organisation that is incredibly profitable..By expnding equity, the govt is only increasing the capacity of NBARD to scale up...As a perspective, you might want to check the relative size of NABARD against Agricultural Bank of China (the nearest Chinese equivalent)...about NPAs, farm NPAs are a small proportion of banking NPAs..A slightly dated report should give you the perspective..
http://articles.economictimes.indiatime ... banks-npas

the amount of corporate sector NPAs written off by public sector banks in the past five years at Rs 20,532 crore is five times that of NPAs written off in the agriculture sector at Rs 4,436 crore.

About Right to Food, you are being more than insensitive by arguing against the concept of making affordable food available to a large part of the populatin..Now India's exact poverty numbers may be a matter of debate, but the fact that there are hundreds of millions of poor isnt up for debate..Our HDI indicators show that, and even Surjit Bhalla would accept that..How exactly to achieve the objective is a matter of debate - and there is a vigorous debate on - but the fact that something needs to be done to ensure that children dont go hungry is as important in political economy terms as it is in pure economic terms..

[somnath]

The markets took the budget really well, even after a day that was spent in "digesting" it...But as said before on BRF (and in many places now), the expenditure target is really ambitious in its parsimony....Barring that, there isnt anything really insightful....Its humdrum stuff, but then, budgets are not really meant to be more than that...

the interesting parts will be implementation of GST and the cash tranfer scheme..

[Ambar]

Somnath, you are not considering the interest rate difference and indirect subsidies that the farmers get. Besides, 1:5 comparison of NPA figures hardly matters as agriculture makes up less than 1/5th of our economy. I always take statistics with a grain of salt, and i find it hard to believe that they have less than 1 billion$ in agriculture NPAs in the last half a decade. Besides, unlike the corporate sector where liquefying the NPAs is much easier and politically less painful, touching agro NPAs is almost an impossible task. And remember, most of these loans go in for re-croping after crop failures and a very small % into better engineered agriculture.

That there are poor all over the world is no secret. When a salaried, taxpaying, middleclass guy has to shell out 40Rs /kilo of rice, and the same rice is distributed at 3Rs/kilo to another section of the society is a good way of creating permanent nanny-state which we can ill afford. A cab driver who might well be earning a 4 times the money of a grade-2 clerk would be eligible for 'right to food', where as a tax paying clerk with quarter of an income will sweat bullets to buy a handful of grain. We all know how well and how fair the socialistic 'food societies' functioned for a good part of our nation's existence.We don't need another one to drain the exchequer.

Create a better society by encouraging equal opportunity and let people work hard and earn the fruits of their efforts. Addiction to free stuff doesn't create a better nation, it just makes it inherently shallow.

[ShauryaT]

Defence budget: Incapable of meeting growing threats

The increase in defence budget from Rs.147,344 crore (Rs 1,473.44 billion) in fiscal 2010-11 to 164,415 crore (Rs 1,644.15 billion) in fiscal 2011-12, reflects a gain of 11.59%.

In real terms, if one looks at the inflation, there is no increase in the Budget.

In fiscal 2010-11, the defence budget allocations were approximately 2.34 per cent of the gross domestic product and in fiscal 2011-12 with the rising GDP they almost remain the same.

The 2.34% is just the allocated portion and in many years due to the misplaced procurement policies, the actual spend is close to 2% of GDP. Imagine, with all our threats, two fricking % - shame and the nation will pay for this continued sin with her blood, honor and maybe her land.

[somnath]

Somnath, you are not considering the interest rate difference and indirect subsidies that the farmers get. Besides, 1:5 comparison of NPA figures hardly matters as agriculture makes up less than 1/5th of our economy. I always take statistics with a grain of salt, and i find it hard to believe that they have less than 1 billion$ in agriculture NPAs in the last half a decade.

You might not be aware of the PSE Index that is brought out by OECD to measure farm support/subsidy..India's PSE is WAY (with a capital W) below any other WEstern country - and that includes both direct and indirect subsidies...You dont want to believe in stats, but form a logic in absence of it? For an estimate of farm sector NPAs, you can also refer to NPAs of regional rural banks or farm sector data released by the major PSU banks - the numbers are not horrendous, not by any stretch..The debate with farm support in India is really of distribution, not of quantum...So should fertilizer subsidy go to fertiliser companies? Or should fertiliser subsidy be nutrient-based? Or should power subsidy be as a cash transfer or as free power, or as a graded pricing policy?

And these are just pure "economic" rationale..One is not even talking about the political economy - how do you progress in a country with 60% rural population?

When a salaried, taxpaying, middleclass guy has to shell out 40Rs /kilo of rice, and the same rice is distributed at 3Rs/kilo to another section of the society is a good way of creating permanent nanny-state which we can ill afford. A cab driver who might well be earning a 4 times the money of a grade-2 clerk would be eligible for 'right to food', where as a tax paying clerk with quarter of an income will sweat bullets to buy a handful of grain. We all know how well and how fair the socialistic 'food societies' functioned for a good part of our nation's existence.We don't need another one to drain the exchequer.

One can cite equally egregious examples for the "middle class tax paying guy" - why should the LPG he uses be subsidised so much..Why should the diesel/petrol (latter less so now) he uses to drive his car be subsidised so much? Why should his education in Delhi Uni be priced @ 3000 rupees/year (or some number like that)...Why was an IIT degree available for 26k/year till a few years back? Or an IIM degree for 1.5 lac (total) till very recently? Why is the AIIMS MBBS available for 10k/year? For that matter, why indeed should there be so many exemptions in direct taxes - both income and corporate?
The list will be very very long indeed...

Lastly, have a look at this - revenue foregone by the govt on account of various tax exemptions..

http://indiabudget.nic.in/ub2011-12/sta ... nnex12.pdf

Leave aside the revenues estimated ot be foregone on indirect tax exemptions - those are very ballpark - take just the direct tax exemptions...Between corporate and individual income tax exemptions, the govt is foregoing 1.4 lac crores this year...That itelf should pay for both NREGA AND the Food Security Bill....Justified?

If the issue is about the Food Security, the debat that is currently on is whether the ambit of it should be universal or targeted. Jean Dreze and his ilk are arguing for universal..The rationale? It becomes self selecting...The middle class, that is used to consuming Lal Qila basmati is not anyway going to buy "inferior" rice @ the lower price...And reduces the issues with targeting..People on the other side, C Rangarajan etc, say that a universal ambit ill riase the costs of the project too much...

Economically, the India project has to be about pulling up the hundreds of millions of people so that they can enter the workforce as useful participants...Lack of food, lack of health and lack of education - all three need to be tackled...The entire laissez faire approach either wont work or will take too much time - too long to prevent social unrest from overtaking us...A la Egypt!?

[Ambar]

It is quite obvious our definitions of 'Indian middleclass' vastly differs! The middleclass is used to 'Lal qila Basmati' ? Sir, what world do you live in? Say that to a milling guy in BEML who sweats out 9 hr shifts for 12000Rs month supporting a family of 4! The so called 'subsidized fuel ' (after 60% of the price/unit is made up of customs/excise/import/state/vat taxes) is the same for everyone, and there is no discrimination through vote bank politics. (Although Kerosene is sold at 1/5th of its market value through food societies - which in turn make its way to black markets).

Those government backed educational institutes also have 'quotas' and massive fees subsidies based on caste/religion and income. So i'm not sure what parity you are talking about.

Lack of food,health and education can be tackled through equal opportunities and not through freebies for one section of the society at the cost of another.

[Mort Walker]

One can cite equally egregious examples for the "middle class tax paying guy" - why should the LPG he uses be subsidised so much..Why should the diesel/petrol (latter less so now) he uses to drive his car be subsidised so much? Why should his education in Delhi Uni be priced @ 3000 rupees/year (or some number like that)...Why was an IIT degree available for 26k/year till a few years back? Or an IIM degree for 1.5 lac (total) till very recently? Why is the AIIMS MBBS available for 10k/year? For that matter, why indeed should there be so many exemptions in direct taxes - both income and corporate?
The list will be very very long indeed...

This is a false analogy. Food is used by all classes all of the time, yet it is priced differently by government entities that determine "class". Other than fuel, the other "subsidies" have much less weight.

[somnath]

Ambar-ji,

Not sure whether you are interested in substantive analysis or not...But you make fundamental errors of assumption...Subsidy on fuel, for example, goes MASSIVELY more to the middle class chap who burns 5 litres of petrol a day in his car than the "poor" chap who burns a few mililitres of kerosene...In educational institutions, despite reservations (which anyways has nothing to do with income) - bulk of the seats (and therefore subsidies) are taken up by the middle class, this includes the reserved category seats...

The question for "equal opporunity" is pertinent - how do you ensure equal opportunity without access to at least the basics?

Other than fuel, the other "subsidies" have much less weight.

How can one conscientously argue against food subsidy for the poor while pocketing 1.4 lac crores worth of income tax exemptions?

People forget a fundamental point - without social cohesion and peace, no economic progress is possible...And access to minimum needs is a right of all citizens......Food (and health and education) are the needs that need to be ensured...And it cannot be left to the "market"...

[amit]

The 2.34% is just the allocated portion and in many years due to the misplaced procurement policies, the actual spend is close to 2% of GDP. Imagine, with all our threats, two fricking % - shame and the nation will pay for this continued sin with her blood, honor and maybe her land.

Shaurya,

I also support the idea that the Defence Budget should be over 3 per cent of GDP. However, if you look at Table 1 of this pdf, then you'll see the Defence Budget has always been under 3 per cent since 1990-91 till 2004-05 when it went over 3 per cent. The figures in the table are till 2004-05 but there are other sources which will tell you that since then it's again gone below 3 per cent.

If we are to do a blame game then I guess the entire political class has to be blamed for this very low allocation (as a percentage of GDP) for Defence that we've been witnessing for the past 20 years.

At the same time a point to be noted is that in most years the Armed Forces return money they could not spend.

A bit OT here but the pdf also gives good, even if a bit dated, information about Pak and Chinese defence spending.

[amit]

People forget a fundamental point - without social cohesion and peace, no economic progress is possible...And access to minimum needs is a right of all citizens......Food (and health and education) are the needs that need to be ensured...And it cannot be left to the "market"...

I can understand folks arguing about delivery mechanisms, leakage of the system, corruption and the rationalities of some schemes. But I'm stumped that one can argue against the basic assumption of social sector spending for the poor!

Sure people should learn to stand on their feet. But are there enough jobs to go around for all the poor in India who actually want to work?

[Mort Walker]

The question for "equal opportunity" is pertinent - how do you ensure equal opportunity without access to at least the basics?

It is the government that determines what equal opportunity is. The central government and several states have failed to provide the basics since independence. What makes you think it can happen now?

How can one conscientiously argue against food subsidy for the poor while pocketing 1.4 lac crores worth of income tax exemptions?

No one is against food subsidies for the poor. It is the current methodology used which is flawed. The basics must be provided in rural areas. In urban areas, where there is significant cash and cash transactions, the opportunity to defraud the system is high and those who need the subsidies, as Ambar pointed out, don't get them.

People forget a fundamental point - without social cohesion and peace, no economic progress is possible...And access to minimum needs is a right of all citizens......Food (and health and education) are the needs that need to be ensured...And it cannot be left to the "market"...

This is a red herring argument. You are suggesting that without subsidies there will be social unrest and that is false.

[somnath]

Mort Walker-ji,

If the opposition is to the methodology, I have no quibbles...there is a lot that is wrong with the current distribution of state subsidies..And BTW, some of the things being talked about go towards addresssing them...But to argue that state expenditure on basic needs isnt required is highly hypocritical from a segment that has just gotten 1.4 lac crores in tax breaks only this year!

And about

The central government and several states have failed to provide the basics since independence. What makes you think it can happen now?

Well, as someone (I forget who) said, lets try new ways...At least we will make new mistakes, rather than continuing on the old ways and continuing to make the same old mistakes that have defied solutions!

[Mort Walker]

^^^The rate of corporate taxes can be argued, but the cost of doing business in India is high for manufacturing due to poor infrastructure. It would be preferable to keep those corporate exemptions to prevent industries from shutting down.

[somnath]

^^^ The same poor infratsructure has a bigger role to play in keeping the poor away from basi services, no?

Anyhow, given that the disucsion has veered to this, I will start what I had said some time back - a discussion on NREGA and its impact..

Why is it important? Well, because the development story in India in the last 20 years is marked by one big failure - inability of reforms to generate enough employment...In fact all variables, employment elasticity, employment growth and elasticity of poverty to PCI growth - have shown declines from the 1983-1993 period to the 1993-2004 period...Linked to that is a less-than-optimal result on poverty alleviation...Numbers vary, but the decline in India's poverty levels is still disproportionate to its achievements in tpline macro in the last 15 years...

NREGA is an attempt to directly address the issues - its a cash tranfer-cum-employment-generating tool..without the inefficiencies/overheads embedded in creating corporate entities..Thankfully, there is now enough data on NREGA for researchers to do both top-down and bottoms-up studies...I am referencing a few:

Top-down theoretical analysis
http://www.ilo.org/public/english/burea ... p17007.pdf
http://www.levyinstitute.org/pubs/UNDP- ... Report.pdf

Bottoms-up empirical analysis
http://www.economistsforfullemployment. ... da_SAM.pdf

There are many more, incl some by Jean Dreze that I will dig out later, but the above give a flavour..

the conclusions are quite clear:

1. The impact on employment is clear, identified and unambiguous..
2. Leakages are less than what is widely estimated (15% ussage) for most public programmes.
3. The income multiplier of the expense is low, as Bibek Debroy and Surjit Bhalla would argue, but IMO that was never the objective in the first place...If the programme influences a material jump in employment elasticity of GDP growth (now at 0.32, down from 0.4), it would have achieved its purpose...

It would be good to have a discussion on the issue..It lies at the heart of not just the programme itself, but at the heart of India's development strategy..

[Theo_Fidel]

Somnath, you are not considering the interest rate difference and indirect subsidies that the farmers get. Besides, 1:5 comparison of NPA figures hardly matters as agriculture makes up less than 1/5th of our economy. I always take statistics with a grain of salt, and i find it hard to believe that they have less than 1 billion$ in agriculture NPAs in the last half a decade. Besides, unlike the corporate sector where liquefying the NPAs is much easier and politically less painful, touching agro NPAs is almost an impossible task. And remember, most of these loans go in for re-croping after crop failures and a very small % into better engineered agriculture.

Agricultural land belongs to farmers. If they should chose not to crop there will be NO harvest. For instance about half of Kerala's farms sit uncultivated because the bribe to grow crops is not sufficient. This is essentially different from all other areas of a competitive economy.

Even in the rich WEST farmers are bribed to grow crops. Agriculture is a horrible profession that people get out of as soon as they get the chance. I would suggest people get used to ever increasing agricultural subsidies or ever declining crop production. We will see how reasonable you can be when there is no rice on your plate or your child's plate. Pah!

[somnath]

Some very interesting data on NREGA experience

http://knowledge.nrega.net/777/1/NREGA-PPT.pdf

Special reference to the amount of employment generated in 3 years - >40 million households, or 220 million people...Greater than the population of Bangladesh (ignoring the double counting of course!)...

[Arjun]

Why is it important? Well, because the development story in India in the last 20 years is marked by one big failure - inability of reforms to generate enough employment...In fact all variables, employment elasticity, employment growth and elasticity of poverty to PCI growth - have shown declines from the 1983-1993 period to the 1993-2004 period...Linked to that is a less-than-optimal result on poverty alleviation...Numbers vary, but the decline in India's poverty levels is still disproportionate to its achievements in tpline macro in the last 15 years...

The inability of reforms to generate enough employment is solely on account of underperformance of agriculture - all other sectors have exhibited good employment growth.

The first priority therefore should be to reform the agriculture sector to make it far, far more dynamic - and globally competitive. That would automatically bring up the rural employment figures, and reverse the load on the cities.

Instead what we have is essentially a 'handout program' that in many ways works against the agricultural sector by removing the pool of laborers available to the farmers. I am not saying it will, but it could also potentially create a dangerous 'entitlement mentality' among the rural poor, meaning this program is not in the nature of stimulus - but a permanent feature that can now never be rolled back.

Also, since NREGA and 'handout programs' obviously generate a bigger vote-bank than agricultural reforms, there is now an active disincentive for the government (specifically INC which has initiated this program) to reform agriculture.

the conclusions are quite clear:

1. The impact on employment is clear, identified and unambiguous..
2. Leakages are less than what is widely estimated (15% ussage) for most public programmes.
3. The income multiplier of the expense is low, as Bibek Debroy and Surjit Bhalla would argue, but IMO that was never the objective in the first place...If the programme influences a material jump in employment elasticity of GDP growth (now at 0.32, down from 0.4), it would have achieved its purpose...

There were supposed to be two outcomes - employment and asset creation. Given enough outlay for the program obviously getting the employment numbers is the easier part. Asset creation, as I pointed out earlier, still needs to be addressed.

As stated above, the key to rural employment is in reforming agriculture. The more the government relies on NREGA instead of taking the necessary steps on agriculture, the worse off the country would be.

[amit]

The first priority therefore should be to reform the agriculture sector to make it far, far more dynamic - and globally competitive. That would automatically bring up the rural employment figures, and reverse the load on the cities.

The first priority therefore should be to reform the agriculture sector to make it far, far more dynamic - and globally competitive. That would automatically bring up the rural employment figures, and reverse the load on the cities.

Sorry boss you've got this totally wrong. Globally competitive agriculture is machinery intensive not labour intensive.

The inability to generate jobs is due to our labour laws and poor infrastructure and has nothing to do with agricultural policies.

Every single nation which has grown from being poor to being rich or well on the way to being rich, all the way from Japan, the Asian Dragons, China and now Vietnam, have gone through the same cycle.

And that is from being predominantly agricultural economies to being low cost, low end engineering and products manufacturing nations to eventually going up the value chain and producing more high end stuff, especially in the engineering sector and then eventually to a Services driven economy.

In India the missing link has been low cost, low end manufacturing which can potentially generate hundreds of thousands of jobs.

A classic case is our textile sector. Why do you think that despite being one of the largest cotton producers and being virtually self-sufficient in machinery production and the availability of generous finance India's textile sector hasn't been able to scale up to China's levels? The reason is that export demand is seasonal in nature. As a result, say during the Christmas period demand could be three times as much as it is during the other times in the year. To be able to meet the demand Textile mills need to be allowed to temporarily ramp up employment and then reduce when the demand is gone. Our labour laws don't permit this kind of latitude. As a result you have many cases of folks being unemployed for 12 months of the year instead of being so for say 6-7 months in a year which flexibility in the laws would have permitted.

There are other examples, branded retail products like sports shoes and sports apparels and the toy industry never came to India partly because of the infra deficit but most because of the labour laws.

As result of this India's GDP contribution is skewed, Services contributes and inordinately large share (compared to the state of development we are in) while manufacturing is less than desirable. As a result we produce high end engineering stuff like nuclear power plants but the Ganesha idol that you'll buy in your neigbhourhood shop is most likely made in China. And this despite rampant unemployment and disguised unemployment in the economy.

Our low employment generation rate has nothing to do with agricultural policies. It would be rather silly to try and increase employment in a sector which just contributes 14.5 per cent of GDP and expect to grow by over 9 per cent.

To really advance we need to take people off agriculture and agriculture related activities. The first stop for these unskilled workers coming off farm lands should have been low cost manufacturing. We don't have that and so we still have 60 per cent of the population producing 14.5 per cent of GDP.

You can't take a farm hand off the land and put him in a highly automated car production line. You could, however, have had him stitching your next pair of Nike sneakers. Unfortunately Nike prefers places like China and Indonesia. You gotta ask the question: "Why?"

[Arjun]

Sorry boss you've got this totally wrong. Globally competitive agriculture is machinery intensive not labour intensive

I should have said Agri-business sector, rather than agriculture sector. The latter would be a subset of the former. Agri-business would include areas like the farm inputs sector (seeds, fertilizers, pesticides); pure agriculture, plantations and cash crops; livestock; food processing; beverage production & cold chains for storage.

The maximum employment potential is in the food processing sector, which today employs 15 million or more directly and 35 million indirectly. If one can focus on doubling this alone you can imagine the growth in employment.

Every single nation which has grown from being poor to being rich or well on the way to being rich, all the way from Japan, the Asian Dragons, China and now Vietnam, have gone through the same cycle.

And that is from being predominantly agricultural economies to being low cost, low end engineering and products manufacturing nations to eventually going up the value chain and producing more high end stuff, especially in the engineering sector and then eventually to a Services driven economy.

In India the missing link has been low cost, low end manufacturing which can potentially generate hundreds of thousands of jobs.

Brazil has a very large and highly export-oriented agriculture sector. Point is the focus can be on being the best in all three sectors - having a very strong manufacturing or services sector is not mutually exclusive from having a very strong agri-business sector. Further since 50% or more of the population today depends on agriculture - the agri-business / food-processing sector is one that can create massive employment right there in rural locations, as opposed to more of the urban locations that manufacturing needs.

A classic case is our textile sector. Why do you think that despite being one of the largest cotton producers and being virtually self-sufficient in machinery production and the availability of generous finance India's textile sector hasn't been able to scale up to China's levels? The reason is that export demand is seasonal in nature. As a result, say during the Christmas period demand could be three times as much as it is during the other times in the year. To be able to meet the demand Textile mills need to be allowed to temporarily ramp up employment and then reduce when the demand is gone. Our labour laws don't permit this kind of latitude. As a result you have many cases of folks being unemployed for 12 months of the year instead of being so for say 6-7 months in a year which flexibility in the laws would have permitted.

I am 100% bullish in pushing for a world-class manufacturing sector - but to sustain India's demographics one needs world class services, manufacturing and agri-business as well!

Btw, other than labour laws and infra deficit, one other major reason why India never got the massive manufacturing orders like China was due to reservation of many key sectors (toys, shoes) for the small scale sector. That implied that the efficiences that could be brought about through massive scale could never be utilized for these industries. With de-reservation of many of these sectors - there is still hope - though China has obviously a gigantic first mover advantage because of these faulty schemes.

[amit]

Brazil has a very large and highly export-oriented agriculture sector. Point is the focus can be on being the best in all three sectors - having a very strong manufacturing or services sector is not mutually exclusive from having a very strong agri-business sector. Further since 50% or more of the population today depends on agriculture - the agri-business / food-processing sector is one that can create massive employment right there in rural locations, as opposed to more of the urban locations that manufacturing needs.

I agree we need manufacturing, agriculture and services to fire on all cylinders to achieve maximum growth.

But getting more people engaged in agriculture is not IMO the way to increase productivity in the agri sector.

It's interesting you mentioned Brazil as a success case study in having a highly export-oriented agricultural sector. Since you mention it, I'm sure you know the story behind the "success". Anyway let me point out some interesting data:

Brazil is a leading producer and exporter of soybean, sugar, coffee, oranges, poultry, beef, and more recently ethanol. As a consequence, agricultural exports account for 40% of Brazil’s trade surplus, and agricultural production accounts for almost 6% of the GDP, while the entire agribusiness sector contributes to approximately 25% of the country’s gross domestic product (GDP).

This achievement has not been attained without a heavy price.

Agricultural growth in Brazil continues to occur under a matrix of extensive social inequality and environmental degradation. Brazil has one of the highest rates of inequality in dietary energy consumption, income, and land distribution in the world, as well as one of the highest rates of tropical deforestation that has occurred since the beginning of farming by humans circa 10,000 year ago. In our research we contrast the country’s agricultural system with its oppressive record of income and land inequalities and environmental degradation and discuss ways to reconcile economic, social, and environmental goals.

n terms of social equity, land distribution in Brazil remains highly skewed: the overall Gini coefficient (a measure of inequality, with high values representing greater inequality) is 0.77, but with a significant variety between crops. Staple foods like cassava and beans have significantly lower Gini coefficients than export crops like soy and sugarcane. Sugarcane has the highest agriculture land distribution Gini coefficient (0.88), {sugarcane is grown mainly for biofuels} and a recent study showed increased land concentration with sugar expansion in the State of São Paulo in the last decade.

All of this comes from here. There's more, if you're interested.

Another report says this:

Brazil is a middle-income country and is rich in natural resources, but poverty levels and human development indicators in poor rural areas are comparable to those in the poorest countries of Latin America. In the country as a whole, about 35 per cent of the population lives in poverty, on less than two dollars a day. But in Brazil’s rural areas poverty affects about 51 per cent of the population.

Since approximately 19 per cent of the total population, or about 36 million people, live in rural areas, this means that Brazil has about 18 million poor rural people, the largest number in the Western Hemisphere. And Brazil’s North-East region has the single largest concentration of rural poverty in Latin America. The North-East is the country’s poorest and least developed region and the focus of IFAD’s operations. In this region, 58 per cent of the total population and 67 per cent of the rural population is poor (ECLAC, 2007).

Bottomline, I would hesitate to hold up Brazil as a shinning beacon of success of agriculture. Most of the success rests on ethanol production, which is I personally think a disaster for the soil and country which produces it and boom for fancy zero carbon economies like Germany. However, that's the subject for another debate.

A note: Toy manufacturing used to be in the reserved sector but I think that's long been abolished. But no multinational like a Hasbro every considered India a manufacturing destination because of the labour laws.

A related note: Why do you think there's this huge annual migration in China during the Spring festival break? That's because millions of rural folks who work in the factories in the Pearl River Delta area go back home to their farmsteads. We missed this kind of employment opportunity and I blame it on the labour laws and poor infra.

[somnath]

The inability of reforms to generate enough employment is solely on account of underperformance of agriculture - all other sectors have exhibited good employment growth.

Arjun-ji, thats not quite right....It is natural for all development cycles to have an inflection point where agri shows a diminishing, and then negative employment elasticity..This is because beyond a point, land holdings become too fragmented to remain economical..Especially true for large population (or density of population) countries...The cycle then needs to shift to manufacturing and services where the employmnt elasticities need to increase in order to absorb people being released from agri..

The issue with India is that both manufacturing and services have displayed stagnant, even declining employment elasticities..

http://ipc.umich.edu/Labor%20Conf/Sessi ... zumdar.pdf
http://www.adb.org/Documents/Papers/INR ... /inrm2.pdf

This is a result of many factors - labour laws, SSI reservation, lack of skills..But the point is they are there...And we have a large mass of workers without jobs...In order to make a difference, a direct intervention is required...NREGA is one such intervention...

Agri business is an area where we can do better...But really, the opportunities there too are rather limited from a macro perspective...If you look at "successful" national agri business initiatives globally (Australia, NZ, Canada, US, Brazil), there are a few features that stand out:

1. Abundance of raw material in the form of basic food..In India, the demand for most lines of grains is so high that there is little left over for "processing"...For example, soyabean in India is not even available in adequate qties for humans, as there is a large animal feed demand!

2. Abundance of land and water..

3. Highly capital intensive operations...

None of the three factors are relevant for India...So while India has opportunities there, its not huge from an employment elasticity perspective..Not for hundreds of millions...

There were supposed to be two outcomes - employment and asset creation. Given enough outlay for the program obviously getting the employment numbers is the easier part. Asset creation, as I pointed out earlier, still needs to be addressed.

I am not so sure about that...If asset creation really is a prime objective, then the programme should not have a target of 60-70% disbursal as wages...Even a minor infrastructure work will require a far greater share of non-wage inputs in the investment...It is basically a cash transfer scheme...The "work" is to take care of the issue of targeting - who should receive the cash...If there is hard physical labour involved, people who dont really need the dole will "self opt out"...

Reform of agri is important...But no amount of reform will enable hundreds of millions of workers to be engaged gainfully...For that labour intensive manufaturing and services is the only solution...Till that happens in a large scale, NREGA is an attempt..

[RamaY]

Some very interesting data on NREGA experience

http://knowledge.nrega.net/777/1/NREGA-PPT.pdf

Special reference to the amount of employment generated in 3 years - >40 million households, or 220 million people...Greater than the population of Bangladesh (ignoring the double counting of course!)...

Somnath-ji,

The important factor is the value of assets created. Perhaps NREGA team should conduct an asset valuation audit and see how much value the 2261 million work hours created.

From that presentation

Field Surveys:Are Asstes Useful?
Proportion(%) of sample worksite where the survey team felt that:
NREGA had led to the creation of useful assets in their village
83
The work they were doing on NREGA was useful
92
Proportion(%) of sample worksite where the survey team felt that:*
The assets being created or repaired was useful (very useful)
87(32)
The work done was useful (very useful)
81(29)

As you can see the scheme is creating hardly 30% of very valuable assets. It would be interesting to see the average life time of these assets.

It is definitely a good thing to create rural assets and NREGA can be a good scheme. I hope it is not becoming a money supply scheme for INC rural members/leaders.

[somnath]

As you can see the scheme is creating hardly 30% of very valuable assets. It would be interesting to see the average life time of these assets.

It is definitely a good thing to create rural assets and NREGA can be a good scheme. I hope it is not becoming a money supply scheme for INC rural members/leaders.

RamaY-ji, you are mireading the survey...What it says is that 32% of those who particpated in NREGA works said that the assets created were "very useful" to the community...

I said before, to be really honest, I dont expect the quality of assets to be very high...Even a minor earthworks project would need more than 30% of the total expense as non-wage inputs...In largish projects, share of wages would typically be fairly small, no more than 15-20%...

That is precisely why I dont think asset creation is all that high up in the policy makers' minds...Cash transfer is the prime motivation...

And there, a good start has been made by making wage payments into bank accounts as far as possible..This trend will grow...With increased coverage of UID, the leakages can potentially be cut to a minimum...Combination of a bank account which is centrally credited and UID will make it very difficult for "local corruption" to take place...

NREGA has gotten some key principles right:
1. Its universal..So no issues on who is BPL who isnt, and corruption that we regularly see in BPL cards...
2. The physical work idea makes it a "self opt out" scheme...No one barrign those who really need the money will come in...So the subsidy will by and large be reaching only those who need it..
3. The wages are set at the "minimum wage" level..As a perspective, @ 100 rupees/day (or 80 in some states), it is directl ensuring that people go over that benhmark 2 dollars/day level that is now widely used for measuring poverty...

NREGA has huge opportunities of political mobilisation...And I don see much wrong in that...If INC can use the programme at state level to incerease political partcipation, then it deserves the any political dividends accruing out of it...Nothing prevents any other party from doing the same, as the programme is implemented at a state level by state govts...

[amit]

Corruption and misuse of NREGA funds is a valid concern. But as Somnath points out it can cut both ways since state governments control the fund disbursement. For example in 2008 there were several reports of NREGA corruption.

A sample.

Hirabhai Naik, a member of a social audit team of Gramin Majdoor Sabha (Gujarat), told Newsline that during the process of conducting social audit in Panchmahals district, they found that in many villages, job cards were not being provided to the beneficiaries, but were kept at the Panchayat offices, and this, even after three or four payments had been made to the officials.

“This means if the panchayat officials want, they can make whatever entries in the job cards as they deem fit, because the cards are always at their disposal,” Naik said. The Majdoor Sabha is currently conducting social audits in Panchmahals and Narmada districts. Naik also said that the rural people are mostly unaware of the Act. “It is mostly the NGOs, which keep on talking about these. We have obtained copies of the job cards. In some cases, where payments have been made to the card holder at least four times, no such entry has been shown on paper,” Naik said.

Here's another sample also from 2008.

As a journalist, with an experience of over 25 years, I found the NREGA, the biggest and noblest anti-poverty scheme in the post-independence India. However, the biggest noble scheme seems defeated in KBK districts. The officers looted, and are still looting, the poor men’s money in an organised way by taking advantage of their innocence and illiteracy.

A visit to some villages under the Kaberibadi and the Pedalada panchayats under the Bandhugaon block in Koraput district reveals the pathetic condition of the Kondh tribe. The government, the local elected representatives and the government officials ignore all the 23 villages, which are on the other side of the river Jhanjabati. The tribals living there do not know any other languag, apart from their own dialect Koya, Telugu and a bit of Oriya language.

While most of these villages can only be reached by foot, some villages can be accessed by two- wheelers in all seasons, except rainy season. A concrete 150 metre road, from Kaberibadi to Maudivalsa, under the NREGA funds of Rs 2, 50,000 is completed and no other work is in sight to provide employment to the people. This proves the negligence and carelessness, which is nothing but the denial of the constitutional right to work and live.

However, as the Hindu editorial, also from 2008 notes.

The National Rural Employment Guarantee Act (NREGA), launched two years ago in 200 districts, is going through a critical learning phase. During this period there are bound to be many procedural problems, all the more so as the NREGA guidelines are very exacting. This does not detract from the fundamentally positive nature of this initiative, or from the possibility of making it a success.

Quoting some finding of the GB Pant Social Science Institute the Hindu report notes:

This new series of verification exercises started in May-June 2007 in Jharkhand and Chhattisgarh, in areas where we had found evidence of large-scale corruption just two years earlier, under the National Food For Work Programme (NFFWP). For instance, in the Surguja District of Chhattisgarh, there was virtually no check on the embezzlement of NFFWP funds at that time. The situation was so bad that one of us was constrained to describe NFFWP as a “Loot For Work Programme” (Times of India, July 2, 2005).

In the same district, we were interested to hear this year, from a wide range of sources, that the enactment of NREGA had led to a steep decline in the incidence of corruption. This was borne out by the muster roll verification exercises: in a random sample of 9 works implemented by gram panchayats, we found that 95 per cent of the wages that had been paid according to the muster rolls had actually reached the labourers concerned. A similar exercise conducted in Koriya, the neighbouring district, led to similar estimates of “leakages” in the labour component of NREGA — only 5 per cent or so.

As mentioned before this all from circa 2008.

A more recent report from last year.

To combat corruption, the government has decided to convert all the 10 crore members of the National Rural Employment Guarantee Scheme (NREGS) to the unique identification (UID) format in 18 months.

The agreement between the rural development ministry and the UID Authority of India (UIDAI) has been signed just weeks away from the kick-off of the ambitious numbering process for all residents of India.

Of course UID linked NREGA has its downsides as well. See this report:

''Once the making of job cards for MNREGA is linked with a UID number, the success of the former would depend on accomplishment of the latter. And we are aware that it will take a long time for UID to be effective,'' Khera said.

The tender was issued by ministry of rural development on October 11, 2010, in which applications have been invited to engage service providers for MNREGA under PPP model. According to Khera, the provisions of the contract include UID-compliant enrolment of job card holders for MNREGA scheme.

Bottomline is that NREGA is still a work in progress and it will take some time to get it right.

As Mirhir Shah, Planning Commission member said, in a link posted earlier by Arjun:

This is a programme without precedent. It has achievements also, therefore, without precedent. I would say it is a largest ever employment programme in human history. It has created more work for the poorest people of our country than any other programme since independence.

If you look at the employment generated, if you look at the coverage of the schedule caste and schedule tribe, if you look at the participation of women, if you also look at the financial inclusion that we have achieved, about more than 10 crore bank accounts and post office accounts have been open for NREGA workers. So, I think there is a lot that can be said in terms of achievements.

Another point made by Mihir da is also significant.

Potentially, therefore, I would say that overtime the allocations of NREGA after increasing to a certain point should actually start coming down because the requirement for this programme should actually be progressively decreased. That for me would be the real indicator of success of NREGA. If you were to reduce it to a pure direct cash transfer scheme, I am afraid this potential will never be utilised.

I personally think viewing NREGA through a political prism is not to see the big picture of a scheme which our political class may have gotten right for a change.

[somnath]

Kaushik Basu has written a new book - Beyond the Invisible Hand: Groundwork for a New Economics..Apparently, cash transfers have been discussed as a prime focus in the book...I am going to pick it up - lets see if its there in Kinokuniya!

[RamaY]

^
Looks like it...

NREGA has huge opportunities of political mobilisation...And I don see much wrong in that...If INC can use the programme at state level to incerease political partcipation, then it deserves the any political dividends accruing out of it...Nothing prevents any other party from doing the same, as the programme is implemented at a state level by state govts...

Did the famous economist resigned to cash-transfer schemes, to the extent that majority of subsidies are going to be that way soon? Is govt becoming a wealth distributor by collecting tax from middle class segment and transferring the cash to BPL citizens, instead of nation builder?

So anything and everything is kosher if it gives political dividends hainji because reelection also means popular mandate thus democratic onleee?

[Arjun]

The issue with India is that both manufacturing and services have displayed stagnant, even declining employment elasticities..

http://ipc.umich.edu/Labor%20Conf/Sessi ... zumdar.pdf
http://www.adb.org/Documents/Papers/INR ... /inrm2.pdf

This is a result of many factors - labour laws, SSI reservation, lack of skills..But the point is they are there...And we have a large mass of workers without jobs...In order to make a difference, a direct intervention is required...NREGA is one such intervention...

Essentially what has been created is a 'dole' system where the dole is only provided if the person is willing to put in hard physical work, and with the side benefit that occasionally the work can be put to some good use in terms of asset creation. (Btw - what is the system for monitoring that the person gets paid ONLY if he puts in the work? or is this similar to India's famous absentee teachers in government schools?)

My judgement on NREGA would be dependent on the following - if based on this scheme, it becomes easier for the government to pass the more crucial underlying reforms that you referred to (labour laws, dereservation, skill impartment, boost agriculture / agribusiness) then this is good. The argument the government can use is that now that there is a dole system in the country, there should be no opposition to reformist moves.

On the other hand, if the government uses the scheme as a negative argument (that employment has been taken care of, so why expend political capital on more difficult reforms) - then this is a counterproductive scheme for the country.

[somnath]

Arjun-ji, RamaY-ji,

India's nation-building project needs to work on multiple pillars, but in the final analysis the "aspiration" needs to be focussed on achieving that economic holy grail of "full employment" - from Gandhi's "wiping off the tear from the last eye" to Kaushik Basu's "how does the bottom 20% perform in the sweepstakes" - this should not be lost sight of..

Purely on grounds of economic mathematics, there will be tons of arguments against a cash transfer scheme...But can we wait for a functional PDS, efficient health delivery, good schools and spread of manufacturing for ALL parts of the country? Havent we been trying exactly that for 50-60 years? time to change track, even if the new track has pitfalls, at least the mistakes would be new mistakes...

Joseph Stiglitz's "Globalisation and its discontents" is revealing on many counts, not least on his description of how removal of subsidies precisely at the time when they were most needed caused countries to simply collapse..The "neo liberal" reforms attempted didnt even have a chance to work itself out...

NREGA is an attempt to bypass the existing govt setup of myriad schemes to pass on benefits to the needy...Cash transfers are usually that, and have gotten increasingly popular in many countries...

Cash transfers can be unconditional (straight cash into the chap's acocunt), or conditional (based on, say, enrollment of his child in a school)...The best example of cash transfers is the Bolsa scheme in Brazil (I will post about that sometime later)...In India, the most well-known example is Nitish Kumar's scheme of giving cycles to girl students - its an example of conditional cash transfer (money was paid only to buy cycles) - and look at the impact it had...

NREGA isnt, shouldnt be an excuse for NOT carrying out other essential reforms, whether on agriculture (which Arjunji will necessarily reduce the nos of people employed there) or on labour laws...But it creates a safety net that pulls people in their hundreds of millions out of poverty and gives them a chance to integrate into the India story...

An (apocryphal) story...In a village in Bihar, there is no govt school within 10kms, but there is a pvt "english medium" school charging 500 rupees a month in a nearby larger village...Since NREGA was introduced, enrollment in that school from this village went up by 40%, as more people could afford the fees...Now you might argue that the govt should set up schools everywhere, but by the time it does, another generation in that village would have been lost...Paraphrasing Lord Keynes , "governments can remain indifferent longer than one can remain hopeful"...And India cannot have hundreds of millions of cynical malcontents...

[somnath]

A nice exhange on NREGA between Jean Dreze and Swaminathan Aiyar..Its quite light-hearted, but there is less distance between the two than is ordinarily presumed..

http://lite.epaper.timesofindia.com/get ... ublabel=ET

[vina]

Purely on grounds of economic mathematics, there will be tons of arguments against a cash transfer scheme....

Yawn.. The history of India has had better success with ear to the ground politicos introducing and running successful welfare programs than the sclerotic PDS bureaucracy has done until now. The Doctrinaire Commies and their underlings being the most pitiable in terms of record. Consider W. Bengal for instance.

The most successful welfare scheme thus far was the Mid Day meal scheme by MG Ramachandran . Now that was truly revolutionary for his time . Now the Bhadra Bong Commies would sniff at TN politics of "Film Stars" and other "unintellectual" types and feel oh so - soup-e-rear . But the fact is that those salt of the type folks actually came up with better ideas and had a much stronger record of actually delivering something. In the 25 years of CPIM , their record in HDI in W. Bengal has been pathetic to say the least, while in TN , the Dravidian parties rule has seen much better by way of accomplishment, despite all the venality and ghastliness of their politics.

Case in point about doctrinaire commies. There was an Op-Ed by Jayathi Ghosh (of JNU, where else) in today's Al-Hundi ranting about the cash transfers in the new budget. One look at the author's name and I stopped reading and went straight to the concluding paragraph, which was so predictable and stereotyped that I let out a big yawn.

[somnath]

Yawn.. The history of India has had better success with ear to the ground politicos introducing and running successful welfare programs than the sclerotic PDS bureaucracy has done until now. The Doctrinaire Commies and their underlings being the most pitiable in terms of record. Consider W. Bengal for instance.

The most successful welfare scheme thus far was the Mid Day meal scheme by MG Ramachandran . Now that was truly revolutionary for his time .

Well, its a bit unfair to paint all commies with the same brush..The Kerala experience with HDI has at least half the credit going to them!

MGR's mid-day meal scheme was great - it was a case of a conditional "kind" transfer...NREGA borrows some of the principles from that experiment in many ways...

BTW, I read Jayati Ghosh's article in Hindu today...She does have a point...A cash transfer scheme without the services being on the ground is substantially less-than-optimum..So if healthcare is priced @ 500 rupees a month and "cash transferred", it really doesnt help much if there isnt a health centre in the vicinity, private OR public...There is some argument that over time, the private sector will come up knowing that there are people with buying power for those services...But till that time, the cash transfer will be inadequate as the beneficiary doesnt even have access...

Cash transfer cannot address the issue of access, it increases the problem of "affordability"....