Employee Guarantee Scheme-A follow-up post

The points raised by Anupam's comments are all valid arguments. Let's try to take a look at them in a bit more detail.

1.    “You imply that it effectively becomes a free transfer because of corruption and inefficiency – but that can be said of most public (and we might add a lot of private) resources in India .... the solution must be to put in place ways of ensuring accountability in government to ensure that the money is actually put to use. ”

For a policy to be meaningful it needs to take into account the reality at the grass root level. India's reality is that as a country we are highly corrupt (as per Transparency International's 2010 rating we are ranked 87th out of 178 countries in corruption). So, to say that we have devised a policy which looks fantastic on paper but fails the moment it is implemented is ridiculous to say the least. Its better not to have such policies at all. Corruption-proofing has to be a primary consideration while designing any new public policy.

If you look at the areas where India has done well (namely, IT, Telecom..well unfortunately nothing else really comes to mind!!), you will see that it is where there has been minimal government and bureaucratic interventions. In contrast, think of all the areas where there has been active government involvement and you will only find pathetic mediocrity.

Another aspect that we can see that has worked wonderfully in India (and elsewhere in the world) is by giving tax incentives (or disincentives) to corporates or individuals. Companies and people will do anything to save tax. A recent not very well-known case in point - Indian government gave depreciation benefits to set up “green” energy plants, so companies who have no experience or business related to power are setting up wind power plants!!!

One thought that I have is, that the government should float tenders for projects which it wants done. These tenders should be free for everyone to bid for. The terms should ensure that a fixed percentage (say 60% or 70%) of people employed for the project should come from a target population section (maybe rural poor, urban poor etc). The implementation should be open to audit by independent reviewers and any misrepresentation of facts would result in non-payment of project costs. I am sure this also can be misused, but something on these lines, with inputs from people who know and understand these things better could probably yield better results that just doling out cash.

2.    “About the deficit and the impact on inflation, it is true that the deficit needs to be tackled, but that needs to come from elsewhere. The budget is full of flab – subsidies that cater to all kinds of interests who won't let go of their chunk of the pie. It is time to reduce expenses there instead of saying there isn't enough pie going around to give the poor their rightful share (which they need to work for under NREGA).”

This is, in fact, exactly the problem. The reduction must always come from “elsewhere” and not your pet constituency!! So, petrol/diesel wallas  will not let you reduce their subsidy, fertilizer wallas will not let you touch theirs and the story goes on. Add to this list now, the NREGAwallas!!

Also, your argument is based on the assumption that people have to work for this subsidy, which to my mind is not the case. The money is being collected without much of developmental or constructive work to show for it.

Also, I do not agree with your statement of anyone having “their rightful share”. That again is an entitlement mindset. We disparately need to get out of it. You cannot have a system where people just expect outputs without putting in their share of inputs. It just does not work in the long run. So, just because I am poor does not entitle me to government largesse. What the government can and should do is to provide basic services well, like education, healthcare, law & order. Then let the the ecosystem (mostly called a “market” in a market-driven economy, but I think its sends a wrong message to people) take care of the distribution of wealth and other benefits.

3.    “How about the middle class paying full prices on their gas guzzling cars instead of piggybacking on diesel subsidies meant for farm production. How about looking into why the GDP-to-tax ratio is actually falling in India.”

I agree with you on this one. Private diesel cars should attract a huge price premium in terms of up-front taxes so it acts as a disincentive for people who buy them. I see no reason why people who can afford a 3 million rupee Mercedes cannot pay full price for the fuel. Tax to GDP ratio is falling simply because no government has the courage to tax agricultural income! So, you have millionaire “farmers” paying no tax. (On a lighter vein, that's also why you have someone like Amitabh Bachchan suddenly realized that he is a farmer a few years back!)

4.    “The poor will now eat more with the money they have earned, leading to food inflation? So they should starve so that food prices are down? Disposable income is not spent on food – food is a necessity, for the most part.”

Again, the point I was trying to make was not that poor people should starve so that I can have cheaper onions!! I was simply trying to say that when you distribute cash from helicopters (NREGA is a variation of this approach) then you increase buying power for the people. Since, these people are predominantly poor, the first thing they do is to buy food, as opposed to some others who rush to buy iPads and 3D TVs with their corporate bonuses. So, the consequence of this is that the price of primary food articles will go up due to basic demand-supply mismatch.

My point was that the inflation we are saying for the last couple years is due to this and cannot be fixed by tweaking interest rates in the monetary system. At most, it will create incentives for stashing away the cash into bank deposits for some, but for those whose primary need is food, in all probability they lie in the un-banked segment of society and will fail to have any impact. So, they need of the hour is to look at increasing farm productivity (better farming technology, increase R&D spending in agriculture, irrigation and removal of the Land Ceiling Act, encouraging contract farming etc.) and setting up cold chains and better storage facilities across the country. This will need a lot of co-ordinated effort between the state and central governments and is likely to take a few years to show any results. That is perhaps why no one wants to take it up.

5.    “On #2, I think the teeming population of India is still far from the stage where unskilled labor becomes unavailable. What the corporates are griping about is that the amount of surplus they can extract due to the overabundance of labor has fallen. NREGA tweaks the supply demand chain by effectively setting a minimum wage for labor.”

Again you are right on this. Simple, economics suggest that if you pay more you will get these people to work for you. The issue is, as you say, by setting a floor price, small and medium companies are finding it very difficult to get adequate labor on time. For example, the rubber cultivators in Kerala, are finding it very difficult to get casual labor during harvesting season at a reasonable. So, they have had to pay a lot more. This (and a lot of other factors) have resulted in prices of raw rubber to double in the last two years. This has a ripple effect everywhere rubber is used – from tyres to construction to chemical industries, prices have gone up as input costs go up. Again, setting up the inflationary cycle.

So, what I wanted to highlight is that “consequences of consequences”. One small change has a ripple effect in areas where it was not intended for.

Phew!! That was a long response. Let me know views (bouquets and brickbats are both equally welcome).