labels: prem shankar jha, economy - general
A surrender to populismnews
Prem Shankar Jha
26 August 2005

If villages remain poor and families destitute, it is because money has not been allocated for their development. It is because between 70 and 85 per cent of the money is siphoned off by state functionaries who have created an intricate, mutually supportive web of corruption that involves everyone from the gram pradhans to the BDOs, zilla parishad members and MLAs. The centre may not be able to break this nexus, but does it have to reward it?

Prem Shankar JhaThe deed has been done. Despite the storm of controversy raised by the Rural Employment Guarantee Act, and the fervent pleas of economists from all over the world not to extend the act beyond the parameters of the time-tested 'food for work' schemes, both the houses of Parliament passed the act without a word of demur. What is more, they did so within 48 hours, a speed not matched since Rajiv Gandhi introduced the Anti-Defection Act 20 years ago. But speed seldom makes for reflection. The Rural Employment Guarantee Act has been born out of a flight from responsibility and a surrender to populism among its chosen representatives, that this country has almost never seen in the 58 years that it has ruled itself.

No one would, for a moment deny, that the Act embodies a well-intentioned, indeed noble, effort to make sure that the poor are not forgotten as the country races ahead towards a competitive market economy. But even the best of intentions cannot , by themselves guarantee results. The REGA is the very embodiment of irresponsibility because it violates no fewer than five canons of responsible government.

First, in sharp contrast to the time-honoured and tested food for work programmes, the REGA will divorce power from responsibility. The power to implement will lie with various layers of the state government, but the responsibility for funding it will rest with the Centre. This is a situation that begs to be abused.

Second, it rewards, instead of punishing, non-performance and corruption. If the villages remain poor and families destitute, it is not because money has not been allocated for their development. The current five year Plan has set aside Rs128,000 crore for rural development. If spent honestly, this is sufficient to transform all of rural India within a single five year period. But we have seen 10 Plans go by with similar allocations and in more than half of India, the villages remain as poor and degraded as they were four decades ago.

This is because, at the most conservative estimate, between 70 and 85 per cent of the money is siphoned off by state functionaries who have created an intricate, mutually supportive web of corruption that involves everyone from the gram pradhans to the BDOs, zilla parishad members and MLAs. The centre may not be able to break this nexus, but does it have to reward it?

Third, it commits the Centre to spending very large sums of money that it does not possess. Various estimates place the cost of a nationwide employment guarantee scheme at Rs40,000 crore to Rs150,000 crore. The centre will have to find this money at a time when it is already running a fiscal deficit of Rs165,000 crore, or almost five per cent of the GDP. Even the lower figure will add 1 to 1.5 per cent to its fiscal deficit. The higher figure will bring all developmental spending to an end or plunge the country into sustained high inflation.

Fourth, the advocates of the REGA have based their entire case upon the benefits it is likely to yield, but studiously avoided counting the cost. This does not take long to tally: In the absence of a budget surplus, the REGA will have to be funded by making drafts on private savings held with the banks. That will raise interest rates, lower share prices and push up the cost of raising money for investment. Private investment will either fall or grow much more slowly, and that will mean fewer new jobs.

Higher interest rates will also reduce the demand for working capital, and that too will translate into fewer jobs. It is difficult to estimate the number of jobs that will be lost, but another calculation highlights the loss with far less ambiguity. If Rs60,000 crores were spent on power generation, it would add 12,000mw a year or ten per cent to the generating capacity in the country. That would create millions of jobs not just once, but every year.

Lastly, the success of the employment guarantee programme requires a radical departure from past performance in all those who will be entrusted with implementing it. The least that the government should have done was to test whether such a change of heart was possible in a few districts first. This was all the more necessary because state governments had not even maintained muster rolls in many of the food for work programmes launched so far. Launching the REGA 'cold' is tantamount to commissioning the construction of a full scale commercial plant from a process developed in a laboratory, without first building a pilot plant.

The REGA is also amateurish in its attempt to address the needs of the poor. For there is a wealth of evidence that the jobs it will create are not the jobs that the poor want. What the poor now want for their children are jobs outside agriculture. Between 1994 and 2002 they took six million children off the fields and sent them to school. Today even landless labourers are paying Rs50 to Rs150 a month to send their children to private schools in the hope that they will learn English.

The trend is, if anything, growing stronger. A recent survey of 51,000 farm households, reported in The Hindu showed that 40 per cent of the respondents did not want to continue being farmers. The REGA provides jobs only in the rural areas and at the bottom of the pyramid of income and status, when what they want is jobs in factories, offices and towns. The concept of poverty that underlies the REGA is therefore several decades out of date.

No one can deny that there are genuinely destitute families in every village in India. But except when a drought or flood suddenly swells their numbers they can be counted on the fingers of one's hands. Had this not been, so starvation deaths would have been routine and a high death rate would have winnowed away the surplus population. That, of course, is what Malthus expected. The fact that we have 430-million workers in the organised and unorganised sectors, 41 per cent of the population of India, confirms that nearly every family already has some form of livelihood.

What these families need even more than an income supplement, is greater security - in the face of illness and accidents, at the time of childbearing, and in old age. The REGA at best will provide an income supplement but none of these things.

Had the Congress come to power with a strategy for reconciling growth with equity of its own, it would have known that the best way to permanently ensure the safety and security of the poor is to make development inclusive instead of exclusive. This involves turning the poor into permanent stakeholders in progress. So far the only step it has taken in that direction is to bar foreign direct investment in retailing.

Mass retailing, of the Wal-Mart variety was initially an American innovation. But over the past five decades it has devastated the entire lower middle class in Europe, and turned it into wage earners who survive just above the poverty line. If a similar displacement were to take place in India those who lost their livelihood would face utter destitution.

There are two other ways of vastly enlarging the number of stakeholders in development. The first is not to buy-out the owners of land needed for infrastructure projects, but pay them a royalty in perpetuity for its use. The second is to launch contributory social insurance schemes for the organised and unorganised sector workers supplemented by cesses and taxes on specific activities, pay a royalty in perpetuity to every person (or village) who surrenders land for an infrastructure project.

The first will bring millions of people in some of the most remote parts f the country into the network of beneficiaries from development. There are, for instance, 78 dams to be built in the North-east alone. There are thousands of miles of roads and canals, dozens of airfields to be built. There are mines to be exploited, and factory sites to be chosen. Without a royalty system each such project will expropriate a poor man and be resisted to the hilt. With it, each will be willingly supported.

The two schemes together have the capacity to turn virtually every Indian into a stakeholder in India's future. Best of all they can do so without diverting tax revenues and private savings from investment. The diversion of funds to the REGP has made their implementation harder but not impossible.

* The author, a noted analyst and commentator, is a former editor of the Hindustan Times, The Economic Times and The Financial Express, and a former information adviser to the prime minister of India. He is the author of several books including, The Perilous Road to the Market: The Political Economy of Reform in Russia, India and China, and Kashmir 1947: The Origins of a Dispute, and a regular columnist with several leading publications.

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A surrender to populism