Indian Govt subsidies for the rich :10 % of GDP

NREG costs less than subsidies for the rich`

Q&A/ Pranab Bardhan

Dev Chatterjee / New Delhi November 09, 2007

Pranab Bardhan, Economics Professor at the University of California, Berkeley, has held teaching positions at MIT, Indian Statistical Institute and the Delhi School of Economics, and has been a visiting professor at Oxford, Cambridge and the London School of Economics. The author of 11 books, he is now writing a book on India and China, examining their problems and prospects. He spoke to Dev Chatterjee at his Berkeley office overlooking the Golden Gate bridge, about how economic reforms can get larger support and whether India’s Left really serves the interests of the poor. Excerpts:

Economic growth and globalisation has helped reduce poverty dramatically.

Official estimates don’t take into account non-income indicators like health, education or environment but there can be no doubt that delicensing and deregulation, trade and financial and tax reforms have helped unleash entrepreneurial energies in the corporate sector which boosted competition and growth. But agricultural growth has slackened in the last decade and even in the non-agricultural sector, more than 80 per cent of labour works in the informal sector — I’d like to know how exactly reforms have helped these people.

There is a belief that services sectors like telecom, financial services and software have led our economic growth but almost two-thirds of the service-sector value-added is from the unorganised sector.

If governance in on the decline, as many believe, why is growth increasing?

You can’t say the entire governance structure in India is declining. The Election Commission, the Supreme Court and some regulatory bodies (regulating telecom, insurance, stock exchanges and so on) are quite active, independent and doing a reasonably good job in governance. In some state offices, thanks to info-tech, land and other records have improved. Having said that, governance is still in decline in many areas, particularly in the management of infrastructure and the delivery of social services. It is, I believe, our general inattention to governance reforms that makes economic reforms so unpopular in India.

So what can be done?

I think India has to gradually move towards politically managing some package deals where on the one hand, public services have to be cost-priced so that there is more inducement to public and private investment in infrastructure, and on the other hand, some credible assurances as to the quality of supply of services can be effectively arranged.

The other important issue is that of guaranteeing some kind of safety net for the poor. There is a lot of agitation against land acquisition for industrial and infrastructure projects in different parts of India. This is not just a matter of providing a fair compensation to landowners (so that they can get a share in the rising value of land); what about the many landless workers and other service providers in the area who will be displaced? We need to have some minimum social insurance schemes and job training programmes in place for these uprooted people in a credible form so that they are not just the victims of contractors and the land mafia.

If the public service delivery is in bad shape, why not give the poor vouchers?

While I welcome the idea, I have doubts about its implementation, particularly in rural areas. The poor can go to a good school in an urban area with the help of a voucher but what about the poor in the rural areas? Vouchers work when there are enough competing service providers. In many cases, ghost schools would come up just to take away that voucher from the poor in exchange of some paltry compensation and the education of their children will continue to decay. In higher education there is likely to be more viable competition, and I am all for it. Fees should be increased substantially to improve educational institutions and the government should give more scholarships to the poor so that they are on a level-playing field.

In food distribution, I am more in favour of food stamps and other forms of enriching the purchasing power of the poor, rather than maintaining our costly and ineffective public distribution system.

Does India’s Left serve the cause of the poor?

The Left parties often are most vocal about a narrow segment of the labour force, particularly the unionised public sector employees. They often reflexively oppose labour reform. Job security is a major legitimate concern, but they should work with economic reformers on a package deal that combines more flexibility in the labour market with a better unemployment insurance and job training programme. There are parts of our labour laws which keep the organisation of labour fragmented and only weaken the labour movement (for example, any seven people can start a trade union in India).

They also unthinkingly agitate against any fundamental restructuring of our public salary structure (which needs to make the upper-end salaries somewhat more competitive with the private sector in order to preserve administrative talent, and slow the rise in the salaries of the lower-end where they are out of proportion to the worker’s reservation wage outside). Other examples of unthinking positions are when they oppose privatisation without doing something about the constant political interference in public enterprise management, when they agitate for irresponsible subsidies for rich farmers, against raising tuition fees in higher education or LPG gas prices (which help mostly the rich), and so on. At the same time, no one should deny the vitally important role Left parties have historically played in pushing the cause of land reform, in improving the voice of poor workers in a country where the interests of the rich ride roughshod over them, and, as in Kerala, in substantially improving public services in health and education.

Are programmes like the National Rural Employment Guarantee a good idea?

First of all, there are interesting ways in which information technology has been used in Mexico and Brazil to identify the beneficiaries and monitor the implementation of massive welfare programmes that can reduce the extent of corruption. Secondly, we should not forget that Indians live in a welfare state for the rich. According to the estimates for a Ministry of Finance White Paper in 1997, the central and state governments together gave out (in the mid-90s) about 10 per cent of GDP in the form of explicit or implicit budgetary subsidies for “non-merit” goods and services (largely accruing to those who are relatively rich). The NREG is expected to cost even less than 1 per cent of GDP. How does the corruption in this programme compare with that in our various military purchase contracts? What lessons should India learn from China?

The current capitalist triumphs are partly based on some socialist legacy, in the large improvements in basic education and health, large participation of women in the urban labour force, egalitarian land redistribution which provided a minimum safety net that rendered the dislocations of capitalism somewhat more socially tolerable. They have also given more autonomy to public-sector managers to pursue long-term economic goals. They have concentrated on building the public infrastructure that a modern economy needs and have not hesitated in charging cost-based user fees. We should also learn from their mistakes. The colossal damage of the environment (air and water pollution), for example, should not be repeated by us in our drive for industrialisation.

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