Earth to Mr Jaitley: socialism is not pro-poor, markets are not anti-poor

http://firstbiz.firstpost.com/budget/earth-to-mr-jaitley-socialism-is-not-pro-poor-markets-are-not-anti-poor-90604.html

So why did the Narendra Modi government, whose high-pitched pre-election rhetoric promised a decisive rightward shift in the management of the economy, debut with a budget that would have done the Congress proud? This is something both Congress president Sonia Gandhi and former finance minister P. Chidambaram have smugly pointed out.
This piece by M. K. Venu argues that the maiden budget was `socialist’ because Modi wanted to be seen as pro-poor. Venu quotes finance minister Arun Jaitley telling him in an interview done for Rajya Sabha TV that in a country with so many poor people, any economic philosophy which is totally market based will not work. Listen to the interview here.
That is the problem – the assumption that socialist policies are pro-poor and market-friendly policies are not.  This fairly widely-held assumption is itself based on two wrong assumptions, one about socialist policies and the other about pro-market policies.
That socialist policies are pro-poor flies in the face of evidence from India itself. India’s economic policies were overwhelmingly socialist before 1991. Indira Gandhi’s socialist agenda got an emotional anchor, as it were, with the Garibi Hatao slogan. Apart from the plethora of anti-poverty schemes, all economic policies supposedly had a pro-poor focus. And yet the pace of poverty reduction has been faster post-1991, once India embarked on pro-market policies!
All manner of subsidies have been rolled out in the name of the poor; any withdrawal is slammed as a move to abandon the poor to the vagaries of the market forces. But, barring a few, these subsidies really go to the better off. The poor are anyway left to the market forces. Take Delhi, where highly subsidised water and electricity supplied by the government go to the middle classes while the poor, who live in slums and unauthorised colonies, pay several times more for the same facilities supplied by the market. Yes, the rates are exploitative but the so-called pro-poor state is just not present in these areas peopled by the poor. Yes, the issue is that of governance, and that precisely is the point. Good governance is not about socialism or capitalism; it is about how efficiently the state goes about fulfilling its responsibilities.
Now for the other bogey that Jaitley seems to be mindlessly parroting – that a pro-markets approach necessarily neglects the poor. This stems from the trenchant criticism by the critics of socialism of the dole-centric approach to helping the poor, especially the rights-based entitlements legislations that the Congress initiated (and the BJP supported). But the question whether doles are more effective in helping the poor needs to be examined. This question came up last year when poverty figures released by the Planning Commission showed a sharp decline in poverty levels between 2009-10 and 2011-12 and also a decline in the absolute number of poor. The Congress party was quick to claim credit – not for the years of highest ever economic growth during UPA 1 (which they otherwise kept boasting about), but for welfare measures during its rule, especially the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). 
But economist Surjit Bhalla questioned this claim in this article. Using NSSO data, he pointed out that MGNREGA accounted for only 1 percentage point of the 13.1 percentage points decline in poverty between 2009-10 and 2011-12. In this second article, he gives a more direct link between growth and poverty reduction.
Now to the wrong impression about pro-market policies.
Venu’s article argues that Modi’s statements that government coffers are meant for the poor is `very socialist in its tenor and intent’. This reinforces the completely fallacious image of pro-markets ideologues as unfeeling cads who want the government to work for the well-off and the rich. Not even free market fundamentalists (except those in the loony fringe) argue against measures to help the poor. There will, they admit, always be disadvantaged people who will need the helping hand of the state. The point of divergence between socialist policies and pro-market policies is not about helping the poor; it is about how to help them.
The socialist approach is through price-distorting doles and welfare programmes (no matter how leaky and inefficient they are). The pro-markets approach is to get the state to stop meddling in, and micro-management of, the markets and to concentrate on providing public goods, thus ensuring high growth which will bring more people above the poverty line (no matter how high or low it is set).
Venu cites two new schemes in Jaitley’s budget - Deendayal Upadhyay Gram Jyoti Yojana and  Shyama Prasad Mukherjee Rurban Mission – as examples of BJP social sector schemes and calls this BJP’s own brand of socialism. But these are not welfarist schemes; these are schemes to provide physical infrastructure - clearly the role of the state even in a market economy – that will spur economic activity and growth. Socialist policies do not bring high growth; pro-market policies do. We have seen that in India.
High growth will not only help address the problem of poverty, it will, far more importantly, provide the resources for targeted interventions to help the poor and the needy. If there is no money in government coffers, even socialist states cannot help the poor. Such interventions should ideally be through income support and cash handout measures than inefficient welfare programmes that are liable to corruption and cornering by the better off, leaving the poor where they are. Even Amartya Sen has not argued against excessive state intervention in the markets; he too believes growth is necessary for poverty reduction. It is another matter that he prefers inefficient welfarism over more efficient income support measures.
The problem with the discourse on political economy in India is that words like socialism, pro-poor and market friendly are bandied about, especially by politicians, without adequate understanding of what they mean. Jaitley’s statements prove this.

Inflation needs a political solution

http://www.firstpost.com/economy/politicians-hold-the-key-to-taming-inflation-dragon-1298845.html

So, India’s central banker Raghuram Rajan did not hike rates on 18 December, even though both wholesale and retail inflation persisted at elevated levels. The man who was expected to act like a hawk, is being panned for behaving like a dove, taking a benign attitude to inflation.
Rajan made it clear that he is not comfortable with such labels and that, far from being soft on inflation, he was keeping a close eye on it. If inflation did not ease, he said, he would act appropriately. Maybe he had a problem with the choice of birds, and would have preferred to be compared to the wise owl instead.
Will inflation – particularly food inflation – ease over the next month? Given that general elections are due in a few months, the government and the Congress Party will certainly hope that it will. The results of the recent assembly elections made it very clear that the public will be unforgiving about rising prices. However, opposition parties would do well not to gloat about the government’s plight. What India is seeing today is not a cyclical or seasonal high inflation that will correct itself. High inflation, especially food inflation, has got entrenched and is not likely to go away soon. It is certainly going to pose a huge challenge to whichever government comes to power in May 2014. And there is no quick solution for it.
The persistent high inflation that we are seeing now is an economic problem created by politics. The solution, too, is rooted in politics. The UPA cannot escape the blame for the current high inflation. The unchecked populism during its ten years is mainly to blame. Finance minister P. Chidambaram admits that higher farm gate prices and higher rural wages (thanks to the NREGA effect) had played a role in rising inflation. But he justified both decisions as being right. “The argument that inflation must be contained by suppressing farm gate prices or rural wages is a specious argument that ignores the needs of the poor and deserves to be rejected,” he said at the Delhi Economics Conclave in mid-December.
It is by now well established that the rising food inflation is the result of increasing demand, thanks to growing prosperity, far outstripping supply. This statement, however, needs to taken with a bit of caution. While expenditure on fruits and vegetables (which has seen the highest levels of inflation) grew by 42 percent between 2004-05 and 2011-12, data from the National Horticulture Board shows that production increased 53 percent. Dr Ramesh Chand, director of the National Centre for Agriculture Economics and Policy Research (NCAP), explains this discrepancy, pointing out that given the huge increase in demand even a marginal fall in production in some months has a huge multiplier effect on prices. This becomes more marked in vegetables that lend themselves to hoarding – potatoes, onions and tomatoes, which have almost become necessities now. So clearly, there is a supply bottleneck issue that needs to be addressed. For this, traders and the entrenched cartels in farm goods are to blame.
How is this to be tackled? The solution is an economic one – liberalising and bringing in more competition into agricultural trade. But politics is not letting it happen.
The issue of monopolies and cartels in agricultural trade has to do with the state-level Agricultural Produce Marketing Committee (APMC) Act which set up regulated zonal wholesale markets to which farmers in a particular area are bound to sell their produce. This not only encourages monopolies, but also stands in the way of the integration of farm production with the national market. According to an ICRIER report on the non-alcoholic beverage sector, even in cases where food processing firms buy produce directly from the farmers, they have to pay the APMC cess.
There is near-unanimity that the APMCs need to go or at least be modified to allow more competition and that a barrier-free national market is the best way to tackle food inflation. Unfortunately, this is something that is solely in the realm of state governments. A model APMC Act, which allowed for more competition, was drawn up by the Centre during the National Democratic Alliance (NDA) government. During the NDA and the UPA reign, there have been attempts to prod states to adopt this model legislation. A committee of state ministers in charge of agricultural marketing has unanimously endorsed the need to adopt the model Act. And yet, only 17 states have done so. So strong is the political hold of the vested interests that control these markets.
When food inflation started heading northward in 2002-03, the NDA government cooled prices by releasing part of food grains stocks through the public distribution system and selling grains at cheaper rates to millers. The government is sitting on huge food grain stocks, but it is wary of offloading this because of the requirements of the Food Security Act. Can the damage be contained? There is a provision in the legislation to move to a system of cash transfers, which will obviate the necessity of huge public stockholdings. This is again a political call that either the present or future governments will have to take. Do parties have the gall to take this route? Remember that this unwise piece of legislation was green-lighted by all parties.
Former finance minister Yashwant Sinha recently recalled an anecdote from his tenure about the finance minister of a northern state losing his temper when the Union finance secretary suggested that states abolish a tax on trade in food grains in order to keep food prices down. For the minister, filling up his state’s coffers were more important than the larger macro-economic implications of rising food prices.
When politicians across the country and across parties refuse to see economic logic, can there be an easy solution to the inflation problem? There is no point drawing comfort from the fact that high inflation is being driven by food prices and that core inflation is largely at acceptable levels. As C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, has warned, sustained food inflation gets generalised and spreads to other sectors. Given the current levels of distortions in the marketing of food grains, cereals and fruits and vegetables, high food inflation is unlikely to be a temporary phenomenon. Rajan, at his press conference on Wednesday, clearly said that the RBI could not indefinitely wait for the supply side to catch up with demand pressures on the food front and that if necessary, he would take steps to bring demand closer to supply. That is obviously the only solution that will be left.
But just because inflation targeting is one of RBI’s mandates, is it justified to put on it the entire onus of solving a problem that is not of its creation in the first place? In doing that, isn’t the political class that is responsible for the situation being let off the hook? Won’t the use of monetary policy to address a supply-side problem lead to other problems? These are questions all political parties need to mull over. It is time inflation is seen as a political problem requiring political solutions. The structural problems cannot be addressed overnight. The benefits also will take time to materialise. If any new government does not take action early enough, five years down the line (or even earlier during elections to state assemblies) it will find itself in the same situation as the UPA.
In October 2012, when Rajan’s predecessor D. Subbarao hiked rates to tackle inflation amid fears that it would hurt growth, a miffed Chidambaram had said he would walk alone if necessary to face the challenge of growth. Chidambaram or whoever the finance minister will have to walk alone to address the challenge of inflation. At any rate, they can’t expect the RBI governor to walk alone on this issue. They – and the entire political class – will have to support him.

Sure, poverty fell, but no thanks to UPA’s NREGA

First published in Firstpost.com: http://www.firstpost.com/economy/sure-poverty-fell-but-no-thanks-to-upas-nrega-981421.html
As the country heads closer and closer to elections, there will be a slow and steady release of facts, figures and sundry survey reports showing 10 years of United Progressive Alliance (UPA) rule in good light. In end-June, the National Sample Survey Organisation’s Employment and Unemployment in India, 2011-12 indicated an uptick on the employment front between 2009-10 (when the last survey was done) and 2011-12 (though a lot of questions remained unanswered, as this story in Forbes India shows). And now the latest poverty estimates released by the Planning Commission yesterday show that poverty decline between 2004-05 and 2010-11 has been faster than between 1993-94 and 2004-05.
Critics – especially political opponents – would be quick to pick holes in this. First, they would probably latch on to this interview that former member of the National Statistical Commission, Amitabh Kundu, gave to The Indian Express. In this, Kundu has argued that if the survey had covered 2012-13, the poverty estimates would not have been that satisfying. So it looks as if the 2011-12 survey was done only to show the UPA in good light. 

This question was raised in the case of the employment figures as well and the current and former chief statisticians refuted the conspiracy theory of statistical skulduggery. Large sample surveys are done by the NSSO every five years. After the 61st round in 2004-05, there was a 66th round in 2009-10. But since that was a bad economic and agricultural year, it was decided that the results would not be comparable with 2004-05 and so it was decided to conduct another survey in 2011-12, after just two years (when the next survey would actually have been due in 2015). This decision was taken even before the results of the 2009-10 survey were out. 

Next, the sceptics will mock the poverty reduction achievements on the grounds that the estimates follow the Suresh Tendulkar poverty line, which is laughably low. But this too deserves to be junked. When the Tendulkar poverty line was adopted in 2009, it actually showed a higher incidence of rural poverty than the earlier Lakdawala formula did. Secondly, when the controversy over the Tendulkar formula first broke in 2010 – and critics (notably from the anti-growth and anti-reforms brigade) insisted the formula was flawed, an exercise was done to show poverty estimates using both formulas. The rate of poverty reduction between 1993-94 and 2004-05 was shown to be slightly higher under the Lakdawala formula (0.77 percentage points) than the Tendulkar formula (0.73 percentage points). So clearly, the Tendulkar formula does not underestimate poverty. 

If the left and the BJP really want to get after the UPA government on poverty, it should be on how this reduction was achieved. The Congress and the intellectual gurus of its welfarist approach will no doubt crow that this is the result of the so-called inclusive growth agenda followed by the UPA since 2004. Specifically, they are going to credit the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) with the achievement. But as economist Surjit Bhalla points out in his column in The Indian Express today, this cannot be true. Using the NSSO data, Bhalla points out that MNREGA accounts for a small share of casual employment. Casual work as a percentage of total rural employment, he shows, was only 1.6 percent in 2009-10 and 2.1 percent in 2011-12. And within casual work, MGNREGA accounted for just 36.4 percent and 37.1 percent in 2009-10 and 2011-12 respectively. So MGNREGA, he argues, accounts for just 0.65 percent of total rural employment. 

He also debunks the theory that MGNREGA has helped increase rural wages. MGNREGA wages, he shows, rose by only 25 percent between 2009-10 and 2011-12, while non-MGNREGA casual work wages rose by 39 percent. 

And then comes Bhalla’s most damning indictment. The decline in poverty between 2009-10 and 2011-12 was by 13.1 percentage points; MGNREGA accounted for only 1 percentage point of this reduction. The left will not take up this line of argument because it would not like to junk a welfarist scheme, not matter how bad an idea it is. The BJP too is not averse to supporting bad economic ideas (witness its lack of opposition to the food security bill). 

But the real arraignment of the UPA’s so-called dole-oriented approach to inclusiveness is in these figures, not in junking the Tendulkar line.

UPA model has slowed down both growth and inclusiveness

http://www.firstpost.com/economy/upa-model-has-slowed-down-both-growth-and-inclusiveness-751561.html

In his speech at the 46th annual meeting of the Asian Development Bank (ADB) at Greater Noida, Finance Minister P Chidambaram declared, “India’s potential growth rate is 8 percent plus and we cannot afford to become complacent and sit back”.
Sure, one can’t. But will the solution he offers – ‘focus on inclusive growth’ – get India back to the 8 percent plus levels that it once reached (and crossed briefly)?
This is not to argue that India must pursue an economic model that benefits only a small elite (as it had been doing in the years before 1991). Growth needs to be, as he puts it in the same speech, ‘broad-based’.
Unfortunately, the ‘inclusive growth’ model that the United Progressive Alliance (UPA) has been following has all the potential of depressing growth and, only the most fanatical leftist will argue that inclusion can be achieved without growth. Employment guarantee and food security legislations may be inclusive in the short run but have the potential of harming growth in the long run.
If Chidambaram is looking for clues to solve the growth-inclusion challenge, he should perhaps go through a background paper that ADB prepared for the annual meeting – Beyond Factory Asia: Fuelling Growth in a Changing World.
Factory Asia is a model that ADB describes as one of “regional production networks connecting factories in different Asian economies, producing parts and components that are then assembled, with the final product shipped largely to advanced economies”. This model, adopted by China and the southeast Asian countries, helped put these economies on a high growth path.
There’s an Asian Century on the horizon, the monograph says, based on the rapid rise of its manufacturing sector. India isn’t a part of Factory Asia – since its manufacturing is more focused on the domestic market – but is on its periphery and would perhaps do well to follow that path, the paper suggests.
Circumstances, however, have changed. The Factory Asia model faces new challenges: the weak outlook for the advanced economies which provided much of the markets for the Factory Asia countries; growing protectionism in these markets; rising production costs (supply chain disruptions, wage increases, volatile exchange rates, skill shortages) are eating into the price advantage Asian manufacturing enjoyed.
But these issues and challenges can be addressed and India (which the paper puts among the developing Asian economies) could adopt and be part of a New Factory Asia model.
With consumer demand shifting from developed to emerging markets, developing Asian economies should tap into their own domestic demand as well as regional markets, fostering free trade and pulling in manufacturing investment by improving the investment climate. They need to build strong, competitive brands by ensuring globally compatible labour and safety standards. The private sector should be encouraged and helped to move up the manufacturing value chain, to make up for the narrowing wage differential.
Focusing on skill development is also important and necessary, given the increasing sophistication of manufacturing processes and the shrinking of the labour pool in some countries. Moreover, it is also important to encourage small and medium enterprises, which can help produce intermediate goods and provide supporting services.
Chidambaram’s speech had the usual laundry list of steps the government is taking to put the economy on track – the focus on infrastructure, investments in manufacturing, fiscal consolidation, the Cabinet Committee on Investment, easing foreign direct investment in hitherto taboo sectors, skill development programme, among a host of other things which we all know are happening only on paper.
There will be some who argue that the prescriptions in the monograph may not be entirely suitable to India. Sure, there is no cookie cutter model for development.
Recent census reports have shown that the number of farmers has declined in 10 years, while that of agricultural labour has increased. But with pressure on land growing, there won’t be enough employment for all of them. The service sector will require skills that farm labourers may not have. NREGA is not the solution. The answer, then, is to give manufacturing a huge fillip.
That’s why it would be good for this government and for any other government in the future to take these recommendations seriously.

After Roti, Now Makaan

UPA’s next folly: right to housing,without a land bank

(this was published in Firstpost last week) 

So, after roti, it’s going to be makaan.

There has been talk for some time now that the United Progressive Alliance (UPA) government is working on a right to housing legislation. Rural Development Minister Jairam Ramesh had made a commitment to this effect to the Ekta Parishad – a network of activist groups – last year, as it led a Jan Satyagraha march to Delhi in October last year.

One had hoped that saner voices in the government would nip this in the bud. But with elections looming in the horizon, sanity obviously goes out of the window. So Ramesh’s ministry has finalised a draft National Right to Homestead Bill, 2013, the details of which have been published in The Indian Express.

The highlights of the housing scheme are the following

1: Every landless and homeless poor family in rural areas will be entitled to a `homestead’ of not less than 10 cents” (0.1 acre, or 4,356 sq ft).

2: Homestead is a dwelling with adequate housing facilities. The definition of ‘adequate’ includes access to basic services (drinking water, electricity, roads and public transport), appropriate location, accessibility and cultural adequacy.

3: This right has to be enforced within five years of the enactment of the law.

When Finance Minister P Chidambaram unveiled a budget shorn of election-driven populist announcements, there were cynical predictions that this was merely to please rating agencies by providing a semblance of an effort at fiscal consolidation. And that pork barrel giveaways would resurface as we got closer to 2014. The cynics are being proven right. The Indian Express report says the Bill could be tabled in the monsoon session of Parliament.

Sure, it’s unfortunate that India has close to 8 million homeless rural families. The Twelfth Plan working group on rural housing estimates the shortage in the Plan period (2012-17) at around 40 million. But is giving such families a right to housing the answer? There’s reason to believe it isn’t.

It’s not as if the problem of homelessness has been ignored completely by policy makers. The Indira Awas Yojana (IAY) was started in 1985 to help below poverty line rural families build houses or upgrade existing kutcha houses. The central and state governments share the costs on a 75:25 formula.

In 2005 the UPA government brought it under the umbrella of its flagship Bharat Nirman scheme to give it extra support and thrust. Implementation of the scheme may have improved – achievement of targets has increased from 66 percent in 2007-08 to above 80 percent – but it has also been dogged by scams, with stories coming from as far as Assam and Kashmir, apart from Bihar and Odisha. There are irregularities in the selection of beneficiaries and the quality of construction has also been found to be extremely poor.

The IAY also has a provision for the government to provide land for families on its waiting list who don’t have land. That’s easier said than done. Where is the government going to get the land from? No doubt, from all the surplus land that state governments have acquired under various land reform legislations or donated under the Bhoodan movement started by Acharya Vinobha Bhave. But what is the record of such land being redistributed (which was the rationale behind the land ceiling laws and Bhoodan)?

Let me quote Ramesh’s words back to him. “Five million acres has been pledged as part of the Bhoodan movement over the last 60 years but only 50 percent has actually been distributed…This is a land scam beyond everything, without any parallel,” Ramesh said last year. (See the report here.) A Land Reform Commission that Nitish Kumar appointed in Bihar also came to a similar conclusion.

Even in West Bengal, which is supposed to be a benchmark for implementation of land reforms, the iconic Operation Barga has not been as successful as it has been claimed to be. For every registered bargadar (sharecroppers who were given redistributed land) there are several unregistered ones. Land sharks and other goons have taken away land from people who got titles. Can Ramesh ensure that people who get land under his proposed law will not have it taken away, either forcibly or by subterfuge? Many of the landless have been allotted land, they have not got titles. It would be better for Ramesh to focus on that first, even though it is a state subject.

Forget land grabbers. The proposed law says it will give land to the landless. But the government can also take away land for public purposes. And its record of  compensating those whose land is taken away (especially those with small patches of land) is abysmal, at best. There’s an inherent contradiction here. Would it not be better to restore the right to property (abolished by the 44th Constitution Amendment in 1978) and enforce it?

These are reasons enough to conclude that a right to housing will be meaningless at best and a scam at the worst.

There’s no point arguing that a scheme or an idea is good and that it is the implementation problem that needs fixing. Grand ideas, which are not practical to implement, are nothing more than empty dreams. So long as they remain dreams, there’s no problem. But when they become the basis of pushing through laws with huge financial implications for a country with a faltering economy, there’s a very serious problem, indeed.

This whole rights-based entitlement approach of the UPA is hugely problematic.

There is ample evidence that each of the rights that it is championing – education, work, food and now housing – can be better achieved by means other than legislated guarantees. Ending the licence raj in education can ensure better access to schools, even for the poor. Unshackling agriculture and small rural and urban enterprises could generate more and productive jobs than NREGA. Ending distortions in the food economy can ensure that food stocks are managed more efficiently so that people don’t go hungry.

But the record of the UPA in listening to voices of reason when it is set on reviving the mai-baap state is poor.

So what’s the next right it will confer, as we move closer to 2014? Kapda?