An economist's view on the new government's initiatives

  • Blog Post Date 19 December, 2014
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Pranab Bardhan

University of California, Berkeley

In this article, Pranab Bardhan, Professor of Economics, University of California, Berkeley, provides his perspective on some of the initiatives of the new Indian government at the centre in their first six months in office – Swachh Bharat Abhiyan, Jan Dhan Yojana, ‘Make in India’ campaign, and the proposed changes to MNREGA. In his view, inefficient subsidies must give way to a basic monthly income for all citizens.

Q: What do you make of the policies of the new Indian government so far? Do you see more continuity or change?

Pranab Bardhan: As in most things, I see both continuity and change. In fact, some of the announcements that have been made are continuation of earlier policies. The Swachh Bharat Abhiyan, announced with much fanfare and broom-wielding by politicians stepping out of their limousines for photo-op, for instance, is largely the same as the Nirmal Bharat Abhiyan the earlier government had launched. This government has probably more energy and will probably do more, but one has to understand issues such as why toilets built in the earlier programme did not get used. One obvious reason is the absence of regular water supply to keep toilets usable. Even without that problem, there are several social and cultural issues that come up, which cannot be solved merely by bureaucratic fiat.

For instance, why is it that the toilet programme has succeeded much more in Bangladesh, a poorer country, than in India? One does not really know, but a part of the answer may be that as in other social programmes in Bangladesh these are not just sarkari (government) programmes foisted from above. Non-government organisations (NGOs) got involved in working with the common people on these projects, particularly in changing habits of personal hygiene. Another answer that has been given by some - and which we should discuss and find out more about - is that Hindu culture instils some deep aversion to cleaning toilets. For centuries, our toilets have been cleaned by people who have occupied the lowest and most degraded rungs of the social hierarchy.

So, even if you give people toilets but they are not willing to clean them, they will often remain unused. This is less true of primarily non-Hindu societies like Bangladesh. The new government’s energy to solve this issue is welcome but they must understand (and that’s where the continuity part comes in) why the earlier programme did not work.

Similarly, one programme that the government has announced, and which I am generally in favour of, is the Jan Dhan Yojana. But here, too, the government must understand why more than 40% of households have so far lacked banking access. It is difficult to reach out to remote areas of the country. The idea of bank accounts with overdrafts for everybody is also problematic. This may end up as massive loan waivers which will weaken the banks. If you want to help the poor, give them unconditional transfers out of public revenues, if you like, but not at the expense of the public sector banks’ viability.

Q: There are some who say that no-frills accounts for the poor can become viable if there is a move towards direct cash transfers. The earlier government tried but gave up on it. Do you think this is something the new government should push aggressively?

Pranab Bardhan: We must distinguish between two kinds of cash transfers: transfers to producers and transfers to consumers or citizens. I think producer subsidies such as fertiliser subsidies should be transferred as cash directly to producers. Today, fertiliser subsidies are both regressive, benefiting richer farmers far more than the poor, and inefficient, with a part of the subsidy going to inefficient fertiliser firms.

There will be opposition if you try to reduce such subsidies. So as a first step, the subsidies must be converted to cash transfers, which is somewhat politically easier, and which will make the subsidy transparent. (In this context, if I may be flippant, even the perks and allowances which ministers, MPs and their families receive, such as free flights and transportation and free medical treatment, should all be given in cash, so that you and I know how much each politician costs the country). Transparency will make it easier to reduce such subsidies over time. Even consumer subsidies such as those on LPG (liquefied petroleum gas) cylinders, which benefit mostly the richer sections, should be eliminated. In the case of diesel the subsidy should be eliminated with special vouchers for public buses etc., which the poor use.

Instead, I would favour some kind of universal citizen transfers. Estimates show that total non-merit subsidies funded by both states and the centre amount to roughly 9% of India’s Gross Domestic Product (GDP), which largely benefit the better off — the ‘dole’ for the rich and middle classes. So, I have advocated the following kind of deal: if we can persuade the better-off people to give up only one-third of these subsidies, calculations show that it is possible to provide each household in India, rich or poor, more than Rs. 1,000 per month. And you won’t even need to raise fresh taxes for this.

Q: So you favour something like a universal basic income?

Pranab Bardhan: Yes. This is the idea of a universal basic income, and it was originally suggested by some European thinkers in the 19th century (whom Marx called ‘utopian socialists’). This is very much on the agenda of green parties in Europe today. This is even more important in India because we mess up on distinguishing the poor from others. Below poverty line (BPL) lists in most states exclude many poor people while many well-off families manage to bribe their way in. Even the Aadhaar programme, which I am in favour of, will not solve the problem because the Aadhaar card won’t tell you if the person is rich or poor. But if you move towards universal transfers, you can avoid the inefficiency and corruption in classifications such as BPL. Of course, mere cash transfers are highly unsatisfactory in case of provision of some basics like healthcare, as the poor are often uninformed about how and where to spend the cash for such basic services. The universal programme I am in favour of in that sector is that of a single-payer universal healthcare system.

Q: You have been involved in a debate on the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA). Why do you think the programme should be retained despite leakages?

Pranab Bardhan: Those of us who support MNREGA are not saying that there are no problems. Many problems such as delay in payments, corruption, irregularities in materials, etc. persist, though there is some evidence that these problems are declining over time in many parts of the country. But despite its problems, it is an effective conditional cash transfer programme. The condition is that you have to work manually to get the transfer, which immediately excludes the middle class and the rich. And it acts as a safety net for the rural poor who find it difficult to get work in the lean season. The sheer existence of an alternative fall-back option improves the bargaining power of landless labourers.

There are leakages, and the programme needs to be improved. But the leakages are very small compared with the subsidies to the rich. The entire programme costs only 0.4% of GDP. Even if you assume that half of it is stolen - which I don’t think is true - it still costs only a tiny fraction of the subsidies spent annually on the dole for the rich. So I think there should be some sense of proportion, which people tend to lose, in this debate.

There are also those who oppose MNREGA because they believe it is raising wages but I tell them that any poverty eradication measure will raise the bargaining power of the poor, and hence their wages. If you are against MNREGA raising wages, you must be consistent and oppose any poverty eradication effort!

So, I am a bit worried about the government’s attempts to dilute MNREGA provisions surreptitiously rather than through openly debated amendments to laws that were passed with the BJP’s (Bharatiya Janata Party’s) support earlier. The same kinds of changes are happening in case of environmental clearances by means of various ‘notifications’, a form of reform by stealth (which the Prime Minister publicly says he does not like); similarly, there have been ‘notifications’ to get rid of the mandated need for consent of local people in the case of deforestation.

Q: What do you think of the ‘Make in India’ campaign? Do you think India has already missed the manufacturing bus, given that economists such as Dani Rodrik seem to suggest that the days of manufacturing are over?

Pranab Bardhan: I hope Make in India is not what the Swadeshi Jagran Manch used to ask for. If it is about swadeshi (of or belonging to one’s own country) in another incarnation, then it goes against trade liberalisation. Before trade liberalisation, Indian producers had to use made-in-India intermediate goods, which were sometimes inefficient, rendering finished products costly and uncompetitive. One of the ways in which trade liberalisation improved productivity was that it allowed producers to use more efficient imported materials and components.

As long as it is not in favour of mindless import-substitution, I welcome efforts to boost manufacturing. I don’t completely agree with the reported view of Dani Rodrik that the days of manufacturing are over. Yes, there are some countries where manufacturing has peaked, particularly in exports. But for countries such as India, China, and Indonesia with large domestic markets, there is still a huge scope for manufacturing. Think of the huge increase in demand for light manufactured items when living standards in the rural areas of states such as Odisha, Bihar, Uttar Pradesh (UP), and Madhya Pradesh improve. What is disconcerting is that India is not able to get into even relatively simple manufacturing products in the global value chain that China is getting out of. Countries such as Bangladesh, Vietnam, and Indonesia are ahead of us in making those products.

Q: Are our labour laws to blame for this?

Pranab Bardhan: The labour regime is a constraint but as I have written earlier, it may not be the binding constraint. I looked at the data on a very labour-intensive industry: garments. Now, if labour laws are the binding constraint, you will expect to find many firms just below the threshold level of 100 workers beyond which stringent labour regulations kick in. But the data do not show that. There is instead bunching at a very low level: at around the eight-employee mark. So, the question really is what prevents an eight-employee firm from becoming an 80-employee firm.

If you ask an eight-employee firm’s owner what prevents him from expanding, he is likely to tell you that if he were to expand, and invest in better machines, he will need to assure himself of regular power supply. So, the binding constraint, in my view, may well lie in the poor quality of infrastructure in India, whether it be power, roads, or ports.

China’s success in manufacturing is a classic example of infrastructure-led growth. Most people don’t know that long before China initiated economic reforms, it had already created the base for an industrial boom by investing heavily in the power sector. Under Mao, China carried out a lot of rural electrification, whereas even today, half of the households in our villages don’t use electricity. Of course, China also invested heavily in health and education and that created a much more productive workforce. So in physical and social infrastructure, China had already solved many of its problems much earlier, in the Maoist period.

A version of this article has appeared on Live Mint. Pramit Bhattacharya interviewed Prof. Pranab Bardhan.

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