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Mainstream, Vol XLVII, No 1, December 20, 2008

Lasting Way to Fight Recession: Revamp NREGA

Sunday 21 December 2008, by Kamal Nayan Kabra

Over the last few months a number of measures have been taken by the Government of India in order to deal with the effects of the acute and far-reaching financial and economic crisis and onset of recession in the rich industrialised countries. The basic thrust of these steps has been to improve the liquidity of the financial system by releasing the funds of the banks impounded with the RBI, to lower the rate of interest and restore confidence in the solvency of the banks. Luckily the solvency of most of the banks was not dented, thanks largely to the public sector character of our major banks. It is well known that the present crisis originated in the USA owing to the unregulated hyper growth of the greed-driven, casino-like financial sector (rightly called the fictitious or the unreal sector) totally divorced from the real productive activities. The wild growth of hundreds of financial instruments and the mammoth volume of their transactions combined with their total unregulated functioning (the phenomenon of finacialisation, that arose as a result of growing disparities and lack of adequate domestic demand to sustain real sector investments) led over time to a series of bubbles ( each succeeding one with greater ferocity) and their inevitable bursting (the sub-prime crisis and its aftermath being the latest in the series) over the entire history of the post-Reagan-Thatcher era re-enacting the pre-Second War history of world capitalism.

Massive growth of wealth in the hands of a small number of transnational firms created the conditions in which even profitable and full use of the existing production capacity has become difficult, let alone the availability of fresh profitable investment opportunities, especially those comparable with the easy and short gestation period huge profits afforded by playing in the financial sector de-linked from the production sectors. In the financial sector it has become possible to have trading volume many times the size of one’s own funds. Thanks to factors such as leveraging opportunities, low margin money requirement, the scope for global scale operations owing to different time zones creating opportunities for arbitrage, derivatives based transactions and information revolution that made on-line, exchange based trading in financial instruments a very quick, recorded operation with low counter-party risk that the financial sector has overshadowed the real economy. Little wonder that the volume of financial transactions now ranges between five to ten times the size of the real production sectors in the world. Thus for want of investment opportunities in the real sectors that could attract the rich and the super-rich, the unregulated financial sector promises a real bonanza.

In India after the 1991 neo-liberal policy changes, stock markets, commodity futures, currency markets, insurance business, investment banks, hedge funds, private equity funds, along with many other existing and growing financial firms operating with a large number of new and uncontrollable financial instruments and uncontrolled and enticed inflow of foreign financial resources, including hot money flows prepared the ground for the fantastic growth of the financial sector . It has grown in size to come nearly on par with the manufacturing sector. But these trends have also increased the vulnerability of the economy to an unprecedented extent, especially because of the indiscriminate, highly risky lending and their securitisation as also by the participation by the Indian firms and persons in the global financial markets owing to partial capital account convertibility. This is in addition to the virtual full convertibility given to themselves by India’s big money in the form of widespread hawala operations.

As a result, the effects of the failures and shenanigans in the financial markets of the G-7 countries, mainly the USA, the entire financial intermediation and trading process has become vulnerable to the evaporating confidence of the savers, small and big investors, and the other players themselves owing to the uncertainty about imminent insolvencies of those who played the ball indiscriminately and gave a free run to blatant greed and its no-holds-barred operation owing to lack of any regulatory arrangements worth the name. In fact, some initial failures caused multiple failures down the line and some of the biggest and oldest companies went bankrupt, were sold or had to be taken over by the anti-statist states. With the US economy’s role based essentially on the international reserve currency role of the dollar, its massive budget and foreign exchange deficit and the role of the US economy as among the biggest trading partners of many countries added to the complications and enlarged the negative fall-out. These factors and processes are both among the causes and the spread mechanism of the contagion to countries such as India that were forced to go global in their real and financial sectors as a part of the shock therapy delivered on account of the explosion of the debt bomb in the early 1990s. As a result, need has been felt worldwide to rewrite the script of the global financial, exchange rate and payments mechanism and reduce the clout of the so-called superpowers.

Thus it is not difficult to see that the effects of these disruptions in the fictitious markets do not remain confined to these markets alone. In many ways the real economy and the countries with little direct participation in the global financial markets come to grief. It was mainly the monopoly power enjoyed by the multinational large firms that permitted constantly rising mark-up pricing allowing the private companies to achieve their business goals, while the global trading in shares increased the market valuation of their capital. Often times the high and rising market value was encashed by share market operations by frequent profit-taking. This kind of gain tended to become a major source of growing concentration of wealth and adversely affected the real sectors and has spread its tentacles from the fictitious economy to the real economic spheres and is spreading its virus to the rest of the world, including Third World countries such as India.

The people who came to make a huge killing in the financial markets, largely windfall gains, spend a part of it for real estate investment and speculation, pushing up prices to dizzy heights. Similarly other markets, such as bullion, foreign exchange markets, travels, hotels and other areas of luxury spending experience a boom, draining resources away from the needs of the general masses. Thus shortage of wage goods gets accentuated leading to high capital intensity, high import intensity and these processes are helped by a low interest rate regime. The over-expansion of the financial sector thus lays the basis for a general spread of panic mania and crash of the unreal economy causing shortage of liquidity for further speculation but also for the real needs of genuine businesses for production and investment purposes. The constant growth of the financial sector is an essential condition for the maintenance and expansion of the present globalised, MNC-dominated economic order. It is this that has exploded.

ONE thing is clear. There are two kinds of diagnoses and responses, depending on the relative voice of the popular vis-à-vis the corporate business classes. One is oriented towards the problems and self-goal of the financial sector players to bail them out, restore confidence in the system as it operates and bring everything back to the same old game. A non-activist state merrily assumes direct responsibilities at the cost of the ordinary citizens to bear a better part of the losses incurred on account of reckless operations that gave the business tycoons easy and corpulent profits. The other is to draw attention to the massive, unearned windfall profits made by a small number without contributing anything real and meaningful to the general well-being and on the contrary making things go from bad to worse for the general masses as an increasing number is thrown out of their jobs, forced to accept wage cuts and, most tragic, denied adequate social security, new jobs and income earning opportunities. All these things further worsen the existing distribution of income and wealth, both internationally and intra-nationally, that is one of the major factors that caused and exacerbate the present crisis. Instead of dealing with the negative effects on the broad masses, the authorities in India view the present crisis mainly, if not entirely, in the form of a steep fall in the share market prices and market capitalisation of the stocks of the listed companies, in one word, in terms of the low and declining level of the Sensex. There are similar turmoils experienced the financial markets and their major players in the super-rich countries. It is clear from the decisions taken by the Government of India so far that they are least concerned about the peoples’ woes and crying needs, most of which predate the present crisis and got intensified and upfronted by the recent turn of events.

The upshot of all the measures taken so far by the Indian Government seem to be to address the concerns of the stock market players, other financial sector players, the corporate sector industries, some exporters, and so on. It is not realised that the best method of stable and sustained growth along with serving the cause of our valued social objectives and popular needs is to take steps to create a large and growing domestic market. (In fact, as a matter of long-term trend in the country’s economic policies the concern with creating external demand for “made in India” has all along been far more acute than that for creating a stable and growing internal market for manufactured and other wage-goods: in concrete terms that is the simple meaning of the non-existent concern with equity and social justice in Indian plans and policies, particularly after the 1991 right-about-turn). Such a market has to be the market in which the average Indian citizen has to be able to participate and benefit. Obviously, such a market has to expand the demand for labour, something that the private sector investment has not been able to do all these years and public investment has responded only as a token by means of some ritual allocations for village and khadi industries. Such a concern for mass consumption goods and employment ( as also equity) demands public spending on a scale large enough to make use of the labour of every adult and thus stop the wastage of our large pool of physical and brain power. It is logical that this process cannot be sustained without large increases in the supply of mass consumption goods, provision of social and economic infrastructure for rural India and the urban slums. But ignoring all such crying needs that can be the bulwark against economic fluctuations of the kind we witness presently, the concerns of the authorities in India have remained confined primarily to ease the liquidity crunch and make credit both plentiful and cheap for the big organised capital. How low interest rates reduce the earnings of the household sector, the main saver in the Indian economy, increase the profits of the large organised capital, the main borrowers from the financial sector, and by cheapening capital becomes a blow against labour-using techniques of production are issues that are simply consigned to oblivion by the Indian policy establishment.

However, it is universally agreed that there is an urgent need to increase effective demand so that the threatening recession, the spread of the down turn from the unreal to the real economy does not assume ominous proportions and further aggravate the already highly unsatisfactory employment situation. It should be difficult to deny that what the country has seen over the past two decades or so is the long term and regularly worsening crisis of the Indian farmers arising from persistent discrimination against the farm sector, especially the dry farming regions and the small and marginal farmers. The pursuit of job-loss growth of the past two decades (as can be seen by the positive association between the rate of growth of national income and the rate of growth of unemployment in India) has assumed explosive proportions leading to excess capacity and disturbing social tranquillity going beyond the already disturbed conditions prevailing over large parts of the country. Suggestions have been in the air and some measures have been announced to give a boost to infrastructure investment largely in the public sector. Under the present conditions of business confidence being at its lowest ebb despite the fact that the government is in an overdrive to appease and pamper the big Indian and foreign capital, including the speculators in our bourses, increasing public investments and that too in activities that can have the largest spread effect is something that normally should suggest itself, but fails to do so owing to the ideological blinkers of market fundamentalism and blind growthmanship.

One often comes across reports these days that many projects in the pipeline in the private sector have been put on hold, and fresh investments are nowhere to be seen. Layoffs are worsening the already grim job prospects facing the poor and the young, both educated and illiterate, urban and rural. It is difficult to believe that the private and more particularly corporate investment can come forward to save the day, irrespective of the high and rising level of the Sensex. In all these exercises there seems to have been a very limited realisation that the poor and the rural masses too are not immune to the adverse fall-out of the global recession and the over-expansion of the Indian corporates and speculator-friendly financial sector, that is, the components of crony and casino capitalism. Moreover these effects are going to further queer the pitch for the poor rural masses (for instance, via the blocking of the escape route of the circular urban migration for eking out a meager and miserable living) as a result of the declining urban and organised economy under the impact of the Western slowdown and fast decline in effective demand owing to the high rate of long standing inflation and bleak employment scenario.

Moreover, now the need for increased public spending is advocated by everyone, even by the diehard opponents of state activism in the economic sphere. Hence there is every reason to divert these resources for meeting some glaring shortcomings and failures of the past, especially in the sense of giving a disproportionately low share of public spending to meet either the short run or the long run needs of the poor. The low and uncertain demand coming from the poor, really numbering over 80 crore Indians, is the natural arene for injecting new purchasing power.

A very welcome and epochal step in the direction of correcting the social imbalance in policy and public spending priorities has been initiated in the form of the National Rural Employment Guarantee programme. Thankfully the programme has been extended to cover the entire rural India and a large number of positive reports regarding its execution and good effects are really heartening, notwithstanding the reports of corruption, misuse and inadequate progress, and so on, from some States. On balance, the positive feedback from the scheme more than justifies the scheme and the hopes pinned on it. There are welcome reports that there has been a distinct reduction of distress migration from certain eastern States to certain north-western States as in situ income earning opportunities have been generated by the NREGA. It has to be allowed to consolidate itself, introduce correctives and receive greater allocations (in fact flexible demand based allocation for a scheme that ensures demand based right to work is a logical corollary). Hence the need for modifications in the scheme and its mode of implementation with greater direct involvement of the positive forces.

In this context in the present need to pitchfork public spending for macro economic reason as also for overcoming the imminent threat of the Western meltdown casting its dark shadows on our economy and its most vulnerable sections, the most deserving candidate for allocation of enhanced public spending is the NREG programme. This can be done best by removing the unjustified restriction of the scheme to one person per family and to a hundred days. A real universalisation of the scheme and making it adequate to meet the minimum needs of everyone round the year are logical to the stated rationale of the scheme. These changes would reduce the scope for corruption and arbitrariness quite substantially. Under the present provisions in the best performance case also the per day per person income accrual would amount to only less than rupees six. The moment one compares this with the generosity and promptness with which the stock market, corporate and large financial sectors’ operators needs, real and perceived, have been responded to by the government over the last few months, it becomes absolutely indefensible to restrict a fifty-years-too-late scheme, that is, the NREG proframme, for answering the basic citizenship needs and rights of the poor masses to such a ridiculously low level with an explicit cap on the maximum benefit that could be granted to the poorest of the poor. Recall how the Gandhian talisman regarding the face of the last man is quoted in and out of season by the people in power, especially to generate a hallow of social sensitivity, while presenting the Union Budget. Contrast this eloquence with the actual practice seen, for instance, in the form of the tardy, delayed, meagre and poorly delivered response to the farm sector crisis and the traumatic chain of mass suicides by the farmers in many parts of India, and the prompt, suo moto generous response to the nominal paper losses of the unearned wealth of the speculators owing to the steep fall in the share prices or their imminent bankruptcy owing to their inability to meet their margin money obligations vis-a-vis the bank-funded speculative share market deals, including those of short selling! The total value of such largesse, when added to the existing tax expenditure for the corporate sector, would exceed the allocations for the rural poor many times over. These discriminatory and delayed steps seem to be the general rule. One can cite many recent instances of such discriminatory, pro-big capital decisions. One may recall how the much flaunted loan waver for the farmers was delayed by the gimmick of ordering a fairly time-consuming expert study of the well-known problem of farmers’ indebtedness, just the same way as the crystal-clear issue of land reforms has been put in cold storage by entrusting it to another expert study. The sacrifice of thousands of crores of rupees in the process of privatisation of the telecom services is also well known. How the policy of user charges for the essential health and education services compares with the long term losses regularly incurred by the public airlines to benefit the air travellers and the recent cut in the prices of aviation fuel to make it cheaper than petrol used by the scooter riders is something that is really too brazen. One would be struck with the ongoing gigantic scale of the process of transferring public resources and opportunities to the so-called wealth creators.

Contrast all these with the miserly and insensitive allocations for helping the poor (defined in terms of a poverty line that has remained fixed in real terms and has declined to 17 per cent from over 60 per cent of the mean income for the rural sector over some thirtythree years ago, while the nominal mean national income has gone up over 25 times!) It is in this context of the immediate steps taken against the impending economic disaster and long term discrimination against the poor that one is pleading for making the rural employment guarantee a genuine guarantee, as suggested by its name and stated purpose.

HERE is how this can be done, something that is the most decent thing that can be done for the poor masses today within the prevailing framework and with immense direct and indirect good for the organised big and small capital alike. This is the way to create a large, broad-based internal market, improve the health and nutrition status, enable the poor children to go to school and create in situ livelihood opportunity available to put a brake on the distress migration process that is the major anti-hunger insurance that people provide to themselves. It is consistent with the present actual fiscal practice of running huge deficits but keeping them outside the budget! In any case the sooner the government gives up its self-imposed fiscal impotence under the name of the fiscal responsibility law, the better; it is for restoring the autonomy of the country’s development policy. There is no justification for making guaranteed employment restricted to a family and not making the individual as its unit. So a neo-liberal philosophy-based regime has to do what its philosophy dictates, make incme entitlement available to an individual. Entitlement to work and income is a prerogative of an individual. So please do not depart from your own principles and make every individual adult entitled to demand and obtain work. In a country where everyone who is better than the poor has her or his income revised upwards many times and many times over in the government sector, including for the holders of the most exalted positions of public service, keeping the wages under the programme glued to the initial levels is something that cannot pass any test of fair play. So at least rupees one hundred per day should be the wage made available to a person who volunteers to work under the scheme. There is no shortage of work that is crying to be undertaken and completed. Hence the restriction of hundred days of work too should be removed. This would be the most people-friendly method of injecting purchasing power, generating effective demand and creating or activating production processes to keep us away from the virus of recession that has infected the rich G-7 countries and is threatening to reach our shores. And a guarantee remains a worthless paper promise unless the failure to provide work is accompanied by the payment of compensation for dishonouring the guarantee. It is one thing to make a legal provision to this effect and another to put in place administrative arrangements for giving effect to it that are suitable to the capabilities and circumstances of the person who seeks work but is not provided work. Just as the irregularities in the payment of wages have been sought to be addressed by a number of novel devices, the procedure for obtaining the compensation in lieu of the failure to provide work should be made people-friendly, say, for example, by accrediting an independent agency to do social audit and find out the shortfall between the number of days for which work was demanded and the number of days the work was actually provided. It is for this agency to ensure that like wages being credited to the post office savings account of the job-seekers, the compensation amount too is credited to their savings account. Of course, this arrangement presupposes that there is a real intention to guarantee income flows on an adequate and regular basis and implement productive works in the rural areas.

A revamped NREG scheme along the lines discussed above would inject a large stream of purchasing power in to the economy that would provide a stable foundations for fighting recession both in the immediate and long term. Its spread effects would rejuvenate our rural artisanal activities, small and tiny enterprises and all these would, in turn, help the growth of the large organised manufacturing and services sectors; for certain goods and services the large sector in any case remains the sole source as these goods cannot simply be produced by the other sectors. The spectacle of poor ruralites flocking the poorly serviced parts of urban India and adding to both physical and social squalor too would diminish as the scheme of remunerative work at one’s doorsteps becomes a palpable reality and gathers steam.

It is time thus to make use of the opportunity provided by the threat of recession to complete the agenda of effectively generating internal market and provide a measure of stability to our industries, make the growth of the economy really inclusive and prevent inclusive growth from becoming yet another verbal gymnastic.

A prominent economist, Dr Kabra is a former Professor (now retired), Indian Institute of Public Administration, New Delhi.

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