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A V Rajwade: The politics of distribution-II

A V Rajwade  |  New Delhi 

For income disparities to reduce, the price rise should play an important role in increasing rural incomes

Last week, I argued that the politics of distribution can be afforded only with an equal emphasis on the politics of production, particularly industrial growth, which creates the resources needed for distribution. Since Independence, the share of industry in India’s GDP has gone up, but nowhere near as much as one often tends to assume from recent numbers — it was 12.5 per cent in 1950-51 and a little less than 20 per cent last year.

The environmental and land policy agendas are by no means the only impediments to manufacturing growth and employment. So is the exchange rate policy. As US President Barack Obama said in Mumbai: for every additional $1 billion the US exports, thousands of jobs are created in the US. We, on the other hand, seem blissfully unconcerned, in our exchange rate policy, about the need to keep the tradeables sector competitive in the global economy. Indeed, after the Obama visit, it was left to the Bollywood couple Shabana Azmi and Javed Akhtar to raise a very pertinent question: feeling great about having created thousands of jobs in the US is fine, but what about creating jobs here, where they are needed even more?

As for industrial growth, there is also the question of interest rates and the availability of money. Inflation is a problem, but it is primarily driven by food and commodity prices. The latter are determined globally and the former are a reflection of the successive increases in minimum support prices, and the impact of the National Rural Employment Guarantee Scheme (NREGS) on agricultural labour costs. Indeed, price rise is a relatively painless way of transferring income (as Keynes described it) from urban to rural India.

And such transfer is needed, if disparities are to come down. Back in 1950-51, agriculture accounted for 52 per cent of our national income and employed perhaps two-thirds of the workforce (India After Gandhi by Ramachandra Guha). In other words, even then, agricultural per capita incomes were lower than the income of the remaining economy. But the disparity has grown dramatically since then. At present, agriculture accounts for just 17 per cent of national income, but provides employment to 45 per cent, according to the labour ministry’s recent report on employment.

It is the leadership’s responsibility to explain to the (vocal) urban population the need to increase rural incomes and inflation’s role in it. Leadership, as Jawaharlal Nehru showed in the late 1940s-1950s on the Hindu Code Bill, to which a vast majority of Hindus was opposed, requires a leader to persuade people, even the political opposition, to agree to do what they are unwilling to – if that is what is right for the country – and not always make policy by holding a wet finger in the wind. The other side, of course, is the need to create more jobs outside the agricultural sector, once again emphasising the need to practise the politics of production, of fostering fast industrial growth. And, deflationary monetary and exchange rate policies are not the way to do this. Policy rates have already been raised six times this year.

Can the services segment, which has grown the fastest over the last 60 years, not do the trick? It is unlikely, since it’s difficult to imagine that the services sector will keep growing at the rate it has, and keep producing reasonably paying jobs, unless supported by fast industrial growth.

Today’s Europe is a good example of what happens when entitlements become no longer affordable to the fisc. In country after country, there are public sector job cuts, benefit curtailment, delayed pensions and the social unrest these steps are generating. Even Cuba, one of the last bastions of socialism, has recently cut half a million public sector jobs because the “state cannot keep maintaining … bloated payrolls”. (China realised this a long time back; its public sector today is highly profitable and generating huge surpluses.) In fact, Cuba has unveiled a capitalistic revolution after 50 years of socialism, a road taken by China three decades back, and Vietnam a decade later. The experience of Asia over the last 60 years emphasises the crucial role of growth in excess of 7 per cent per annum in poverty removal. And, it is worth remembering that “we cannot take our high growth for granted” as the finance minister said in an interview in the Hindustan Times (September 25). Indeed we cannot.

The politics of distribution can sometimes end up harming exactly the people it is supposed to benefit. The recent financial crisis leading to the deepest global recession for 70 years was as at least partly the result of housing loans to “sub-prime”, that is, poor borrowers. Who suffered the most? The poor, the less qualified, the people being evicted from their houses.

Coming back to the NREGS, a subcommittee of the Central Employment Guarantee Council has recently reported that the work performed under it was not productive. If that is the case, why not have direct, preferably electronic, cash transfers, which will save so much in terms of administrative costs and leakages? This issue leads to the other input of the politics of distribution, namely governance. I hope to return to the topic later.

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First Published: Mon, November 15 2010. 00:06 IST