The Indian Economy Blog

September 15, 2005

Good Intentions. Bad Ideas

Filed under: Infrastructure,Labour market,Regulatory reforms — Amit Varma @ 1:49 am

A version of this piece was first published in the Asian Wall Street Journal (subscription link).

The road to hell is paved with good intentions—and nobody knows that better than India’s poor. There can be no better intention than removing poverty but, for more than half a century, a well-intentioned and bloated state has only perpetuated it with misguided policies and regulations. And New Delhi still hasn’t learned from these mistakes. The Indian government is soon to embark on perhaps the grandest waste of taxpayers’ money yet: the Rural Employment Guarantee Bill.

The REGB, recently passed in parliament with unanimous support across political parties, is supposed to provide 100 days of work in a year to every rural household across the country that wants it. This is expected to cost Rs. 40,000 crore (around US$ 9.1 billion), which amounts to 1.3% of GDP. And by some estimates, costs may reach four times that figure. The bill is in line with the rhetoric of the Congress-led coalition government, which came into power last year disdaining the liberalization policies of the preceding BJP government, and promising to introduce “reforms with a human face.”

The problem is that there is no evidence that the Indian Government is capable of properly implementing any social welfare plan. Former Prime Minister Rajiv Gandhi remarked in 1987 that only 15% of the money spent by the government actually reached its rightful recipient. The rest was wastage. Similar distribution schemes–such as the Public Distribution System and the 1976 Employment Guarantee Scheme in the state of Maharashtra–fell victim to inefficiency and corruption, and have all failed to achieve their stated objectives.

These failures have much to do with the the vast Indian bureaucracy, which is designed in such a way that inefficiency is inevitable, and corruption likely. Bimal Jalan, a former governor of India’s central bank, put it succinctly recently when he pointed out that “the most important problem in governance and administration of projects or schemes launched with great hopes is the involvement of a large number of agencies and ministries in decision-making and implementation. It is also common experience that these multiple agencies do not work in unison to resolve any administrative issue.”

Whatever money does make it through all the confused bureaucracy is prone to being siphoned away at the end of the line, where local distribution is meant to take place. The recently passed Right to Information Act, a welcome move that is supposed to increase transparency by forcing the government to make its paperwork available to anyone who wants to see it, can only be of limited help. Most of the country does not even know about it, or would not dare to use it against an oppressive local government.

The REGB will also have economic consequences. Labor markets could be distorted at local levels if the wages paid by the scheme are more than the local rate decided by the market. If the government runs short of funds and makes drafts on private savings held by banks, interest rates could go up. Then there’s the obvious fact that the money spent on this scheme could certainly be put to better use somewhere else. New Delhi could use it to build much-needed infrastructure like roads, ports and power installations, enabling greater participation in the economy and generating more sustainable employment.

The key to generating employment lies in less government intervention, not more. The government needs to reform India’s archaic labor laws, whose inflexibility hampers industrial growth as well as employment. In a variety of repressive ways, firms are not allowed to enter into free contracting, and cannot manage their workforces according to market conditions. In theory, labor laws are supposed to protect workers from being fired, but in practice such laws discourage industrial units from being set up, and hamper entrepreneurship and industrial expansion. The effect is that employment is far lower than it would have been in a free market.

India also needs to shut down its “License Raj,”–the oppressive web of regulations that acts as a massive disincentive to entrepreneurs and businessmen. It is no coincidence that India ranks 118th on the Heritage Foundation Economic Freedom Index, and 127th on the UNDP Human Development Index. Economic freedom and development go hand in hand, and India could have done as well in manufacturing as it has in services had its entrepreneurs been given the freedom to set up businesses without having to apply for myriad licenses, bribe numerous officials, and sometimes spend years in the process. Increased entrepreneurship and industrial growth would have been far more effective than the REGB in generating long-lasting employment.

India’s 58 years since independence have been ones of lost opportunity, with a waste of human capital and millions of lives lost to needless poverty. Successive Indian governments have made all the right noises about reducing poverty, and then followed all the wrong policies. Sadly, the REGB looks like more of the same.

17 Comments »

  1. Thanks to great Indian economists Manmohan Singh and Amartya Sen.

    Comment by Vishal — September 15, 2005 @ 2:40 am

  2. I have done some research on rural employment schemes. I have few objections to make-work schemes which designed: (1) to address short-term shocks (such as disaster reconstruction); (2) to increase labor-intensity in labor-abundant areas for public works projects which will undergo construction anyway.

    I am staggered by the magnitude and apparent disregard for targeting of the REGB, as you have described it. What possible policy gain did Singh bargain for to concede this lemon?

    Comment by Roehl Briones — September 15, 2005 @ 5:43 am

  3. Tax-to-GDP Ratio Fetish
    The Times of India has been leading a capaign that India’s Tax-to-GDP Ratio is too low is 10%
    and should be increased to 15%.(this number appears to be this ration for developed countries)
    From today’s edit “it is fortunate that new schemes such as REGB will force Govt to increase this ratio to more desirable value” (ie 15%).
    Such foolishness in a consequence of our mal-education. Why this fetish about this Tax-to GDP ratio.

    Comment by Vishal — September 16, 2005 @ 12:05 am

  4. The single most important question about REGB is – how is it proposed to be implemented? Is it the same old bureaucratic structure with minor tweaks or some wholesale new fresh, lenient structure? I have been trying to get more information about this part, but there is no luck. In absence of that information it is fair to assume that it will be the same old way of disbursement and execution. This means Rajeev formulated number of 15% only will reach to people. No wonder, many are skeptical about this scheme. I wish Indian Media and Grass root political pressure groups would be more vocal in trying to correct this core part of the scheme – the delivery mechanism. That does not seem to be the case, unfortunately.

    The other point I am bit skeptical is what Asian Wall Street speculates about dire consequences of the scheme on Indian Economy. The money, quite likely to be waste; but the article assumes too much of a structure with Indian governance so as the Indian State will follow REGB scrupulously way into the future. If the past is any guide about the bleak prospect of scheme’s success; then it is also the guide to point out that somewhere along the line the scheme will be dropped. In India elections do not happen on whether the ruling party executed on the proposed plan or not. (What the heck, elections do not happen so in most of other countries too.) This means, Indian State loosing the way on it’s execution is the only realistic hope for all the tax payers in India whose money may be wasted on REGB scheme.

    Thanks.

    Comment by Umesh Patil — September 17, 2005 @ 2:40 am

  5. Somtime back I had posted my dissapointment and maths on the same here:

    http://some-place-else.blogspot.com/2005/08/right-to-employment.html

    Comment by Abhishek Mehrotra — September 17, 2005 @ 3:13 pm

  6. I would like to point out a falacy in this article in that the following statement – “The problem is that there is no evidence that the Indian Government is capable of properly implementing any social welfare plan” is true for any government around the world. The reason such social welfare plans fail is because
    1. The bureaucrats have no incentive to be efficient
    2. There are no measurable, tangible targets (like profits for corporations).
    Such social welfare plans as the REGB fail because of the inherent contradictions in the concept and not because of imperfect implementation.

    Comment by Vivek G — October 29, 2005 @ 10:21 pm

  7. Vivek, good point. Thank you.

    Comment by Amit Varma — November 1, 2005 @ 2:36 am

  8. How does one post a blog? what email does one send to. If I want to post an article than whom do I mail? sorry for posting these queries on this page but ie all i could find.

    best regards
    sanjeev nayyar
    mumbai

    Comment by sanjeev nayyar — April 27, 2006 @ 12:16 pm

  9. Sanjeev

    Presume you want to create your own blog. The best place to start is probably blogger.com — it’s free, and easy to use.

    Comment by Prashant Kothari — April 29, 2006 @ 2:16 am

  10. Good job.

    Comment by Sow — August 6, 2006 @ 9:05 pm

  11. “Paved with good intentions” is a good read….
    thanks…
    New Hampshire Mortgage man.

    Comment by Jumpajoe — September 18, 2006 @ 10:36 pm

  12. I would agree that bureaucrats have no incentive to be efficient, but that’s the case in any country not just India, but I would support the Indian government for their social welfare plan, I can think of other countries that don’t even try…

    Comment by James Caffrey in Costa Del Sol Spain — September 22, 2006 @ 5:33 pm

  13. In India the things are a bit different, everybody by and large knows that no Govt. in India are any good (ask any Indian regarding their perspective of their politicians!!), including the Govt. itself, the primary objective of any Govt. is to get votes for the next election and for that whatever ‘stunt’ they need to pull they would. This is also stunt. This is how it would work at, lets take, a village level. The money for the scheme (whatever actually reaches a village) would be disbursed through a person who is Congress party’s (in this case but applies to all Govt.) lackey and he would ensure that half of it is siphoned off to finance ‘elections’ and party activities (like rallies, if you think the people participating in Indian political rallies come volunterarily, think again) and the other half would be given to proportionally to people to buy their support in the election (comin up sometime later). It may sound rather cynical but I am afraid thats how the system works, in the process if somebody ‘happens’ to get benefitted, so much the better. The entire efficiency of the 40,000 crores would be not 15% but about .15% :P Therefore, gentlemen above need not worry about its ‘labour related’ economic dysfunctionalities because there would not be any and size of Indian economy is such that it cane dessipate the effects of 40,000 in no time (well, if it cant, the Govt. can again rise taxes, indirectly :P)

    Comment by LeMercenaire — November 24, 2006 @ 2:03 pm

  14. [...] Would that we saw more of the above, and less of this. For more on labor reforms, read Naveen’s post or Nitin and Ravikiran’s points of view. [...]

    Pingback by The Indian Economy Blog » Markets Work. IF You Let Them, That Is… — December 3, 2006 @ 12:56 pm

  15. Nice site..

    Comment by golf resource — December 21, 2006 @ 12:50 pm

  16. i believe there is lot of politics involved behind indian rural being so backword,ppl didnt have any good party to for except congress for 35 years after independence and even party all didnt found anything to do as for challenge , population in urban were aweken little earlier and started kickin cong out and made challange for to work and prove ,over certain period parties are now competiting hard and realised that they can spare ppl to work rather then jus to make them unemplyed and started bringin effeciency.today ther is lot of opportunity even in villages to work and city are all of it
    flood in economy is cyclical and does not last for too long , down period is not far ,but less feared b coz we(indian) we earned lot and certainly can do more

    Comment by maulik — July 1, 2007 @ 12:39 pm

  17. Unequitable distribution of wealth continues to plague the Indian polity. Those of us who believed that rising above the ‘Hindu Rate of Growth’ would solve our national problems of poverty, I think, have been learned how wrong we were. Approaching double-digit growth, we find that while absolute poverty may have been remedied somewhat, disparities have in fact deepened.

    And now we have another problem: Global Warming. Although developed nations like the US are the ones who have created the bulk of this problem over the past century, and continue to constitute the bulk of carbon-emitting nations, India and China have the dubious distinction of being frontrunners among nations that take the planet towards towards the ecological tipping point of no return with their rampant consumption growth.

    For millions of years, nature has been taking carbon dioxide out of the atmosphere — taking carbon out of circulation — and stashing it away, not only as trees, but also as enormous coal and crude-oil reserves under the earth. But since the discovery of the steam engine and the industrial revolution, mankind has been taking these carbon and hydrocarbon reserves and burning them. Every passing year, we thus undo the work of a few thousand years of nature. Humankind is now a rampant force of nature… and India is very much there in this beautiful picture.

    Our GDP and per-capita consumption is rapidly rising at close to 10%, and so the carbon footprint of each individual human-being in India is doubling every 10 years or so. Each extra shirt we buy and stash in our cupboards or each apple that we eat that has been flown in from Australia or China, or even lorried in from Himachal Pradesh, represents an unnecessary load of carbon in the air that we have contributed.

    As the global population grows at a galloping pace — rising as much in 10 years as it did in the entire millennium between 1 AD and 1000 AD — the collective footprint of humankind in terms of carbon emissions, chemical pollution etc grows in geological proportions. In other words, the ‘weight’ or ‘impact’ of humankind on earth is doubling every decade.

    We are driving over 53,000 species to extinction every year, and much of this is happening in India. The web of life in India, as elsewhere, is being torn apart… and yet all we think about is HUMAN POVERTY?

    I think we need to realign our priorities. Poverty alleviation and relief was a post-Independance agenda. Now it needs to take the back-seat to alleviating mass extinctions and climate change.

    I don’t know if remedies are available. Personally, we are already in deep shit and blissfully unaware of it, like a guy who is falling to his death from a skyscraper, but is heard saying as he whooshes past the 10th-floor window, “So far so good! Everything feels great!”

    Our economies, which depend primarily on combustion, need to be urgently unhooked from combustibles and hooked onto alternative sources even if they are uneconomical at first. Energy from combustibles seems economical only because it does not take into account the environmental cost; in other words, such energy is environmentally ‘subsidized’. However, such subsidies are no longer sustainable, and there is an enormous ‘natural deficit’ that has built up that needs to be balanced.

    So we need to learn to consume solar energy, wind energy, tidal and hydro-electric or human-generated energy, even if it seems terribly uneconomical at first. Simultaneously, we need to learn to live with drastically lowered energy consumption.

    Immediate measure 1: We need to impress on decision-makers (and not just general public) at various levels the urgency of our situation.

    Immediate measure 2: We need to show that we ourselves believe in our message. It is not very convincing for us to continue to go around in our big air-conditioned cars and sit in air-conditioned offices, air-conditioned homes and air-conditioned chambers of commerce. We need to show our willingness to step down into less-stylish cars, or maybe even scooters, public transport etc. We need to send out a clear message by (1) scaling down our own usage of electricity by opening our windows and using ceiling-fans etc, (2) walking and bicycling as much as possible instead of taking motorised transport and (3) depending on non-energy consuming forms of recreation such as going for long walks or playing cards together.

    Immediate measure 3: To make a dent on the public consciousness, send out a clear message, and set off a mass movement, those of us who are aware of this problem and deeply concerned about it need to do something emblematic. How about something like dressing very simply and riding a bicycle to work (and everywhere else) one day of every week – something that is directly opposed to our increasingly ostentatious lifestyle?

    I do realize that these ideas are quite a bit off the tangent w.r.t your blog about poverty, administration and governance, and they make me sound like a raving nutcase. But I find it difficult to imagine discussing an issue like poverty in India while we have a larger, nastier problem at hand. I’m actually wondering whether there is any government on the planet that is capable of even rationally looking at this problem, leave alone taking steps to tackle it.

    I wonder if you would agree. Will appreciate a word in response.

    Warmly,
    Krishnaraj

    Comment by Krishnaraj Rao — November 26, 2007 @ 6:11 pm

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