Wednesday, December 04, 2013

What if Modi comes to power? Workers may have to further tighten their belt, social security net may be diluted

By Rajiv Shah
In case Gujarat chief minister Narendra Modi comes to power and takes over reins of Prime Ministership, which many believe is most likely, India’s working class should be prepared to further tighten its belt under an aggressive liberal economic regime. Also, few of the social security steps, such as for guaranteeing rural employment, taken by the Government of India in the recent past, albeit to “woo” the electorate, would start losing their sheen, and may even been dropped. And if proof is needed for this, say informed sources, one finds an outline of this happening, as reflected lately in the views expressed by two well-known economists known to be close to Modi.
Prof Jagdish Bhagwati and Prof Arvind Panagariya, known worldwide for their thinking on reviving an era of laissez faire at a time when even the US, one of its firmest protagonists, is seeking to move away from it, in their book “India’s Tryst with Destiny: Debunking Myths that Undermine Progress and Addressing New Challenges”, have not just vociferously defended the aggressive Modi growth model of development, but have argued why is it necessary to take it forward in India. While a lot has been written on the book, the reviewers have missed out a few important points which Prof Indira Hirway, a top Gujarat-based scholar, has noted in her critique (click HERE).
Arguing in favour of reforms, the authors of the book say, the primary focus of reforms should be on labour laws in order to bring about a dramatic upswing the economy and development. Admitting that there is some need for a few labour reforms, Prof Hirway says, “to believe that the root cause of the current malaise is labour laws would be wrong.”
In their book, the Bhagwati-Panagariya duo say, the Government of India has made many reforms, such as removing licensing, reducing trade protection, opening up to new technology, and removal of reservation of goods/ services for the small sector, yet it has done almost nothing in labour reforms. According to them, the worst law is India the Industrial Disputes Act, 1947, and particularly its Chapter V B of the Act, that does not allow flexibility in hiring and firing workers if the units have 100 or more workers.
Panagariya with Bhagwati
Prof Hirway says, “The authors have suggested amending the Industrial Disputes Act to provide easy labour flexibility and easy exit for firms. We believe that the diagnosis of the problem as well as the solution suggested by the authors is partial. One major reason for large units using capital-intensive technology is that capital is made cheap through large incentives offered to them by governments. Our study on incentives and subsidies to industries in Gujarat shows that the officially accepted goal of industrial development in Gujarat is to promote state-of-the-art global technologies (highly capital- intensive) in the state.”
She adds, “The rates of incentives and subsidies increase with the size of the units. In addition, the definition of capital has expanded considerably for the purpose of giving capital subsidies, and conditions regarding location and employment have been watered down to promote growth of capital- intensive industries.”
According to Prof Hirway, “According to our analysis of the official data, these incentives add up to 40 per cent of the total public expenditure while incentives to small and medium units constitute a mere 2.27 per cent of the total incentives given to industries. Though there are high subsidies on capital, land and water, there are no subsidies on labour or on employment. This is nothing but crony capitalism where allocation of resources is determined by incentives and subsidies and not by competitive market forces. A consequence is that small industries, which are labour-intensive, do not get a level playing field in the economy.”
Prof Hirway argues, “Though one agrees that labour laws need to be streamlined, this should happen only when workers are protected against their vulnerability. It appears to us that the authors have paid attention only to the interests of producers. It is equally important to recommend a minimum package of social security (at least in the thriving export industries to start with) along with a flexible labour market. There is no reference to this aspect at all.”
Coming to yet another major reform the pro-Modi economists want India should go in for, the Bhagwati-Panagariya duo recommends cash transfers – mostly unconditional except for vouchers for education and insurance for illness – instead of wage employment programmes. They argue that this will reduce leakages, give freedom to people to use their purchasing power according to their priority, and will also leave their labour with them to use it the way they want. 
Hirway
In this framework, they cite strong reasons to discard the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) as (1) there are huge leakages and corruption under it, (2) workers have limited choice to choose their assets/ activities, (3) high wage rates lead to a premature shift to capital-intensive technologies, and (4) the labour on MGNREGA is usually wasted.
Comments Prof Hirway, “We agree that cash transfers are important in many cases, but substituting MGNREGA with cash transfer will not be desirable. The economic logic of this programme is to use surplus labour for capital formation to expand the labour absorbing capacity of the mainstream economy. When this is planned well, it can contribute significantly to economic growth in all sectors. It can also promote labour-intensive sectors in the economy in the next round.”
She adds, “Also, MGNREGA is expected to empower the poor, the local bodies, and decentralize democracy. With the new flexibilities introduced in the programme under MGNREGA-II, people have ample room to select the work. Instead of focusing on cases of corruption, the authors should also have looked at some success stories of MGNREGA.”
The pro-Modi economists further argue in favour of land market reforms, which say are badly needed to facilitate changes in the present land use pattern to help economic growth. However, Prof Hirway says, “First, land has limited supply but multiple uses. It is necessary for the government to formulate a land use policy keeping in mind the long-term needs of the economy for agriculture, for human settlement, for infrastructure, for industries, and for environmental sustainability. However, in the absence of a well-designed land use policy, land is allotted on the basis of bargaining power and political pressures exerted by different users.”
Secondly, according to Prof Hirway, “In the absence of structural changes in the employment structure, the farming population has limited scope to enter the modern non-primary sectors. It is not only unfair but also criminal to allow private corporate units to grab farmland from farmers. In short, the land market, which is imperfect and has been distorted further in recent years, needs reforms to incorporate the above points also. The analysis of the authors shows poor knowledge of the prevailing realities.” 
At the same time, regrettably, “natural resources are outside the purview of the book though sustainable use of natural resources is critical for sustainable development as well as for protecting interests of the majority of the population.”

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