Getting back to the basics

In the hype over cricket and New York buses selling India@60, the issue of rising inequality seems to have been lost

Three reports released in the last few weeks, though not quite connected, form a picture about rural incomes and poverty. First, the report card of the National Rural Employment Guarantee Scheme (NREGP) for the first year of the scheme (April 2006 to April 2007) has said, “Judging from available reports, the scheme is not doing particularly well, whether we look at levels of employment generation, or wage rates, or the extent of corruption or the quality of assets generated.” It found that less than 50% of the target man days (two billion) were achieved (critics call it a mere retread of similar programmes in the past that have been plagued by corruption). In Uttar Pradesh, the report said, most people in rural areas were unaware of the scheme. Among the poorest performers were Kerala and West Bengal (reportedly pro-poor states), and among the best performances were Rajasthan, Madhya Pradesh and Chhattisgarh (all BJP-ruled). Finally, the southern states, which normally outperform, haven’t done so well.

Second, the recent Arjun Sengupta report has argued that 70% of the population has to live on less than Rs20 a day. The figure is being quoted at international seminars; I heard the Food and Agriculture Organization using it in Thailand, and others in Singapore. It appears to present a picture different from the one we had got used to, namely that poverty levels were falling rapidly and that per capita incomes had risen by more than 50% in the last six years. It depicts stark differentials between rural and urban incomes, and between the rich and the poor as well.

The third is the Asian Development Bank report published in August, on inequalities in Asia. It is no surprise that income inequalities, measured by Gini coefficients, have worsened in the last decade. However, this impacts access to education and health. The study reveals that in India, while around 5% of children (up to age five) are underweight among the richest 20% households, the share is as high as 28% in the poorest 20% households. Increases in inequality damp the poverty-reducing impact of a given amount of growth. The study shows that in the past decade, per capita expenditures of the top 20% households in India have grown by two and a half times more than that of the bottom 20%. Similar figures were presented in Parliament two weeks ago, from the national survey data.

In the hype over 20-over cricket wins, painting New York buses with India@60, the Sensex at 17,000, we are missing out all this. Diplomats, businessmen, politicians and bureaucrats, all seem lost in the hype, which is growing much faster than the economy, as The Economist had pointed out. Even the media seems insensitive, not just this, but about inflation, onions at Rs30 a kg, rising wheat prices, longer waits for LPG cylinders—in short, the plight of the common man.

The highest in the land need to recognize there is a serious problem. One hopes the new committee that is to look at the future in the All India Congress Committee would accord these issues top priority. Recent figures reveal that direct subsidies to the poor in Singapore, a country that believes in the open market economy, were S$13,600 per head last year. It is possible to look at direct interventions in India which, despite indifferent governance, can make a difference.

Here are three simple suggestions, of just doing what we did well earlier. First, to ensure that the public distribution system (PDS) gets back to the level it was two decades ago, and that fair priced goods are available. Second, to get back to the efficiencies of the Integrated Child Development Services, mid-day meal and nutrition initiatives that worked well in the 1980s and the 1990s—the staff and the programmes still exist, but the delivery is much worse. This is true of preventive health-care programmes, too.

Third, most important, the poor are a victim of the current debate on monetary economics, opening up the capital account, and wheat prices to be set by a derivatives market. It is time to shift the debate to the importance of direct transfers to the poor, of, in fact, shielding them from the fluctuations of the market and of assuring them remunerative livelihoods.

It is time to think up new direct welfare schemes. The NREGP was intended as one such scheme, but the bureaucracy turned it around to fit in with the goals of other schemes such as drought relief and soil conservation. One example that works is in Gujarat. Every expectant mother can get antenatal care as well as delivery at a clinic of her choice, and lists of approved clinics are published at every government office. The state reimburses the clinic directly—there is a limit, which is quite comfortable in the rural areas. Beneficiaries are encouraged to report shortcomings directly. Direct cash transfers are the best way of reaching the poor. If we can do this, and strengthen the PDS, we would have tackled the problem.

Fuel for politics

The ‘no increase in kerosene and LPG prices’, announced ahead of state polls, could be a handy talking point

My comprehension is tested all the time. I thought the nuclear deal was about energy security and power stations, not achievements or disappointments of individuals. We are told that the Minimum Support Price (MSP) for wheat was suppressed last year so that farmers could earn more through private parties—and then, we imported wheat from (the same parties?) at higher prices, and subsidized the distribution. Wouldn’t it have been simpler to pay farmers a higher price ab initio? It was good to hear last month that the finance ministry was confident in managing capital flows, but now, after a deluge, the minister says that he is worried about the flows and that we have yet to learn how to manage them, though he adds that we will. Finally, after being told that international oil prices are on the rise, we learn that prices of LPG and kerosene will not be raised for three more years. I thought we had a commitment before Parliament for fiscal rectitude.

On the last, it was being speculated for some time that petrol and diesel prices would be raised. These are currently calibrated at a crude oil basket of $56 per barrel, while the import prices for India are around $75 per barrel and spot crude is around $85 per barrel. I had written earlier that we would see $100 a barrel before Christmas, and a possible doubling before 2010. Political considerations are obviously at the forefront of the decisions not to hike consumer prices, even though oil companies are reported to be losing Rs160 crore a day.

LPG and kerosene prices would have to be raised at least by Rs200 per cylinder and Rs6, respectively, to maintain the current level of subsidies. Next year will see a steep rise in wheat prices, given both global crop failures and the decision to raise the MSP at home. With this, other cereal prices would go up, too. If cooking gas and kerosene also go up, it would be politically untenable in a pre-election year. As foodgrain prices can’t be kept under control, domestic fuel prices would be capped.

There is some clever thinking here. Liquidity is a problem, and the Reserve Bank of India is having a hard time mopping up surpluses. Oil bonds, at more than Rs20,000 crore this time, will help suck liquidity, thus providing another monetary policy instrument. As their tenure is 15 years this time, the onus for paying up is on three governments down the line. Excise duties could be cut further, but as the revenues are needed to pay for the LPG and kerosene subsidies from the budget, these are retained—as an armour for use when oil prices go up even further. Oil producers ONGC and OIL are to bear a portion of the cross subsidy, thus reducing the exchequer’s burden. The announcement of ‘no increase in prices’, made sufficiently in advance of state elections, could be a handy talking point.

The strategy is clear, and attributable to considerations of the ‘political economy.’ But there could have been less costly interventions, had the key institutions delivered a little better.

First, ONGC has been falling behind in production. Not only has it lost several fields to open tendering in the new exploration licensing policy rounds, it is also unable to exploit the fields it has. It has not been successful in securing equity oil overseas, while the private sector has. The performance shortfall has pushed up imports, and hence, the costs of price adjustment. With global gas prices at around $10 per mBtu, even at the recently agreed prices for private sector gas at $4.20 per mBtu, the difference between market price and producer price is a direct subsidy to the end users—private industry. Over the next decade, this will touch Rs80,000 crore. Had the government agreed to higher, market-based prices, its profit (gas) would have been far greater. Now, the difference will go to private firms consuming the gas, not to the producers. And had ONGC been more efficient and capable, these discoveries could have been its. A lesson for the petroleum ministry to focus its energy on oil exploration and discovery, as the single most important objective.

Second, every country has gone into a conservation and alternative energy mode. Fuel consumption norms for transportation are statutory, and automobile manufacturers are looking at hybrids. Not here. There is absolute silence on fuel efficiency, particularly in the automobile industry. Perhaps it is time to set up an expert panel to prescribe industry–specific mandatory norms—sweetened, if required, by tariff concessions, R&D grants, etc.

Third, the search for alternative fuels has to be systematic. While the mandated 5% ethanol blending with petrol has more to do with helping the sugar industry than with saving fossil fuels, and will only make a small difference, incentives for biofuel are still in their infancy.

The issue is not of pricing alone —more seriously, it is of availability and proper use. We should get our agenda together immediately.

People ready, not the state

The common man is willing to work hard and looks for little from the government other than delivery of basic services

In the temple town of Kumbakonam, near Thanjavur in Tamil Nadu, where I spent Deepavali, the disconnect between the fast growing globalized India and the rural and small-town India is more palpable than ever.

In this rice bowl of the country, the fields are flush and green, with more than 80% of the paddy transplantation completed on time—the harvest at Pongal would be a normal one. A walk through the streets of Kumbakonam was revealing. They were thronged with shoppers, but it was a silent crowd. Shoppers focused on candles, flowers, crackers, fruit and sweets. The consumer goods shops and the higher end boutiques were quiet. Apparel purchases were from the street, not brand names, and on Deepavali day itself, the festivities ended early, as though people wanted to get back to their normal drudgery. Quite a change from the crowds in Chennai, in the gold marts and diamond centres, in the mobile and electronics shops. And a big difference from the splurges in New Delhi one reads about.

The reasons are not tough to find. In a few paddy fields, one sees forlorn signs of government initiatives to improve technology and productivity, but for the most, paddy is grown and transplanted in the same way as in the last thousand years. The villagers I meet testify that agriculture is fast becoming unremunerative. There are no signs of new seeds, fertilizers are hard to come by and expensive, and marketing continues to be in the hands of small traders. A majority of the graduates of the several engineering colleges here linger in the job market for more than two years, a reflection on the quality of education. In 40 years, I have seen little change in the town except in the size of its population. No sewerage, falling nutrition levels and worsening health indicators. It seems a tired town, with few expectations.

There is a visible difference between private initiative and government activity. Private buses are better and punctual, and cause fewer accidents. Private engineering colleges produce a larger percentage of employable people. Private temples are cleaner, better managed. In short, governance and government is missing. The worry is that it takes little to set it right, and that there is little attempt to do it.

The draft of the 11th Plan has been finalized, and the thrust is on indicators to measure investment in education, health and agriculture. The Planning Commission chairman’s concerns about growing subsidies, and the extent to which these would reduce public investment spending, are a sobering backdrop to the Plan. There is concern over the fact that inclusive growth is not happening and that the distance between the Sensex and the small-towners is growing every day.

Sadly, the commission merely continues to express so many concerns —one would have thought they would have practical solutions. It is possible to find ways to bridge the divide. The first is to strengthen existing institutions and focus on delivery.

The Union finance minister had promised an initiative for farm extension in his Budget speech this year, but nothing has been done so far.

A private fertilizer firm in Kumbakonam is providing end-to-end solutions for the farmer—inputs, soil sampling, advice on crop practices and marketing help by tying up with major retail chains. It is working well—an example of what institutional support can do. The farmers are aware and willing to learn. A local magazine wrote about Arokiasamy of Masilapalyam panchayat in Salem district. The villagers recognized this wage labourer’s probity and asked him to be president—he is attending diligently to all panchayat work. Ironically, his wife can’t find work without him—now they have no income and find it tough even to buy rice at Rs2 per kg. People are ready, but not the government.

In the small towns, Thanjavur, Kumbakonam, Chidambaram and Cuddalore, poor waste and water management cause many water-borne diseases. Yet, there are no large initiatives, either at the state or the central level, for urban infrastructure. More local trains and buses would enable labour mobility without adding to urbanization—note how people in Kerala travel between their villages and towns and their places of work daily, thanks to the passenger train connectivity in the narrow state.

Public health is a concern, yet institutions are not strengthened. At Gingee, Dr Rajeswari recently had to manage the primary health center alone for three days and nights, attending to more than 500 patients, until she collapsed—thanks to the delay in posting of a full team of doctors. The real India, the aam aadmi, still has his honour and ethics. He looks for little from government other than effective delivery of what is announced: he is willing to work hard. But there seems to be little space in the political and administrative firmament, and in the media, for the poor man. Yet, it takes little to improve matters.

Two ways to use the money

RBI must have oversight, but the management of the funds should be with professionals - not bureaucrats

The role of the state has changed dramatically in the last five years.

The initial years of globalization of trade and the lifting of barriers to trade in goods, services and financial instruments were brought to an abrupt halt by 9/11. Concerns over internal security, immigration and financial flows brought in several restrictions after 2002, with the state intruding into citizen’s lives more than ever.

This year, the credit crisis, and the reactions in the UK and the US have brought home the fact that the state has an interventionist role to play in the economy as well. Paul Samuelson, in International Herald Tribune last week, argued that he, as one of the authors of the complex derivative devices that have been let loose in the financial markets, is ready to revisit some of his arguments of a decade ago and that recent events have convinced him that free market forces need to be tempered with appropriate state interventions and state regulations.

There is yet another development. Several developing countries with large foreign exchange surpluses have created state institutions of investments overseas—a colonization through money that the recipient countries are watching with some apprehension. These sovereign funds currently exceed $500 billion, and are likely to double in the next five years. The influence of the state can thus extend over geographical boundaries.

India can take unique advantage of these conceptual changes. Our state institutions and interventions in the economy have continued through the reform phase, and indeed, structures of oversight, in the financial markets, in security, and in monetary policy are intact. I am sure several free marketers would be horrified, but I do believe this is the time for a unique set of interventions by the state, though some may be considered unorthodox. I attempt two suggestions here.

Clearly, there is concern at RBI and North Block about the absorption of foreign exchange inflows, and the balancing act of maintaining the value of the rupee, and managing credit, is proving to be tough. Perhaps it is time to consider the establishment of a sovereign fund in the manner of other countries, and given current surpluses, even a modest start up of $25 billion would be good. That these funds can be kept fisc neutral has been demonstrated by several countries.

RBI must have oversight, but the management of the funds should be with professionals - not bureaucrats - with the finance minister, external affairs minister and the commerce/energy minister on the governing board. There could be two objectives—the first to maximize returns through careful investments, and to ensure that returns are better than those on the deployment of reserves by RBI, and the second to secure needed resources, particularly energy and commodity resources, for the country. A part of the fund could also be earmarked for development through aid programmes, with India funding long-term commercial projects in the recipient countries. The earmarking of reserves to the fund would dilute the sterilization requirement to that extent, and accord relief to monetary interventions by RBI.

The second is a bigger dream.

There was a report that Mitsui has decided not to invest in India because of poor infrastructure. We need expressways badly. Equally, we need relief in urban transportation, and in urban water, sanitation. It is possible to conceptualize high-density corridors between Chennai and Tiruchy/Madurai, Delhi to Jaipur/Chandigarh, Mumbai to Ahmedabad/Vadodara etc. Why not, in a new deal, develop these corridors (and others) into mass rail transit systems through ultra fast trains? Quite apart from dispersing the population, this would create jobs, new service industries, reduce the pressure on land, water and sewerage and make life easier. Even at $25 billion, the annual spend won’t exceed one tenth of that, which could easily be obtained by a Delhi Metro type undertaking from the market (there are easy, non-budgetary means of funding). It is possible to create somewhat complex structures that would have no budgetary impact, and find repayment mechanisms. Then to focus on improving water, sanitation, health and education. I will expand on this in my next column.

We need a new paradigm for improving infrastructure, not more Bluelines and flyovers—the success of Delhi Metro is evident as a mass transit system. We have to develop infrastructure ourselves, whatever the cost, only then will overseas investors be interested. A clear role for the state here.

Both the proposals would squeeze out excess liquidity, and keep the India story alive and growing. But there is nothing in these for those crony capitalists—the biggest beneficiaries of reforms so far. It needs government and the bureaucracy to act—improve governance and dedication. I believe it can be done. No politics could prevent this—it is for the aam aadmi directly.

Time to revisit tax code

In the coming Budget, there is an opportunity to raise the lowest income tax slab. It should start at Rs250,000

The onset of December is the time for the scents of Budget making to waft through South Block. The adviser to the finance minister has indicated that he is for lower marginal income tax rates. Five years ago, when he was heading a committee in the Planning Commission to examine rationalization of income tax, he had strongly suggested doing away with a number of exemptions, and rationalizing tax rates at a lower level. Governments since then have been moving in this direction, but not fast enough.

This year may be an important opportunity to have a fundamental look at taxes, both direct and indirect. There are several reasons for this. First, tax revenues have shown a healthy growth. Corporate taxes have been particularly buoyant. Tax-GDP ratio has been on the rise for the last four years, and is approaching emerging economy averages. Revenues of the states have been growing as well, bolstered by the restructuring of state loans and the smooth implementation of the value-added tax (VAT). Several states have revenue surpluses this year, and the growth in liquor excise revenues has been staggering.

Second, the new finance commission would definitely recommend some additional devolution, and this, coupled with the growths in VAT revenues and excise growth (growing GDP per capita would surely lead to greater consumption of branded alcohol), is likely to make state finances comfortable for the next five years.

Third, the urgency for tariff reforms arises from several distortions that have crept in during the last few years. For example, customs collections (of which around 70% are accounted for by petroleum and petroleum products) are growing much slower than import growth. Excise collections do not reflect the increases in industrial production. Either there are significant leakages or there are a large number of exemptions, including area exemptions for special economic zones and special areas such as Uttarakhand and Himachal Pradesh. It is time to take a look at these.

It is also time to revisit the question whether there cannot be a convergence between personal income tax rates and corporate rates, shorn of all exemptions.

In my view, the first area of focus should be indirect taxes, where government is not getting the bang for the buck. There are only around 500,000 organizations in the country that are subject to Central excise, and less than 100,000 of these account for more than 70% of the collection. Given the pressure for exemptions, which clearly creates a distorted excise map, a clear road map to reduce excise duties could be considered. A 2% reduction would leave excise revenues largely unaffected. This is because in the present Modvat structure, firms are paying only the difference between the excise paid at the earlier intermediate level and the present level, and often excise payments at the last stage get crowded out. This feature would contribute to revenue buoyancy in the reduced tariff regime. This move would also help in setting the levels for the Central GST at reasonable levels in 2010.

The second area is customs duties. There is a view that unilateral reduction of customs tariffs dilutes bargaining positions at the World Trade Organization negotiations. Whatever the merits of this argument, there is little justification in maintaining a slew of exemptions and inverted tariff structures, where raw material tariffs are higher than those for finished goods. The large number of preferential trade agreements under negotiation is also likely to distort import tariffs. I am as concerned about the customs department’s ability to deal fairly with a multiplicity of regimes, as with the need for such multiplicity. A simple structure with a flat rate of 5% and 10%, and countervailing duty to protect local manufacture, could clean up most of the act.

But I am certain that all this does not interest the general reader: Only income tax does. There is an opportunity for this year to raise the lower floor substantially—even if the inflation of the last five years is taken into account, the lowest slab should now start at Rs250,000. The top rates have too many add-ons. A simple tariff of 30% would be comparable to many other similar economies. The corporate rates could also be brought down to this level. This is also an opportunity to encourage long-term savings, in new instruments that could be used for building infrastructure; a 10-15 year savings bond, tax exempt, which could be traded in the exchanges, would find a large number of takers, improve savings rates, and provide funds for infrastructure.

The indirect tax changes are election neutral, and the direct tax changes likely to be welcomed. This is likely to be a populist Budget, and the populism can be focused on the expenditure side, and the opportunity of tariff reforms seized.

11th plan horizons

It’s vital that this Plan succeeds. The backlog of development must be cleared in the next five years

The 11th Plan document was adopted by the National Development Council last week. It reflects the basic tenets of the United Progressive Alliance government, of the need to focus on “inclusive growth”. As many as 27 detailed national targets have been set in the plan ranging from enhancing incomes to reducing poverty, to education, literacy, health, infant mortality and child development.

Instead of being all over the place, this is an exemplary document that clearly identifies the gaps in development, and attempts to provide outlays to address these shortfalls.

This is not to say that clarity in objectives will automatically lead to better outcomes. There has already been news that the targets for power generation in the Plan are unlikely to be achieved. The real worry is that the Plan does not talk about how all this will happen, and how different the implementation strategy will be. Let us look at two examples.

The National Family Health survey conducted last year shows deterioration in maternal mortality, child health and nutritional parameters, as well as increasing anaemia among rural women and deterioration in preventive health measures such as inoculation. The question is how improvement would take place. If the answer is that by everyone doing his job better, then it is no answer, for it does not look at the reasons why the current structures are not delivering.

For infrastructure, there is implicit faith in public-private partnerships (PPP), and that model concession agreements that have been developed will ensure that infrastructure investment takes place. In short, the state has withdrawn from infrastructure provision, except in rural areas, and is looking for entrepreneurs to make good infrastructure happen. I have not heard of such a model of development elsewhere. I can only see that at the New Delhi airport for example, the revenue sharing model adopted is giving good revenues to the government as well as the franchisee—at minimum convenience level to the passengers, for there is nothing in the model that requires a defined standard of comfort to be provided to the travellers.

It is vital that this Plan should succeed. All the accumulated backlog of development in agriculture, health, education and infrastructure must be cleared in the next five years. The challenge is to make this happen, given the poor implementation record, and the federal nature of the polity. Let us think about rural health initiatives.

In Andhra Pradesh, a private sector initiative, in combination with the government, has set up a network of ambulances that are available on call with a guarantee that they will reach the patient within 30 minutes and take him to hospital within the hour. There is funding from the private sector, and from hospitals overseas. There is government staff assisting this organization. More than 500 ambulances have been deployed. The entire state is to be covered. Private sector does what it is good at, running the ambulances, providing them with skilled personnel and organization and maintenance. The hospitals then have to deliver, for there is a record of patients brought to them, the kind of illness, etc., that can be monitored easily and is on record. It is starting to show results. The focus is not on building a lot of rural health centres where doctors do not wish to go, but on ensuring that the patients get to good hospitals fast, and that their movement is tracked.

There are several successful initiatives in agriculture. I had earlier written about a fertilizer company that provides end-to-end solutions, from soil testing to crop practices to fertilizer use to marketing, working in tandem with government agencies. This initiative now covers more than 50,000ha. A commodity exchange has started working with villagers to bring them closer to the market, and to improve prices that the farmer gets for his produce.

The private sector is working on setting up food storage chains, e-choupals and providing technology and inputs for commercial crops. In all these experiments, the initiative works hand in hand with the state administration and institutions. The coverage touches more than 1 million farmers. Not a small number, but still a long way to go.

The core common feature of these examples is that the PPP shares tasks and responsibilities in a manner that each partner does what he is good at.

The Plan document, on the other hand, is only talking about PPP that are rentier models—of the state granting a concession for revenue earning by the private sector that is then shared with the government. In the airport example, if there were standards that could be set by the regulator to oversee standards of service delivery, then there would not be so much chaos in New Delhi.

We can do better than what is envisaged in the 11th Plan.

Terror and civil liberties

The approach of picking up people for questioning, and holding them without framing charges and bringing cases for trial, is a major violation of human rights

With heightened concerns about security and terrorism, there has been an active debate about how to combat them. Faced with insurgency in the North-East, militant Maoists in several states, and blasts in public places, state governments have been rethinking the security paradigm and redefining the roles of different agencies and institutions. Several states have passed anti-terrorist laws that provide for preventive custody. The Chief Justice of India has warned the country about the dangers of lawmakers in several states introducing such legislation and using it in a high-handed manner. There have been instances where these laws have been used against those who have opposed industrialization programmes of a state by highlighting the interests of the poor.

There have also been instances of arrests on flimsy grounds of “waging war against the state.” The approach of picking up people for questioning, and holding them without framing charges and bringing cases for trial, is a major violation of human rights. Media and intellectuals have been highlighting these issues. Yet, the jails are full of inmates who have spent years there without being charged. With increasing security concerns, the public is merely told that a suspect has been picked up. Little is heard of the trial or conviction. That such laws are used to settle political scores, and that they invariably work against the interests of the poor, has been established again and again in specific instances.

Barely 6% of the cases on trial end in conviction, and the legal process is fraught with delays and loopholes. The state prosecutors are often no match for the strategies of defence lawyers. Contacts and patronage ensure that the richer you are, the less you need to worry about the law. In short, the public is clearly alienated from the State in the maintenance of law and order and views state agencies as an enemy and not as an ally. There is considerable evidence that this has led to the rise of local strongmen who administer peace in their domains. The larger manifestation is the Maoists—for where they operate, they are the law and not the State.

State agencies, on the other hand, plead institutional helplessness. The law breakers are often better armed and trained; they have political access and support, and the legal system causes innumerable hurdles to speedy conclusion of trials. Most importantly, the law enforcement agencies no longer command the respect and affection of the people and, therefore, are no longer privy to information or intelligence, and are hence unable to come to grips with crime or terrorism. The only way they can enforce obedience is through State terror—picking up suspects, holding them under draconian laws, lumping the innocent and the guilty together, and ensuring that things do not get out of hand. Little do they realize that this alienates the public even further.

Why have we come to this? About 30 years ago, as collector in a crime- prone district, I used to get information about every crime committed the same day and the name of the perpetrator within 48 hours. It was not an intelligence system that was operating —just a fair administrative system that ensured grievances were listened to, and that in return, the villages cooperated and felt that they were part of the State.

In one major incident where scores died in an inter-faction rivalry, I heard of it just before the incident and rushed to the spot, but reached too late to prevent it. Both sides assured me later that honour required that carnage, and that I could not have prevented it, and they were willing and ready to face the law and the consequences. The lesson was that the State was their friend and ally.

The speedy detection of the perpetrators of the London bombings and subsequent terrorist incidents was in no small measure due to the support and cooperation that the police got from the public. The State reciprocated by bringing the guilty to trial quickly. There were no attempts to delay justice. A crime against the State was a crime against every citizen, and all helped in bringing the guilty to book.

We have to compare the record of detection of the half-dozen terrorist- organized explosions here in the last two years. There has been little information forthcoming to the police.

The State and its institutions are in decay, notwithstanding the high Sensex and the mighty conclaves of the government and the rich. And it is in decay because the institutions that deal with the public have become exploitative and whimsical—seeking to deal with dissidence with a heavy hand, and meting out unfair laws to a mute populace. In several states, there is an uneasy calm—the disaffection is manifest at elections. Having dealt intimately with rural populations for more than 15 years of my career, I am not sure how long the tolerance of state-sponsored high-handedness will last.

Two problems of poverty

There is evidence emerging in favour of direct cash transfers to the poor. They can be used in our cities

The last couple of weeks brought three reports on programmes targeting the poor. The comptroller and auditor general report on the National Rural Employment Guarantee (NREG) scheme concludes that only 3% of the beneficiaries had access to the promised full 100 days of employment. Instances of leakage of funds, poor planning and coordination and sheer neglect have been highlighted.

The second report indicates that though credit to the agricultural sector has grown in the last three years, the number of farmers who availed of credit has declined. There is also evidence that the small and marginal farmers have not had access to credit, and that lending by cooperative societies has decreased.

In parallel, given that agricultural incomes have been rising far more slowly than overall credit to the sector, it is clear that the per capita incomes of those engaged in farming have been stagnant or falling in the last three years, while indebtedness per capita has risen. The finance minister has rightly asked for a report on this.

Third, the group of ministers that was to have met and taken a view on raising prices for cereals distributed to APL (above poverty line) families in the public distribution system has not been able to take a decision. At the same time, support prices for farmers have been increased. There has been no decision on raising petrol and diesel prices as well. The liabilities for subsidies are likely to be much larger than projected in the last Budget.

There have been many voices urging the government to do away with the Fiscal Responsibility and Budget Management Act, arguing that inclusive growth needs to address the requirements of the poor, and that ad hoc subsidies are not the way to do this. Off-Budget liabilities have been rising, most importantly due to distortions in energy pricing. A correction in policies, programmes, and even in thinking about the poor is due.

It is perhaps necessary to distinguish between issues over which we have some degree of control, and others over which we don’t. The raise in farmers’ support prices is a right step, one that should have happened a year ago. Farmers need more incomes, not more debt.
At the same time, it is important to recognize that global food prices are rising, both due to improved consumption demand in the face of better incomes, and stagnation in wheat and rice output. Consumer prices must rise. The poor must be taken care of through better targeting and better management, not through across-the-board subsidies. It is the programme managers that must take this forward.

Also, petrol and diesel prices need to be reset within more equitable tariff regimes. I have been arguing for reductions in excise and customs duties, as well as in artificial margins for the oil marketing companies. Refinery margins are close to $15 a barrel and the public sector refineries need to share these profits with the end-consumer. A complete overhaul of the way petroleum product pricing is structured would result in a more balanced price structure, with only a modest burden on consumers.

That would be the easy part. It’s more difficult to deal with poverty alleviation programmes. In the 1970s and the 1980s, their focus was on the rural poor. These required off-farm employment, some access to shelter and support in agriculture and allied activities. It was possible to construct programmes around livelihood patterns that would enhance incomes and lead to sustainable livelihoods. Even then, this required close monitoring, listening to feedback, and being alert against leakages.

Today, the problem of poverty is exacerbated by the urban poor, whose asset base is even lower than their rural cousins. They don’t have land for shelter, or access to common water sources or fuel that is available in rural areas. They, more than the rural poor, need the fuel and food subsidies. But programmes such as NREG can suit only the rural poor. We have thus two problems—the need to differentiate between the urban and the rural poor, and the need to implement programmes—subsidy-based or entitlement-based—more effectively.

There is considerable literature emerging in favour of direct cash transfers. We already have schemes for old age and freedom fighter pensions —can’t we have entitlement benefit schemes for the urban poor that enable them to buy cereals and fuel (kerosene) at close to market prices? With IT and ration cards and voter cards, that’s clearly possible. For the rural poor, there should be a focus on enhancing non-farm incomes, rural employment where possible, skills training as masons and plumbers in other areas, and indeed, provision of skills badly needed in the rest of the economy.

Teach them to fish rather than giving them a fish to eat.

Two problems of poverty

There is evidence emerging in favour of direct cash transfers to the poor. They can be used in our cities

The last couple of weeks brought three reports on programmes targeting the poor. The comptroller and auditor general report on the National Rural Employment Guarantee (NREG) scheme concludes that only 3% of the beneficiaries had access to the promised full 100 days of employment. Instances of leakage of funds, poor planning and coordination and sheer neglect have been highlighted.

The second report indicates that though credit to the agricultural sector has grown in the last three years, the number of farmers who availed of credit has declined. There is also evidence that the small and marginal farmers have not had access to credit, and that lending by cooperative societies has decreased.

In parallel, given that agricultural incomes have been rising far more slowly than overall credit to the sector, it is clear that the per capita incomes of those engaged in farming have been stagnant or falling in the last three years, while indebtedness per capita has risen. The finance minister has rightly asked for a report on this.

Third, the group of ministers that was to have met and taken a view on raising prices for cereals distributed to APL (above poverty line) families in the public distribution system has not been able to take a decision. At the same time, support prices for farmers have been increased. There has been no decision on raising petrol and diesel prices as well. The liabilities for subsidies are likely to be much larger than projected in the last Budget.

There have been many voices urging the government to do away with the Fiscal Responsibility and Budget Management Act, arguing that inclusive growth needs to address the requirements of the poor, and that ad hoc subsidies are not the way to do this. Off-Budget liabilities have been rising, most importantly due to distortions in energy pricing. A correction in policies, programmes, and even in thinking about the poor is due.

It is perhaps necessary to distinguish between issues over which we have some degree of control, and others over which we don’t. The raise in farmers’ support prices is a right step, one that should have happened a year ago. Farmers need more incomes, not more debt.

At the same time, it is important to recognize that global food prices are rising, both due to improved consumption demand in the face of better incomes, and stagnation in wheat and rice output. Consumer prices must rise. The poor must be taken care of through better targeting and better management, not through across-the-board subsidies. It is the programme managers that must take this forward.

Also, petrol and diesel prices need to be reset within more equitable tariff regimes. I have been arguing for reductions in excise and customs duties, as well as in artificial margins for the oil marketing companies. Refinery margins are close to $15 a barrel and the public sector refineries need to share these profits with the end-consumer. A complete overhaul of the way petroleum product pricing is structured would result in a more balanced price structure, with only a modest burden on consumers.

That would be the easy part. It’s more difficult to deal with poverty alleviation programmes. In the 1970s and the 1980s, their focus was on the rural poor. These required off-farm employment, some access to shelter and support in agriculture and allied activities. It was possible to construct programmes around livelihood patterns that would enhance incomes and lead to sustainable livelihoods. Even then, this required close monitoring, listening to feedback, and being alert against leakages.

Today, the problem of poverty is exacerbated by the urban poor, whose asset base is even lower than their rural cousins. They don’t have land for shelter, or access to common water sources or fuel that is available in rural areas. They, more than the rural poor, need the fuel and food subsidies. But programmes such as NREG can suit only the rural poor. We have thus two problems—the need to differentiate between the urban and the rural poor, and the need to implement programmes—subsidy-based or entitlement-based—more effectively.

There is considerable literature emerging in favour of direct cash transfers. We already have schemes for old age and freedom fighter pensions —can’t we have entitlement benefit schemes for the urban poor that enable them to buy cereals and fuel (kerosene) at close to market prices? With IT and ration cards and voter cards, that’s clearly possible. For the rural poor, there should be a focus on enhancing non-farm incomes, rural employment where possible, skills training as masons and plumbers in other areas, and indeed, provision of skills badly needed in the rest of the economy.

Teach them to fish rather than giving them a fish to eat.