The Hindu Business Line : On inclusive decadence

If any government follows a set of policies that puts money into the hands of the ‘aam aadmi’ through measures that harm the entrepreneur, these will be counterproductive.

— K. K.Mustafah

Putting money into the hands of the common man does not create in him an urge to earn more.

Sharad Joshi

On July 2, the Railway Minister, Ms Mamata Banerjee, presented the Railway Budget in Parliament. A couple of days later, there was a railway accident in Howrah, near the Railway Minister’s home turf and, nearer Parliament, a serious collision in Ghaziabad (UP).

It might have brought home to the Railway Minister that social applying values to development of the Railways might be a brilliant idea, but that the first tenet of the railway system has to be safety.

On July 6, the Finance Minister, Mr Pranab Mukherjee, presented the Union Budget for 2009-10. The basic theme was “inclusive development”.

The Finance Minister announced a number of endowments for the rural have-nots as also for the urban middle-class. The Congress party and the UPA had gained an impressive electoral victory under the slogan of “inclusive development” and furtherance of the ‘aam aadmi’.

By the time the Finance Minister finished reading the speech, the stock market had collapsed almost 700 points. In its edition the following day, a national daily explained the stock market fall as a consequence of a couple of paragraphs of the Finance Minister’s speech. The question it raised was: “Inclusive growth” is politically a good tactic and a sizeable vote-winner, but is it the mantra that will solve the problems created by global recession, growth slowdown and job retrenchments?

Where does the money go?

The year 2008-09 saw a large number of schemes and initiatives pumping money into the hands of the common man. This includes not only the Debt Relief and Loan Waiver Scheme, and the National Rural Employment Guarantee Scheme (NREGS) but also the bonanzas under the Sixth Pay Commission.

Going by the reports of the departments concerned, families that were NREGS beneficiaries received around Rs 10,000 a year.

This certainly helped the UPA at the hustings. Is mere continuation of all these programmes, of flooding the common man with funds, the panacea for all economic problems?

There is reason for serious doubts about this UPA credo. Rajiv Gandhi, when he was Prime Minister, had famously said that, of every rupee spent from Delhi, only 15 paise reached the other end of the pipeline. A more recent study by a working group of the Planning Commission has revealed that the situation has worsened greatly since then.

According to the more recent findings, not even one rupee of every Rs 65 sent from Delhi reaches the common man. According to a recent report of a Hong Kong-based consultancy organisation government administration in India is the most inefficient among some 12 countries from Asia taken for the study.

If one takes into account just these two factors of overwhelming pipeline leakages and inefficient execution of schemes, “inclusive growth” might turn out to be a far from efficacious method of economic development.

Even in the post-1991 economic milieu, the UPA leaders seem convinced that the common man is the engine of growth. This is consistent with the earlier school of thought that it is labour that produces all wealth.

Undoubtedly, at one time in history, labour was the prime factor of production. Labour applied to land-produced wealth in those days. Then came an epoch when instruments and capital became the major contributors to production and income. In the present epoch of knowledge, no single factor of production by itself results in wealth creation. It is the entrepreneur who brings together the diverse factors of production and adds innovation as also the ability to bear risk that is the principal determinant of the pace of wealth creation. If any government follows a set of policies that puts money into the hands of the aam aadmi through measures that harm the entrepreneur, these will be counterproductive.

Hunger and fatigue

There is a great degree of accumulated hunger and fatigue in the common man. Every time there is incremental income, labour tends to purchase leisure as the first item in the basket of satisfactions. Any addition to the common man’s income does not create in him an urge to earn more. That involves additional work, which his body is unwilling to undertake. On the contrary, there is a tendency to relax and get some rest.

That is the reason, for example, why textile workers in Mumbai prefer to go back to their villages in Konkan immediately after receiving their bonuses and stay till the windfall is exhausted, rather than use the additional resources to improve their lifestyles.

A great chunk of additional income of the common masses goes into leisure, consumption and unproductive channels. The income multiplier effect of inclusive programmes is negligible.

A study of communities that attained rapid rates of growth clearly shows that growth takes place in turbulent rather than in peaceful and placid circumstances.

The diaspora communities that were forced out of their traditional habitats invariably come out better, despite the transitional hardships they suffer. Periods of war and conflagration correspond to quantum jumps in scientific invention, originally for destructive purposes but deployed, after the war, for more peaceful economic and social advancement.

The Keynesian programme of ‘priming the pump’ to put more and more money into the economy to make up for the deficient effective demand did not really remedy the 1930 recession, even though Lord Keynes got the credit for it. It was soon realised that there is very narrow scope for “dig-and-fill” kind of public-works. The National Rural Employment Guarantee Scheme may meet the same fate.

The recovery after the 1930s recession came only after the beginning of the Second World War which produced an large number of technologies and innovations that provided the basis for the rapid post-War progress in several fields.

The epochs of innovation and exploration have also been eras of great economic growth and prosperity. Movement of diaspora, wars, explorations, Apollo-like initiatives and innovations are the environments that appear to favour prosperity.

(The author is Founder, Shetkari Sanghatana and a Member of the Rajya Sabha. blfeedback@thehindu.co.in)

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