A case against market reforms

The government needs to respond not only through short-term measures to cope with the crisis and its effects, but also by defining an alternative growth trajectory that will be less dependent upon what is likely to be, at best, sluggish world demand. Much more creative and imaginative policy responses are required, in terms of changing directions of investment and consumption in the home market to emphasize wage-led growth, diversifying exports and generally making moves designed to turn economic adversity to advantage.

Illustration: Jayachandran / Mint

What is immediately required is significantly increased public expenditure directed towards particular areas: expansion of the employment guarantee scheme within rural areas and extension to urban areas; creative use of the scheme, especially when it is introduced in urban areas to enable productive use of the tremendous wealth of labour resources available, especially women workers; ensuring food security by moving to universalize the Public Distribution System and provide food and other necessities at affordable rates; a package for farmers to protect them from more volatile crop prices to deal with debt burden and to create the means for sustainable cultivation and higher farm incomes; and resources provided to state governments to enable them to meet basic development and social expenditures.

It is interesting that many of the first set of measures outlined here are already listed in the manifesto of the Congress for these elections. Indeed, insofar as the Congress is seen to have emerged as the victor, and to the extent that the mandate reflects its own manifesto, there is no excuse for the government not to immediately implement many, if not all, of these policies. It is worth noting that, whatever the pronouncements made by the previous United Progressive Alliance (UPA) government, the party that ruled it and will rule the next coalition was conscious that the crucial areas that matter for the economy are employment and livelihood, food security, health access, social security and the conditions of cultivation.

Consider just some of the promises made in the Congress manifesto:

• Provide at least 100 days of work at a real wage of Rs100 a day for everyone as an entitlement under the National Rural Employment Guarantee Act (NREGA)

• Enact a right to food law that guarantees access to sufficient food for all people, particularly the most vulnerable sections of society, and make sure that every family living below the poverty line either in rural or urban areas will be entitled, by law, to 25kg of rice or wheat per month at Rs3 per kg

• Ensure a comprehensive cover of social security to all persons who are at special risk, including single-woman-headed households, the disabled and the elderly, the urban homeless, released bonded workers, members of primitive tribal groups, and members of designated “most backward" Dalit communities

• Give every small and marginal farmer in the country access to bank credit at lower rates of interest and extend interest relief to all farmers who repay bank loans on schedule

If these are implemented as promised, they will provide some relief to the people as well as to the counter-cyclical demand stimulus against the slowdown.

But it is also worth noting what the new government should not do. It should certainly not interpret its victory as a mandate for market-oriented reforms. Much of the mainstream media has jumped to the conclusion that the poor performance of the Left means that the government now has an unfettered opportunity for more privatization and financial sector reform that would further open up India’s capital account. There is already talk of going ahead with many reforms that were earlier prevented by the Left parties while they provided outside support to the previous government: privatization of nationalized banks, pension “reform", allowing futures trading in essential commodities such as foodgrain, and further financial deregulation.

But doing all this would not just be economically stupid in the global context of the financial meltdown and evidence of the irrationality and instability created by deregulated financial markets. It would also be a complete betrayal of the promises on which this election was won. The Congress manifesto actually promises that “public sector enterprises in the manufacturing sector (such as energy, transport and telecom) and in the financial sector (such as banks and insurance companies) will remain in the public sector and will be given all support to grow and become competitive."

It is clear that both the global environment and the Indian economy’s current needs require a shift in emphasis towards wage-led growth based on better conditions for the mass of people. It remains to be seen whether the new government will actually use this historic opportunity.

Jayati Ghosh is professor of economics at the Centre for Economic Studies and Planning, School of Social Sciences at Jawaharlal Nehru University, New Delhi. Comment at theirview@livemint.com