Financial Daily from THE HINDU group of publications
Tuesday, Feb 28, 2006
Industry & Economy
`Follow China model on labour market'
Revisit costs incurred on anti-poverty schemes
New Delhi , Feb. 27
The pre-Budget Economic Survey (2005-06), presented to Parliament today by the Finance Minister, Mr P. Chidambaram, has been refreshingly bold in areas that are otherwise sensitive to the coalition government, even as it makes the usual adulatory references to the reforms accomplished and the results delivered in terms of robust numbers.
First, on the issue of food subsidy, dear to all political parties, the Survey rightly diagnosed that the extant food subsidy as a fiscal policy tool seeks to serve two separate and potentially conflicting objectives of protecting producers' interest through payment of `remunerative' prices and also keeping prices stable/low for consumers!
The Survey cites a recent performance evaluation of the public distribution system by the Plan panel.
The Programme Evaluation Organisation of the Planning Commission has estimated that to transfer one rupee to the poor, the Government spends Rs 3.65 in the form of food subsidy, indicating that cash or near cash transfer could lead to a big gain for the poor.
In a similar pragmatic vein, the Survey points out that the time has now come to shift emphasis and focus attention on the quality of outcome of the various social sector programmes rather than their quantity or coverage!
The labour paradox
Yet another bold statement in the Survey relates to labour laws and labour markets where it highlights the paradox of how the organised sector has accorded too much of job security for too long, while the unorganised sector too little to too many!
Citing various studies to corroborate how Indian labour laws are highly protective, making the labour markets relatively inflexible, it said consequently these laws have restricted labour mobility, which led to capital-intensive methods in the organised sector to the detriment of long-run demand for labour.
To hammer home the point to the Left party allies supporting the Government from outside, the Survey avers that China, with a history of extreme employment security, has drastically reformed its labour relations and created a new labour market in which workers are highly mobile.
What is remarkable is that despite mass lay-offs and open unemployment, high rates of industrial growth particularly in the coastal regions of China helped their redeployment. Perhaps Indian authorities could take a leaf out of China's book.
In the wake of the launch of the National Rural Employment Guarantee Scheme (NREGS) in the country, the Survey argues that if efficiently implemented this will decisively address the unemployment situation in the rural areas. It cautions about the choice of projects under the scheme so as to ensure that need-based and good quality assets and infrastructure are created in the rural areas.
With the NREGS being billed as a safety net, the Survey notes that the entire gamut of expenditure based on anti-poverty initiatives needs to be "revisited". As political parties use anti-poverty programmes as porks, how far this suggestion would be implemented is a moot point.
Need more reforms
Even as the euphoria over GDP growth rates exceeding 8 per cent in the last three years ending 2005-06 is mentioned in the Survey, it did not desist from stating policies and institutions need to be geared up to meet the specific requirements of the infrastructure sectors in the country, particularly a well-defined regulatory architecture to increase the comfort level of the different players in the market.
The reform of the tax regime still remains an unfinished task the Survey said, adding that, "Indian industry needs to be unburdened from the high levels of taxes and the distortive exemptions that provide perverse incentives".
One can only hope that the Budget makes some sensible moves to set right this perversity.
The Survey's exhortation over inflation and hardening of interest rates in the light of unrelenting spurt in global crude prices and unresolved global macro-economic imbalances needs to be heeded.
Its well-laid prescription for ensuring better productivity in expenditure and getting greater growth dividend through deepening the reform process is to be followed for harnessing higher savings and investment to cruise on a sustainable non-inflationary higher growth path over the medium-term.
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