Two faces of subsidy: Bad for the poor but must for the rich

Industries enjoy tax exemptions as incentives for making investments while sarkari job schemes for the poor are condemned as largess.

FirstPost, 23 June, 2013

The empowering idea of laissez faire is also fascinating. It demands that anyone can sell or buy anything to or from anyone at any price. The doctrine discourages governmental interference beyond the minimum necessary for defending property rights and maintaining law and order.

Labour, or human resource, is a key commodity in any market. Employers are free to decide at what price they buy labour depending on the availability (read seller’s desperation). The price also depends on the demand which, in turn, depends mostly on the willingness of the industry to invest into enterprises that require manpower. In simple terms, that is called job creation. We will return to that later.

Ideally, the seller should also be free to decide at what price he sells his labour. In India, labour is always cheap. Yet, it is considered bad for our economy when it gets a little less cheap. Many complain that the growing demand for higher rural wages is triggered by MNREGA, the government’s job guaranty scheme. But is not a welfare state supposed to ensure that the poorest sections of its workforce are paid enough? All capitalist systems, including the USA, have benchmarks for minimum wage.

Can we fault our government for offering what it considers minimum wage to the poor? Is not the private sector also supposed to pay the legal minimum wage? Are the wages paid under MNREGA -- between Rs 122 (Jharkhand) to Rs 191 (Haryana) per day – unrealistically high? In the USA, minimum hourly wage is $9, four and a half times the country’s extreme poverty level of daily $2. The average hourly wage in MNREGA would be around Rs 30 for a six-hour workday, just above India’s poverty line of Rs 22-28 per day.

Will our farms be in the red if they pay, say, Rs 200-300 (including VDA) daily to a farmhand? It is true that profits are steadily going down in agriculture. But that is because our farming practices have become too energy and chemical intensive. We are paying the price for killing soil fertility in the name of green revolution.

With spiralling expenses on diesel, fertilisers, pesticides and herbicides, even free farm labour will not save this self-defeating agricultural model. But many industries function on much higher profit margins than farming. Many of these employ rural labour or migrated rural labour. Should they grudge the poor the minimum wage?

Of course, there are many problems with the way money is spent under MNREGA. The bureaucracy often treats it as an obligation to dole out money. So the jobs are mostly unproductive. With no funds for raw materials and training, many district administrations are squandering MNREGA’s vast potential for value addition to rural infrastructure. A lot of funds are also siphoned out. All these are problems of faulty execution and can be fixed. And yet, the idea of “subsidising the poor” irks so many us.

The annual outlay for MNREGA has been Rs 33,000 crore since last year. Earlier, it was Rs 40,000 crore. Now compare this “subsidy for the poor” with a few other budgetary provisions. The estimated revenue foregone in corporate income tax is Rs 68,007 crore during 2012-13. Custom duty exemption to precious stone and jewellery alone runs into Rs 61,035 crore. What are these if not subsidy for the rich?

Many argue that these exemptions help the economy because more money is pumped into the system which creates, among other assets, jobs. But who will benefit from these new jobs if the poor do not get higher wages that enable them to send their children to schools? Or do we want these children to work and support impoverished families and end up as cheap farm or unskilled industrial labourers like their parents? That helps the rich to keep their wage bills down, and the middle class to avoid competition for white collar jobs.

It is common knowledge that MNREGA wages, or even subsidised food through the PDS, frequently end up at local liquor shops. The poor, like the rest, are far from perfect. Any socio-economic transformation needs time and handholding. But that does not take away the fundamental questions. Why we resent the poor earning a little more? Will it push our industries into losses or merely reduce profit margins? Is there a benchmark for adequate profit?

Job creation becomes slower when big money stays put because projected profits of investments do not meet expectations. When the realty sector complains of a slump, for example, it means that the builders are not lowering the price because they got used to the absurdly high margins of a manufactured economy. At how many times the actual cost a product can be sold in the market? What is the minimum percentage of turnover that companies are expected to spend in salary for blue collar employees? Are there any industry standards for these at all?

If there are, the only way industries arrive at those benchmarks is merely by speculating how much they can get away with. No wonder they demand outlandish profit assurances – tax holidays, cheap land, easy labour and other sops -- from the state to invest, expand or even stay in businesses. In all of this, what is conveniently ignored is that money needs markets as much as markets need money. Wealth cannot sit idle and still multiply. Other than China, India is a market no investor, desi or foreign, can ignore for its sheer size.

Yet, instead of asking big money to rationalise profit expectations, the government has been bending backwards to subsidise the rich who now complain that a section of the poor is refusing to work for a pittance.