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GameChanger
Concall on Food Security Bill
Intended and unintended consequences. In our call for investors to discuss the Food
Security Bill and its possible consequences, we highlighted that the iron-cast target
numbers ignore the impact of economic growth on poverty reduction, and promises
like free meals for children below 14 (who are now one-third of India’s population) as
opposed to only subsidized food can significantly escalate costs. We believe that proper
implementation of this bill can stoke significant rural consumption demand.
Seven different angles to look at the intended or unintended consequences
(1) Definition and updation. Section 16 of the draft bill leaves it to the State governments to
update the beneficiary list from time to time. When one leaves discretionary power to take
supposedly anti-populist measures in the hands of any popularly elected government, such
decisions never get taken.
(2) Demographics. The bill wants to give children below 14 years free meal as opposed to just
subsidized food, 32% of India today is below the age of 14. If one has to cover half of the
two-thirds overall coverage with free meal as opposed to just subsidized food, the cost will be
much bigger than what the excel sheet of numbers currently indicate.
(3) The issue of where you buy and where you sell. Punjab and Haryana account for more
than 80% of the net procurement that FCI does in the various states of India. Given that these
two states are in the northern most part of the country, food grains need to travel the length
and breadth of the country to reach their destinations. The issue is that the economic value of
the grain is much higher than what it will be sold at – it is not surprising that at every level of
the travel chain there is a threat to the quantity and the quality of the grains.
(4) Implications on the global and local prices. International prices of rice rose four-fold to
US$1,200 per ton in FY2008 when India’s food security bill was first mooted and announced,
giving rise to expectations that India’s contribution to the world trade will dramatically fall –
and could possibly reverse by making India an importer of rice. This may force the government
in India to raise the minimum support prices or have tight controls on the exports.
(5) Balancing the fiscal. Our economics team projects the GFD/GDP ratio at 5.7% and 5.8%
respectively in FY2012E and FY2013E: these deficits being unsustainable over the long run,
the government may be required to relook at the tax rates (or heads of incomes chargeable to
tax) meaningfully with a risk of significant uptick.
(6) Prospect of increased savings in rural India and its impact on urbanization. The impact
on savings for a consumer as high as in the 75th percentile will be a meaningful 11% of his
expenditure (those below this percentile possibly spend much more of their incomes on food
and hence the impact for them will be even more pronounced). This can retard the already
tardy pace of urbanization in India.
(7) Unintended consequences of increasing incomes and not focusing on productivity.
Schemes like MG-NREGS and continuous increase in minimum support prices create incentives
for the increased dependence of rural India on mechanization without a corresponding
increase in the availability of industrial jobs, which can lead to a significant chunk of
unemployed people. This can significantly enhance the government’s burden of ‘taking care’
of people dispossessed by economic growth.
Introduction
Good afternoon ladies and gentlemen, welcome to the call. Before we get into the call, I
would like to take a minute to introduce myself and my co-participant, Indranil Pan. Indranil
is the Chief Economist of the Kotak Group.
I am the author the GameChanger series of thematic reports at Kotak Institutional Equities.
You might have seen or read some of these reports which have covered a wide variety of
topics including Indian demographics, water, agriculture, household savings, and mobile
money, among others. I also help facilitate a continuous interaction with policy markers on
key socio-economic issues and have been following the Food Security Bill for the past 6
months – we had written a note on this issue in July when the empowered Group of
Ministers had cleared the bill where we had looked at the mechanics of the bill and now we
have written again a note on Tuesday to look at the possible intended and unintended
consequences of this legislation.
The mechanics of the bill
Let me begin first by talking about the mechanics of the Food Security Bill. The bill proposes
to give massively subsidized food (Rs1/2/3 per kg of coarse grain, wheat and rice respectively)
to 75% of the rural and 50% of the urban population, implying a total coverage of around
two-thirds of India’s population. Within these segments there need to be 46% priority
households in rural India and 28% in urban India. I am taking these and some of the more
reported basic propositions of the bill as read and hence would like to draw your attention
to some interesting aspects that I find in the details of the bill. We will also look at the
lessons that we can draw from the other government interventions in the agricultural wage
and grain markets.
Seven different angles to look at the intended or unintended consequences
(1) Definition and updation
The priority households have not been defined as of now in the text of the legislation but an
acceptable or conveniently used definition is of those households that are below the poverty
line. A socio-economic census is underway in the country currently to determine the
quantum of such people. The results of this survey are expected by the middle of next
calendar year. Counting people and estimating their proportion is one thing but identifying
them over and over again when the grain needs to be delivered to them monthly is another
– and we will discuss the UID project in this context in some time. What is also left
ambiguous is how frequently the list will be updated as the circumstances of the people
change: Section 16 of the draft bill leaves it to the State governments to update this list
from time to time.
We all know what happens when you leave discretionary power to take supposedly antipopulist
measures in the hands of any popularly elected government: such decisions never
get taken. Note for example that the prices in the current public distribution system (PDS)
have not been changed since 2002 and state electricity boards do not ask for their annual
review of tariff since they are not obligated to so (the operative word in the legislation is
that they may ask file for annual revision, and the word may has been liberally implemented)!
In a country that is – over the medium to long term at least, if not in FY2012 or FY2013 –
expected to grow at around 8%, it will annually pull a lot of people out of the wretched
state of poverty they find themselves in and not updating the lists will do serious injustice to
the concept of right targeting.
(2) Demographics
Another dimension that I would like to draw your attention to is the nature of the
demographics in this country. Note that Section 5 of the draft bill makes for even more
generous provisions than the basic rights enshrined in the operative Section 3. Section 5 asks
of the government to provide age appropriate meal, free of charge, to children between 6
months and 6 years (one sincerely appreciates the level of detail that the authors of the bill
have gone to when one sees that they have added a provisio to Clause 1 of Section 5 which
reads, provided that for children below the age of 6 months, exclusive breast feeding will be
promoted). Clause 2 requires that children in the age range of 6 to 14 be given one mid-day
meal free of charge.
Now two things need to be noted here: (1) children till the age of 14 will still take in bulk of
the monthly requirement of 7 kgs, which implies a daily intake of around 230 grams and
hence there will be limited, if any savings in the quantity of the food; and (2) given that the
bill wants to give them (and pregnant women and lactating mothers) free meal as opposed
to just subsidized food, we need to account for a higher cost than what our basic
calculations assume. You would be wondering where the demographics come in here: 32%
of India today is below the age of 14 and even if you project it all the way to FY2026, more
than a quarter of India will be below this age. Now if you have to cover half of the twothirds
overall coverage that you want with free meal as opposed to just subsidized food you
will have a much bigger cost at your hand than what the excel sheet of numbers currently
indicate. Of course where we will get the cooks is another story.
(3) The issue of where you buy and where you sell
One of the most telling commentaries that come from the vast part of the country every
harvesting season is that the farmer is forced to sell at least some part of his produce at
market prices which end up going below the minimum support price. The reason for this is
rather simple: the writ of the government does not run in those areas because the
government has not been able to create the off-take infrastructure. The recent note that we
released on Tuesday looks at the importance of Punjab and Haryana in the procurement
process for the Food Corporation of India (FCI): these two states account for more than
80% of the NET procurement that FCI does in the various states of country. Now given that
these two states are in the northern most part of the country, food grains need to travel the
length and breadth of the country to reach their destinations.
The issue is that the economic value of the grain is much higher than what it will be sold at
– it is not surprising that at every level of the travel chain there is a threat to the quantity
and the quality of the grains. Of course one solution is that the government gives out cash
as support as opposed to making the grains travel all over the country. We note that the
FCI’s logistics cost add between 50% and 60% to the minimum support prices at which the
government procures the grains before they reach the fair price shops (if you need the
details it is there in our note released on Tuesday).
(4) Implications on the global and local prices
The concept that price rises when the supply is constrained or when a big buyer is expected
to move in comes from basic economics. Only about 8% of the world’s production of rice
(i.e. only around 28 mn tons of the 350 mn tons production) is traded in the world markets
and India meets around 10% of this trade via its exports. Given the opaque nature of the
trading in the world agricultural markets, especially rice, India’s move to protect its
consumers has previously had a significant increase in the world prices of rice.
International prices of rice rose four-fold to US$1,200 per ton in FY2008 when India’s food
security bill was first mooted and announced giving rise to expectations that India’s
contribution to the world trade will dramatically fall – and could possibly reverse by making
India an importer of rice. Over time as the threat of this actually happening in the short term
receded and more supply came into the markets based on this price shock, the prices have
corrected to around US$600 per ton.
The actual operation of this scheme can still significantly alter global prices – thereby forcing
the government in India to raise the minimum support prices or have tight controls on the
exports.
We also note that in the local markets the government will now be required to mop up
almost 60% of the marketable surplus. It is important to understand the concept of
marketable surplus – in spite of a production of almost 188 million tons of grains in India
this year, 81 million tons will be consumed by the small and marginal farmers and their
families and hence not be available for the government to purchase. This 60% number is
assuming no losses or wastages in the delivery mechanism – and if one were to take any
conservative assumption on these also the government intervention will become even more
significant. This has the potential to drive out private trade – and making the market illiquid,
which will add to the inefficiency in making the grain reach the right place at the right time.
(5) Balancing the fiscal
Indranil and his team have looked at the impact of this bill on the fiscal position of the
government of India in the near term in their note dated 19 Dec 2011, “Food Security Bill:
Additional pressures on the government”. Their broad conclusion is that the additional
impact of the Food Security Bill, if it were to be implemented as currently held out, will
increase the gross fiscal deficit to gross domestic product (GFD/GDP ratio) to 5.7% and
5.8% respectively in FY2012E and FY2013E.
We believe that these deficits being unsustainable over the long run, the government may
be required to relook at the tax rates (or heads of incomes chargeable to tax) meaningfully
with a risk of significant uptick. The other alternative is to increase the borrowings by issuing
domestic or foreign bonds: the market for domestic bonds naturally exists as the
government can request for an increase in the statutory liquidity ratio (SLR) across the
banking sector to help subscribe to the bonds. One is not surprised that the provident funds
do not get to invest in the equity markets.
(6) Prospect of increased savings in rural India and its impact on urbanization
We note that this measure can meaningfully add to the savings, especially of rural India
residents. The impact on savings for a consumer as high as in the 75th percentile will be a
meaningful 11% of his expenditure (those below this percentile possibly spend much more
of their incomes on food and hence the impact for them will be even more pronounced).
Given the no user-charges based and government financed build-out of hard and soft
infrastructure (for example roads and education respectively), this increased saving will
possibly be channelized towards consumption of higher value items (more sustained focus
on proteins and oils, and possibly also entertainment) to alleviate the misery of life at the
very low per-capita incomes that exist in rural India.
We note that India has seen tardy increases in its urbanization rate with urbanization rising
even from its low base of less than 20% by only around 11 percentage points over the last
four decades.
(7) Unintended consequences of increasing incomes and not focusing on
productivity
We also draw some lessons from the impact of the government-mandated transfers on two
important metrics of agriculture and hence rural India: (1) productivity growth in agriculture
and (2) increase in wages.
Insignificant productivity growth: There has been a significant increase in the rural incomes
and credit over the last eight years: the rural economy has expanded to 3.5X its size in the
last 8 years, implying a nominal growth of 17% annually. We also note, in the same exhibit,
that the productivity (or yields) in rural India have risen only between 8% and 38% over the
eight-year period, implying an annual growth of between 1% and 4% annually. This
divergence in income and credit increases when compared to productivity increases ends up
fuelling inflation.
Significant wage increases leading to mechanization: Given the guarantee of minimum
wages from the government, wage rates in India have dramatically caught up with the
minimum wage. The reason minimum wage regulations can end up creating more
unemployment (as the Economics 101 text books would say) is that the market clearing
price given the productivity of the labor is lower than the wage being asked by him, making
it unprofitable to employ him. As an exhibit we have repeatedly highlighted that the
divergence in the increase in prices of manual labor versus tractors is to the tune of 5-13%
over the last four years. Anecdotally, as well as given from the increasing penetration of
mechanization, it is clear that rural India is replacing labor with capital.
We are concerned that the increased dependence of rural India on mechanization without a
corresponding increase in the availability of industrial jobs can create a significant chunk of
unemployed people. This can significantly enhance the government’s burden of ‘taking care’
of people dispossessed by economic growth.
A final word on the UID project
There has been some concern on the impact of the Standing Committee of the Parliament
coming down heavily on the unique identification project. We have said this earlier and
maintain that it is better for cash to flow through the system rather than goods (like food
grains or fuel) that have higher economic value than the price at which they will be sold. Our
GameChanger report ‘M2: Mobile Money’ looked at the feasibility of making this happen.
For this to happen, the UID is a key component of identifying the beneficiary and also
helping in the financial inclusion of the person concerned.
We note that the concerns of the standing committee come from (1) the interpretation of
the constitution (whether the Executive can start a process that the Parliament has not
cleared – and there is a fine line determining that), (2) the haste with which the process has
gone through, (3) the enrolment process, (4) the lack of privacy laws and (5) the issue of the
accuracy of biometric identification. Many of these issues bedevil many aspects of the
government machinery: for example the lack of privacy laws has not stopped the issue of
PAN by the IT department or the enrolment process for the ration cards that will be required
under this scheme will be as error-prone as the UID project. In any case, overcoming these
objections require more political will than logical reasoning.
The important point to note is that the recommendations of the Standing Committee are
just that – they are recommendatory in nature and not binding on the Parliament. They
constitute an input for the Parliament to deliberate on the issue but the final legislation
depends on the will of the Parliament.
With this, we would like to open the floor for any questions and discussions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GameChanger
Concall on Food Security Bill
Intended and unintended consequences. In our call for investors to discuss the Food
Security Bill and its possible consequences, we highlighted that the iron-cast target
numbers ignore the impact of economic growth on poverty reduction, and promises
like free meals for children below 14 (who are now one-third of India’s population) as
opposed to only subsidized food can significantly escalate costs. We believe that proper
implementation of this bill can stoke significant rural consumption demand.
Seven different angles to look at the intended or unintended consequences
(1) Definition and updation. Section 16 of the draft bill leaves it to the State governments to
update the beneficiary list from time to time. When one leaves discretionary power to take
supposedly anti-populist measures in the hands of any popularly elected government, such
decisions never get taken.
(2) Demographics. The bill wants to give children below 14 years free meal as opposed to just
subsidized food, 32% of India today is below the age of 14. If one has to cover half of the
two-thirds overall coverage with free meal as opposed to just subsidized food, the cost will be
much bigger than what the excel sheet of numbers currently indicate.
(3) The issue of where you buy and where you sell. Punjab and Haryana account for more
than 80% of the net procurement that FCI does in the various states of India. Given that these
two states are in the northern most part of the country, food grains need to travel the length
and breadth of the country to reach their destinations. The issue is that the economic value of
the grain is much higher than what it will be sold at – it is not surprising that at every level of
the travel chain there is a threat to the quantity and the quality of the grains.
(4) Implications on the global and local prices. International prices of rice rose four-fold to
US$1,200 per ton in FY2008 when India’s food security bill was first mooted and announced,
giving rise to expectations that India’s contribution to the world trade will dramatically fall –
and could possibly reverse by making India an importer of rice. This may force the government
in India to raise the minimum support prices or have tight controls on the exports.
(5) Balancing the fiscal. Our economics team projects the GFD/GDP ratio at 5.7% and 5.8%
respectively in FY2012E and FY2013E: these deficits being unsustainable over the long run,
the government may be required to relook at the tax rates (or heads of incomes chargeable to
tax) meaningfully with a risk of significant uptick.
(6) Prospect of increased savings in rural India and its impact on urbanization. The impact
on savings for a consumer as high as in the 75th percentile will be a meaningful 11% of his
expenditure (those below this percentile possibly spend much more of their incomes on food
and hence the impact for them will be even more pronounced). This can retard the already
tardy pace of urbanization in India.
(7) Unintended consequences of increasing incomes and not focusing on productivity.
Schemes like MG-NREGS and continuous increase in minimum support prices create incentives
for the increased dependence of rural India on mechanization without a corresponding
increase in the availability of industrial jobs, which can lead to a significant chunk of
unemployed people. This can significantly enhance the government’s burden of ‘taking care’
of people dispossessed by economic growth.
Introduction
Good afternoon ladies and gentlemen, welcome to the call. Before we get into the call, I
would like to take a minute to introduce myself and my co-participant, Indranil Pan. Indranil
is the Chief Economist of the Kotak Group.
I am the author the GameChanger series of thematic reports at Kotak Institutional Equities.
You might have seen or read some of these reports which have covered a wide variety of
topics including Indian demographics, water, agriculture, household savings, and mobile
money, among others. I also help facilitate a continuous interaction with policy markers on
key socio-economic issues and have been following the Food Security Bill for the past 6
months – we had written a note on this issue in July when the empowered Group of
Ministers had cleared the bill where we had looked at the mechanics of the bill and now we
have written again a note on Tuesday to look at the possible intended and unintended
consequences of this legislation.
The mechanics of the bill
Let me begin first by talking about the mechanics of the Food Security Bill. The bill proposes
to give massively subsidized food (Rs1/2/3 per kg of coarse grain, wheat and rice respectively)
to 75% of the rural and 50% of the urban population, implying a total coverage of around
two-thirds of India’s population. Within these segments there need to be 46% priority
households in rural India and 28% in urban India. I am taking these and some of the more
reported basic propositions of the bill as read and hence would like to draw your attention
to some interesting aspects that I find in the details of the bill. We will also look at the
lessons that we can draw from the other government interventions in the agricultural wage
and grain markets.
Seven different angles to look at the intended or unintended consequences
(1) Definition and updation
The priority households have not been defined as of now in the text of the legislation but an
acceptable or conveniently used definition is of those households that are below the poverty
line. A socio-economic census is underway in the country currently to determine the
quantum of such people. The results of this survey are expected by the middle of next
calendar year. Counting people and estimating their proportion is one thing but identifying
them over and over again when the grain needs to be delivered to them monthly is another
– and we will discuss the UID project in this context in some time. What is also left
ambiguous is how frequently the list will be updated as the circumstances of the people
change: Section 16 of the draft bill leaves it to the State governments to update this list
from time to time.
We all know what happens when you leave discretionary power to take supposedly antipopulist
measures in the hands of any popularly elected government: such decisions never
get taken. Note for example that the prices in the current public distribution system (PDS)
have not been changed since 2002 and state electricity boards do not ask for their annual
review of tariff since they are not obligated to so (the operative word in the legislation is
that they may ask file for annual revision, and the word may has been liberally implemented)!
In a country that is – over the medium to long term at least, if not in FY2012 or FY2013 –
expected to grow at around 8%, it will annually pull a lot of people out of the wretched
state of poverty they find themselves in and not updating the lists will do serious injustice to
the concept of right targeting.
(2) Demographics
Another dimension that I would like to draw your attention to is the nature of the
demographics in this country. Note that Section 5 of the draft bill makes for even more
generous provisions than the basic rights enshrined in the operative Section 3. Section 5 asks
of the government to provide age appropriate meal, free of charge, to children between 6
months and 6 years (one sincerely appreciates the level of detail that the authors of the bill
have gone to when one sees that they have added a provisio to Clause 1 of Section 5 which
reads, provided that for children below the age of 6 months, exclusive breast feeding will be
promoted). Clause 2 requires that children in the age range of 6 to 14 be given one mid-day
meal free of charge.
Now two things need to be noted here: (1) children till the age of 14 will still take in bulk of
the monthly requirement of 7 kgs, which implies a daily intake of around 230 grams and
hence there will be limited, if any savings in the quantity of the food; and (2) given that the
bill wants to give them (and pregnant women and lactating mothers) free meal as opposed
to just subsidized food, we need to account for a higher cost than what our basic
calculations assume. You would be wondering where the demographics come in here: 32%
of India today is below the age of 14 and even if you project it all the way to FY2026, more
than a quarter of India will be below this age. Now if you have to cover half of the twothirds
overall coverage that you want with free meal as opposed to just subsidized food you
will have a much bigger cost at your hand than what the excel sheet of numbers currently
indicate. Of course where we will get the cooks is another story.
(3) The issue of where you buy and where you sell
One of the most telling commentaries that come from the vast part of the country every
harvesting season is that the farmer is forced to sell at least some part of his produce at
market prices which end up going below the minimum support price. The reason for this is
rather simple: the writ of the government does not run in those areas because the
government has not been able to create the off-take infrastructure. The recent note that we
released on Tuesday looks at the importance of Punjab and Haryana in the procurement
process for the Food Corporation of India (FCI): these two states account for more than
80% of the NET procurement that FCI does in the various states of country. Now given that
these two states are in the northern most part of the country, food grains need to travel the
length and breadth of the country to reach their destinations.
The issue is that the economic value of the grain is much higher than what it will be sold at
– it is not surprising that at every level of the travel chain there is a threat to the quantity
and the quality of the grains. Of course one solution is that the government gives out cash
as support as opposed to making the grains travel all over the country. We note that the
FCI’s logistics cost add between 50% and 60% to the minimum support prices at which the
government procures the grains before they reach the fair price shops (if you need the
details it is there in our note released on Tuesday).
(4) Implications on the global and local prices
The concept that price rises when the supply is constrained or when a big buyer is expected
to move in comes from basic economics. Only about 8% of the world’s production of rice
(i.e. only around 28 mn tons of the 350 mn tons production) is traded in the world markets
and India meets around 10% of this trade via its exports. Given the opaque nature of the
trading in the world agricultural markets, especially rice, India’s move to protect its
consumers has previously had a significant increase in the world prices of rice.
International prices of rice rose four-fold to US$1,200 per ton in FY2008 when India’s food
security bill was first mooted and announced giving rise to expectations that India’s
contribution to the world trade will dramatically fall – and could possibly reverse by making
India an importer of rice. Over time as the threat of this actually happening in the short term
receded and more supply came into the markets based on this price shock, the prices have
corrected to around US$600 per ton.
The actual operation of this scheme can still significantly alter global prices – thereby forcing
the government in India to raise the minimum support prices or have tight controls on the
exports.
We also note that in the local markets the government will now be required to mop up
almost 60% of the marketable surplus. It is important to understand the concept of
marketable surplus – in spite of a production of almost 188 million tons of grains in India
this year, 81 million tons will be consumed by the small and marginal farmers and their
families and hence not be available for the government to purchase. This 60% number is
assuming no losses or wastages in the delivery mechanism – and if one were to take any
conservative assumption on these also the government intervention will become even more
significant. This has the potential to drive out private trade – and making the market illiquid,
which will add to the inefficiency in making the grain reach the right place at the right time.
(5) Balancing the fiscal
Indranil and his team have looked at the impact of this bill on the fiscal position of the
government of India in the near term in their note dated 19 Dec 2011, “Food Security Bill:
Additional pressures on the government”. Their broad conclusion is that the additional
impact of the Food Security Bill, if it were to be implemented as currently held out, will
increase the gross fiscal deficit to gross domestic product (GFD/GDP ratio) to 5.7% and
5.8% respectively in FY2012E and FY2013E.
We believe that these deficits being unsustainable over the long run, the government may
be required to relook at the tax rates (or heads of incomes chargeable to tax) meaningfully
with a risk of significant uptick. The other alternative is to increase the borrowings by issuing
domestic or foreign bonds: the market for domestic bonds naturally exists as the
government can request for an increase in the statutory liquidity ratio (SLR) across the
banking sector to help subscribe to the bonds. One is not surprised that the provident funds
do not get to invest in the equity markets.
(6) Prospect of increased savings in rural India and its impact on urbanization
We note that this measure can meaningfully add to the savings, especially of rural India
residents. The impact on savings for a consumer as high as in the 75th percentile will be a
meaningful 11% of his expenditure (those below this percentile possibly spend much more
of their incomes on food and hence the impact for them will be even more pronounced).
Given the no user-charges based and government financed build-out of hard and soft
infrastructure (for example roads and education respectively), this increased saving will
possibly be channelized towards consumption of higher value items (more sustained focus
on proteins and oils, and possibly also entertainment) to alleviate the misery of life at the
very low per-capita incomes that exist in rural India.
We note that India has seen tardy increases in its urbanization rate with urbanization rising
even from its low base of less than 20% by only around 11 percentage points over the last
four decades.
(7) Unintended consequences of increasing incomes and not focusing on
productivity
We also draw some lessons from the impact of the government-mandated transfers on two
important metrics of agriculture and hence rural India: (1) productivity growth in agriculture
and (2) increase in wages.
Insignificant productivity growth: There has been a significant increase in the rural incomes
and credit over the last eight years: the rural economy has expanded to 3.5X its size in the
last 8 years, implying a nominal growth of 17% annually. We also note, in the same exhibit,
that the productivity (or yields) in rural India have risen only between 8% and 38% over the
eight-year period, implying an annual growth of between 1% and 4% annually. This
divergence in income and credit increases when compared to productivity increases ends up
fuelling inflation.
Significant wage increases leading to mechanization: Given the guarantee of minimum
wages from the government, wage rates in India have dramatically caught up with the
minimum wage. The reason minimum wage regulations can end up creating more
unemployment (as the Economics 101 text books would say) is that the market clearing
price given the productivity of the labor is lower than the wage being asked by him, making
it unprofitable to employ him. As an exhibit we have repeatedly highlighted that the
divergence in the increase in prices of manual labor versus tractors is to the tune of 5-13%
over the last four years. Anecdotally, as well as given from the increasing penetration of
mechanization, it is clear that rural India is replacing labor with capital.
We are concerned that the increased dependence of rural India on mechanization without a
corresponding increase in the availability of industrial jobs can create a significant chunk of
unemployed people. This can significantly enhance the government’s burden of ‘taking care’
of people dispossessed by economic growth.
A final word on the UID project
There has been some concern on the impact of the Standing Committee of the Parliament
coming down heavily on the unique identification project. We have said this earlier and
maintain that it is better for cash to flow through the system rather than goods (like food
grains or fuel) that have higher economic value than the price at which they will be sold. Our
GameChanger report ‘M2: Mobile Money’ looked at the feasibility of making this happen.
For this to happen, the UID is a key component of identifying the beneficiary and also
helping in the financial inclusion of the person concerned.
We note that the concerns of the standing committee come from (1) the interpretation of
the constitution (whether the Executive can start a process that the Parliament has not
cleared – and there is a fine line determining that), (2) the haste with which the process has
gone through, (3) the enrolment process, (4) the lack of privacy laws and (5) the issue of the
accuracy of biometric identification. Many of these issues bedevil many aspects of the
government machinery: for example the lack of privacy laws has not stopped the issue of
PAN by the IT department or the enrolment process for the ration cards that will be required
under this scheme will be as error-prone as the UID project. In any case, overcoming these
objections require more political will than logical reasoning.
The important point to note is that the recommendations of the Standing Committee are
just that – they are recommendatory in nature and not binding on the Parliament. They
constitute an input for the Parliament to deliberate on the issue but the final legislation
depends on the will of the Parliament.
With this, we would like to open the floor for any questions and discussions.
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