This is a question that requires more than a HN post to answer.
In broad outlines though
1) On the one hand this is our social safety net, and the floor to ensure that farmers are guaranteed a floor price for their efforts
2) We HAVE boosted agricultural productivity, which is why we have stocks which are now rotting.
3) We are stuck (edit: Didn't finish this point) with the legacies of our past. Which include our own step backwards in the 1960s.
4) > We must avoid giving Freebies. Giving away things for free/subsidy is the root cause of the problem.
The food isn't free. Its at a nominal subsidized rate.
The poverty line is about 32 rs a day. This system acts as a social safety net, while also at the same time ensuring a floor price for agricultural produce.
NREGA, a right to work act; may well be digging holes to fill holes. Yet it also is working to support a minimum wage across the country.
Can they be scrapped? Yeah.
Will it be good for India? No, it will likely be a disaster.
The transition from an inefficient, old school system to a modern system will immediately close out entire generations from the economy. No amount of education and retraining will close that gap.
Expect a gradual transition, as alternatives to western systems are dreamt up which work in an Indian context. Some of them are redundant, but are what people will swallow and accept.
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Other fun stuff:
Heck forget freebies, you should check out the reverse taxation mechanism that recently got introduced and is applicable from mid year.
The larger firms now are responsible for collecting the taxes they pay for obtaining services! If you work for a large firm and rent a car, if the final bill contains service tax, you are now obligated to pay that service tax to the government separately.
Why? Because the govt knows it can't go after the unorganized sector directly. So they make it inimical for the un-organized sector to remain disorganized.
MNCs will transfer their work to companies like Hertz, or other rent-a-car companies and so on.
Smaller firms will have to register and become compliant to survive.
Widening the tax net, and increase compliance.
At the expense of the more established firms.
Bizarre? Yeah, its par for the course.
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Side note:
2 MBA students actually tried to live at 100 Rs/day and then Rs 32 a day. At the 32 mark, they said travel was out of the question because the calorific/time effort required to move that distance to get to a bus station would have curtailed other equally important activities. (http://rs100aday.com/about/)
But the point in discussion is why do people need to be provided food for free? Clearly if they are not able to buy for a real long time- This indicates they are not earning enough. So fixing that makes more sense than fixing problems in the free food program. Because if we fix the affordability issue we will not need the free food program at the first place.
Yes the distribution system is broken. I think a step to fix that was tried- FDI in retail was good. Companies could buy directly from the farmers, eliminating middle men and the entire inefficient distribution cycle. But I and you know well the political opposition to those reforms.
Substitute free food for welfare and it might make more sense.
Also your goal is good in the long term. In the short term we will be taking a lot of stop gap measures to reach that point.
I don't think we have the option for mass production/industrialization to boot strap our unskilled labor.
I know of some people who are building startups aimed at giving people in slums more usable skills - like carpentry, plumbing and so on. Those private sector moves will still bear fruit only to a moderate extent at best in generation N=0.
Its only after we get that to reach N=2 and beyond that it should start making an impact.
In short, for us, its going to be a hugely drawn out battle.
I hope that changes, and I may easily be wrong, looking at things from this scale (mobile VAS could suddenly create tons of alpha for its users or who knows what).
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First hand horror stories again:
(Do note I am pro FDI)
A disturbing case that I received second hand was regards how Reliance handled their farmers.
For other HNers, Reliance is a huge (gigantic) Indian conglomerate which does nearly everything.
Reliance encouraged its producers to use a series of crop enhancing pesticides and chemicals which had long term negative impacts to the farmer's land.
At the end of it, the land was fallow. At which juncture Reliance washed their hands of it.
Just to be pedantic: I don't think it's literally free, it's subsidized.
"Companies could buy directly from the farmers": this has nothing to do with FDI in retail. Indian companies are free to do so already. The reason it isn't happening has probably to do with small landholdings, bad public infrastructure like roads, electricity etc. Hence it probably makes sense for somebody to specialize in aggregating the output of multiple producers (aka middleman).
Also transport of goods within India isn't friction-free (AFAIK agri. products can't be transported across states w/o a permit). Yet another opportunity for specialization aka middleman.
These things won't just go away because FDI is allowed in retail. YMMV.
This is a very important topic, so to answer many of these points from the canon of modern economics:
1. Price floors are net harms to economies. Overall growth and employment is reduced at the expense of artificially bolstering the farming industry, which otherwise would be seeing necessary cuts in jobs and profit margins. Re: American New Deal farm subsidies and Japanese rice subsidies.
2. Oversupplies are offset when the market is fully private, because the price mechanism is a consideration for all participants, not just those who are too rich to qualify for the public distribution system. As a result, Purchasing increases as prices decrease, which India doesn't like allowing.
4. Subsidies and freebies exist on the same continuum; when they mean that the government is paying for some portion of the price of a good, they create price floor pressures. Price floors create surpluses [1]. As a result, you have supply exceeding demand, and the country suffers as too much labor is put into producing the oversupply.
It can be debated all day whether social welfare systems are good or bad, but they are undoubtedly more effective when they support people in very broad ways (such as welfare providing money) rather than narrow ways (such as subsidized food) since the market distortion is more acute when individual industries are subsidized: prices, supply and employment are both distorted. It is natural for countries to reduce the proportion of their population that farms as they grow, and so it's an immediate consequence of that that many farmers need to be allowed to be unprofitable in their farming, so only the most efficient are left.
It is incredibly important that the market be allowed to do its work. Prices need to be allowed to go below the point of profitability for many producers such as farmers, because the industries otherwise become overstaffed and create surpluses, which is a far greater harm in the long run. The same for other employment systems, such as the NREGA you mentioned.
There exists a tradeoff between economic growth and how much the government forces employment over its natural level. If you look at [2], and replace the y axis with "Economic Growth level" and replace the x axis with "forced employment above natural equilibrium", you'll find that policies like NREGA are working to push India closer to point C than B. The same tradeoff curve exists for farming profit margins versus food distribution efficiency, and many other things.
But this is an excellent economic case, and it goes to show why well-meaning policies that seek to guarantee the welfare of the few that are most disadvantaged end up creating an overall worse effect--they cannot solve problems, they can only redistribute them across the rest of the economy. A population segment that is producing €1 billion under their GDP potential can be uplifted, and produce at that maximum potential, but at the expense of €2 billion of economic harm done to the rest of the economy. The net result is that overall, the country goes nowhere with its efforts to reduce poverty and create growth. So India's public distribution system may feed a million people, but only at the expense of a massive economic inefficiency, perhaps of the size that could have fed 2 million, or more. The net result is that everyone ends up a little hungrier and a little poorer than they would have otherwise been; and to now return to Kamaal's point, we can now see why these freebies and subsidies cause problems in the first place. They create the very poverty they were designed to solve.
The ultimate hallmark of market economics is the recognition that the few can only be saved at the expense of the many. It is only economic and technological growth that ultimately moved entire nation's populations completely above poverty lines, and so all efforts that take away from economic growth to instead give to subsidies and forced overemployment or price floors are also efforts that stop countries from ever moving past those poverty issues in the first place. So saving the few at the expense of the many, over time, undermines your ability to save anyone at all; and countries slide into despair, as those nations that tried the hardest to support the few in theory (such as communist economies) severely underpreform in comparison to free market economies, and eventually disintegrate. India is fortunate to be free enough to avoid that backslide, but it could solve its problems much faster if it were to look to market economics, and allow its problems to solve themselves.
I agree it distorts the market. The theory is sound, and also known. The PM and the FMs definitely know.
In practical terms though, when enforcement and justice dispersal is weak, the best business model is theft.
The point raised, doesn't address/account for the trust deficits, weak enforcement abilities, and uneven power structures which already distort market forces.
On top of that though, you do have social structure and ideologies that are hesitant to embrace full fledged market ideologies.
the politics ofmthe country can currently accept only incremental change.
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All in all, the lesson you mention has been learnt, you are watching its implementation. Being carried out, at a rate which doesn't tear a country apart, while members of government actively oppose them.
With government interventions I usually base my reasoning on these facts:
Income inequality is known to lower growth, and the development of industrial economies occurs concurrent with the growth of the middle class. The oft-praised Scandinavian economies are extensively socialized. However, it's also known that subsidies, benefits, etc. can create harmful disincentives and lower productivity.
So to whatever degree that markets are effective, socialist policies can add benefit within a certain kind of mix that lowers inequality without destroying productivity. And I agree that this doesn't translate directly to subsidies or targeted programs. These kinds of interventions are a powerful tool, but they need to work with the market incentives, not against them. That was the mistake of the Communist concept.
Modern thinking in this realm tends to look towards concepts like basic guaranteed income - instead of affecting firms(which, as we already know, will optimize emotionlessly, ignoring negative externalities) these concepts ultimately rely on the ambitions of the most motivated individuals outweighing the downsides of potential freeloading.
In broad outlines though
1) On the one hand this is our social safety net, and the floor to ensure that farmers are guaranteed a floor price for their efforts
2) We HAVE boosted agricultural productivity, which is why we have stocks which are now rotting.
3) We are stuck (edit: Didn't finish this point) with the legacies of our past. Which include our own step backwards in the 1960s.
4) > We must avoid giving Freebies. Giving away things for free/subsidy is the root cause of the problem.
The food isn't free. Its at a nominal subsidized rate.
The poverty line is about 32 rs a day. This system acts as a social safety net, while also at the same time ensuring a floor price for agricultural produce.
NREGA, a right to work act; may well be digging holes to fill holes. Yet it also is working to support a minimum wage across the country.
Can they be scrapped? Yeah.
Will it be good for India? No, it will likely be a disaster.
The transition from an inefficient, old school system to a modern system will immediately close out entire generations from the economy. No amount of education and retraining will close that gap.
Expect a gradual transition, as alternatives to western systems are dreamt up which work in an Indian context. Some of them are redundant, but are what people will swallow and accept.
-----------------
Other fun stuff:
Heck forget freebies, you should check out the reverse taxation mechanism that recently got introduced and is applicable from mid year.
The larger firms now are responsible for collecting the taxes they pay for obtaining services! If you work for a large firm and rent a car, if the final bill contains service tax, you are now obligated to pay that service tax to the government separately.
Why? Because the govt knows it can't go after the unorganized sector directly. So they make it inimical for the un-organized sector to remain disorganized.
MNCs will transfer their work to companies like Hertz, or other rent-a-car companies and so on.
Smaller firms will have to register and become compliant to survive.
Widening the tax net, and increase compliance.
At the expense of the more established firms.
Bizarre? Yeah, its par for the course.
----------------------- Side note:
2 MBA students actually tried to live at 100 Rs/day and then Rs 32 a day. At the 32 mark, they said travel was out of the question because the calorific/time effort required to move that distance to get to a bus station would have curtailed other equally important activities. (http://rs100aday.com/about/)