Column : Prove that growth is inclusive

Written by Michael Walton | Michael Walton | Updated: Aug 21 2009, 06:20am hrs
How bad is the drought It is not a crisis for the macroeconomy, but is potentially catastrophic for affected households. Suicides, the tip of the iceberg, are already rising. The issue is fundamentally distributional. The government has the instruments to respond. In particular, this is the first drought year in which the National Rural Employment Guarantee Act is up and running. This is of potentially immense significance. But it will also be a huge challenge.

Why is the drought not a huge deal for the macroeconomy So far it looks unlikelybelow the lower end of the range projected by the Indian Meteorological Departmentthat the drought will be worse than previous severe drought years, such as 1987 or 2002. Past experience suggests a 1-2% growth impact. The lower end of this range looks more plausible: the economy has continued to diversify, with agriculture in relative decline. Even within the rural sector, non-farm employment accounts for some 30% of employment and half rural income, and rural households are increasingly linked to urban economies. At the aggregate level, if a 1% growth impact is off an underlying 6-7% growth rate, then were looking at, say, 5%. Thats a growth rate most of the world would kill for in this post-crisis year. Five per cent expansion means growing markets. On this score the business sector can relax.

But business cannot relax on household effects: large numbers could face devastating consequences. Apart from compassionate motives, the current growth model depends on a social compact, that is now (implicitly) framed as dynamic capitalism plus social inclusion. Yet the social inclusion agenda has lagged tragically, and catching up has proved to be slow, even with the rising government spending of recent years. Droughts are much more politically salient than chronic poverty, however awful that is. Awareness of the lives of the middle class and rich is now much greater in villages. Failure in drought response could have deep effects on the polity and policy design.

So lets focus on household effects. A fundamental, and under-emphasised, point is the heterogeneity of drought effects. Yes, there are obvious geographic differences. But over-emphasis on the district list is problematic. There will be large variations between villages and between households within villagesdepending on variations in access to stored water, inter-household variations in access to rural non-farm income and urban remittances. Equally important, drought is not only about farmers, since rural labour markets can be badly hit. Nor is it only about pricesthough, of course, stabilising food markets matters. The really big issue is getting extra purchasing power into the hands of those who are most hurt, whether or not they are farming. Now that is precisely what the NREG does. But only if the guarantee works and only if wages are paid on time.

So why is this such a challenge Both the Union and some state governments have said they will expand NREG. But we know that implementation has been variable. And making the guarantee work really is essential for protection. There is a good case for temporary relaxation of the 100-day rule (already partially relaxed). Equally important is responding to potentially dramatic, localised, increases in demand for workwe simply dont know by how much as the scheme has only operated in good rainfall years so far.

Big increases in the scheme means a lot of money flowing down through the system, often into local systems thick with corruption and weak institutional conditions. The world over, droughts are favoured times for rent-seeking: drought entrepreneurs are an infamous feature of the drought-ridden North East of Brazil. That gets to the second pointNREG has the formal institutional mechanisms for assuring the money goes to the right place, but it doesnt always work. However, even in Jharkhand there has been some success in activating social mechanisms. I would see this as the highest priority for joint action between the government and civil society actors. This is more important than going after hoarders. The best attack on hoarding is to make it unprofitable. That option is not available for stopping corruption in public work schemes.

It is an immense asset to India that NREG exists, and that it has had some years of implementation experiencesometimes rockyin years of good rainfall. No other developing country has an institution of such scope. The drought is its first really big challengeand a big test for the social compact that the government at least formally proclaims. It is in the interest of the whole country, including the business sector, that rural households are truly protected in this drought year. The NREG is not the only instrument to avoid catastrophic effects of the drought, but it is the most important.

The author is at the Harvard Kennedy School, the Institute of Social and Economic Change and the Centre for Policy Research