Job entitlement schemes like MGNREGA have hit India Inc?s ability to find workers

The other day a frequent visitor to India from Europe, who is a keen observer of our polity, commented on how the different state governments in India are competing hard with each other. It would have been a wonderful development for the nation if he had been referring to competition to become the most business-friendly state or the best in providing citizen services. Unfortunately, the visitor was commenting on what he perceived to be a growing competition between state governments to hand out more and more innovative freebies to the electorate. I think his comment was triggered by full-page advertisements by one of the state governments in that week, announcing its achievements since taking over power. Most of the newspaper front page enumerated the various hand-outs given to different sections of the population ranging from free laptops, free bicycles, free power, free rice scheme, dole to the educated unemployed, and other freebies.

It is not only state governments who are behind this growing populist trend. The central government has also contributed more than its share, as a result of which its subsidy bill has grown over 16% annually over last decade to R1,100 billion in 2010-11. As one of the consequences of this trend, its 150-odd centrally-sponsored schemes had a budget of R6.6 lakh crore in the 11th Five-Year Plan. There seems to be little respite in sight to curtail this populist trend, what with the spate of ?right to? bills being passed or under consideration of Parliament.

The European visitor raised three important questions at the end of his observation. First, why wasn?t employment generation and economic growth at the top of the list of achievements of the state governments rather than the long list of entitlements offered to different sections of the population? Second, drawing upon the experience in Europe, he wondered if we were not underestimating second/ third order implications of proliferating these entitlements on the long-term economic and fiscal position of the country/states? And finally, were we not creating a kind of ?moral hazard? for sections of the population getting these ?entitlements??

To illustrate his second question he went on the describe how many European countries are unable to deal effectively with the impact of the euro crisis on their economy as their degree of freedom was constrained by the extensive entitlement system built up over the years post World War II. There was no doubt that this had surely led to more equitable society and was paid for by rapid economic growth and a young and growing population. The challenge being faced now was lack of incentive to change this entitlement system enjoyed by the large section of the population who had gained and who were now retired or close to retirement. They were used to a certain standard of living through state-provided healthcare and pensions and wanted to maintain status quo even though slowing or negative growth during the crisis had made it difficult for the governments to sustain these entitlements and made it imperative to improve productivity and reduce public debt. Governments who tried to change the system did so at the peril of being voted out at the next elections.

Turning to his third question, I fear that a mindset of entitlement is slowly seeping into many sections of our population, often as a second order affect of a policy. This became apparent when a leading industrialist narrated his woes in getting workers for his engineering plants in Tamil Nadu and being forced to ?import? workers from distant states. He wondered, perhaps somewhat dramatically, why would a person want to move away from home to another town to work hard for 8 hours on the shop floor when he can stay home and earn income under the MGNREGA scheme, have his entertainment needs taken care of with free TV and free power, food needs with subsidised rice, add to his income with free milch cows, and get all this under a roof provided by subsidised housing? One is beginning to hear similar stories across the country, ranging from the agricultural farms of Punjab to construction industry in Delhi.

This brings me to the visitor?s first and perhaps the most important question. To any outside observer, it appears that irrespective of whichever party is in power, the political agenda is one that is explicitly or implicitly populist in a push to give more and more innovative ?entitlements? and ?buy? the next election. The tragedy is that, in doing so, we seem to have lost sight of our (or what should be) most important political agenda, namely creation of new jobs. We are not an ageing society like Europe. We are society that is becoming younger each year and will do so for next 30 years, where 60% of our population is below 30 and they have huge aspirations to better themselves. We need over 200 million new jobs in the next 15 years which only economic growth can deliver, and not more and more government hand-outs.

No one questions the need or the use of distributive policies adopted by the central and state governments to redress the high income disparities in the country and unequal opportunities to different section of our population. However, what I question is the unfortunate extreme position we seem to have taken (or perceived to have taken) in the last decade, first with India Shining of the NDA and now the aam aadmi of the UPA governments. We need both, and not one at the expense of the other. And we need much less of the competitive politics of who wins the entitlement war!

I hope my European visitor has the answers to his questions in future trips in the form of full page advertisements by governments which celebrate more the creation of millions of new jobs and less of numerous entitlements.

The author is managing director, the Boston Consulting Group, India. These are his personal views