Record cafe Pronab Sen: Cutting NREGS spend in FY15 was a mistake

By: and |
Published: June 25, 2015 12:13:17 AM

National Statistical Commission chairman Pronab Sen says that the government should aggressively tap the National Rural Employment Guarantee Scheme to provide income support to farmers in case of a deficient monsoon.

National Statistical Commission chairman Pronab Sen says that the government should aggressively tap the National Rural Employment Guarantee Scheme to provide income support to farmers in case of a deficient monsoon. In an interview with Banikinkar Pattanayak and Santosh Tiwari, he also explains why companies shouldn’t complain too much about a ‘gloom doom’ despite weak results. Excerpts:

How do you view the latest GDP growth (7.3% in 2014-15) which gives the impression that things are improving vis-a-vis the old series data which said the country grew below 5% for two straight years through FY14?

The best way of looking at it is that the two sets of data aren’t inconsistent. The point is a factory doesn’t think in terms of value added, it considers only volume of production. But while production has expanded at about 3.5-4%, value added has grown at a faster pace.

When people talk about weak corporate results, they are essentially talking about the rupee value of the bottom lines of companies rather than the inflation-adjusted value. But what they don’t talk is that with a bottom line expansion of, say, 10% now when the wholesale price index (WPI) is down by more than 2% is way better than the 10% growth when WPI was up 7%.

Companies must also consider that the country witnessed high inflation in earlier years, so their interest payments during 2012-13 and 2013-14 were very high. Moreover, wages went up very sharply during that period. Companies have actually been using their cash to reduce their working capital loans and have desisted from building fresh capacity. This is showing up in two things: low credit growth and reduction in interest payments.

So where is the gloom doom?

Talking about gloom doom from the point of view of companies is unjustified, but it’s justified from the workers’ point of view. This is because employment is directly correlated to the volume of production, but it has little or no relation to value added. So, while the incumbent—whether it’s incumbent capital or incumbent worker—is doing fine, there is not sufficient new job opportunity for others.

Why is the divergence between growth in industrial output and the core sector widening (IIP rose 4.1% in April while core sector contracted 0.4%)?

A large part of the core sector, including cement and steel, is demand-driven. Earlier, rural and small-town India was holding up demand in construction. But that demand has collapsed. In another component, electricity, there is sufficient supply but no takers, as poor finances of SEBs don’t permit them to buy more. There are power cuts not because of inadequate power but because SEBs’ finances don’t allow them to buy more.

But even capacity utilisation by companies seems to be falling…

Even with a slowdown in investment, the country still witnessed investments to the tune of 30% of GDP in fixed capital until recently. So, capacity was created, which was essentially being supported by rural demand. But, since last year, rural demand has slowed very sharply, which is getting reflected in the unused capacity of companies, particularly in the FMCG sector.

What can be done to fix it?

The government didn’t do certain things and the weakening of rural demand is the outcome of it. First, the MSP growth was minimum (3.8%) last year. Second, there was monsoon failure with a 12% rainfall deficit, and a consequent drop in farm production. In such a situation, the income support through NREGS should have been raised. However, the payouts fell to R22,000 crore in 2014-15 from R34,000 crore in the previous year. On top of it, the government released six million tonnes of grains into the market and kept a lid on prices. So, the farmers got hit by three things last year: loss of production due to monsoon failure; lack of income opportunity due to low NREGS payouts; and low rise in grain prices. This led to a collapse in rural demand.

Isn’t raising MSPs of various crops only modestly a good idea?

Not raising MSPs substantially is a good idea. But if there is a drought, at least employ all measures to protect farmers, and NREGS is an important component of that. I’ve been favouring release of grains into the market for 3-4 years now, but the important thing is the timing of release. When there is a loss of production, the government needs to partially compensate farmers through higher prices. So, official stocks shouldn’t be released at the time of the harvest or just before the harvest. The government must first allow the harvest to take place and let the market absorb the grains, and it may release its stocks later so that any resultant drop in prices following the offloading is borne by traders and not farmers. In a bad year, MSP hikes are not that important provided market prices are allowed to go up. Then what will happen is that the farmer will sell grains to traders rather than to FCI.

But Punjab and Haryana impose high taxes on grain procurement, which has driven out private traders from their markets.

In Punjab and Haryana this is a problem. FCI can procure there and cater for the grain requirement under PDS. But farmers in other states would sell directly to the traders.

The government has said it would provide additional R5,000 crore this fiscal for NREGS, if need be. This will help. Isn’t it?

The Act says the government shall provide all funds that are necessary for NREGS on a need basis. So, if people are registering for NREGS work, you are legally committed to provide it. You can’t say you have fund constraints. Now, consider this: in the last big drought year of 2009-10, NREGS payouts went up to R48,000 crore from R32,000 crore a year before, which is how it should be. In normal times, NREGS payouts have been between R28,000 crore and R32,000 crore, which is to take care of the problem of seasonality in farm labour. But in a drought year, your bit has to be even beyond that. So, not providing enough for NREGS last year was a serious issue. When there is a crop failure, the government should do at least two things: provide income support to the affected through other means and ensure that the market reflects the scarcity of production. The government can always do inflation correction later.

But there are concerns about leakages in funds spent under NREGS…

Leakages are a distribution issue. Maybe the village head is getting the money instead of the worker. But the fact is money is reaching villages and, at least, the government is sending purchasing power down to the village level. So, leakages are not inherently an economics problem because the person getting the money will also spend it.

Rural wage growth has been below 5% since January and the Met department has forecast a 12% monsoon deficit for 2015. In such a situation, do you see any recovery in rural demand?

Not unless the government resorts to an aggressive NREGS. The government has budgeted R34,000 crore for NREGS for 2015-16. Last year too the Budget allocation was to the tune of R34,000 crore, but only R22,000 crore was released.

The growth in nominal GDP has been slowing (10.5% in FY15 vs 13.6% in FY14) while that in real GDP improving (7.3% in FY15 vs 6.9% in FY14). If it continues in 2015-16, won’t it affect the fiscal deficit target of 3.9% of GDP?

When WPI is negative, nominal GDP would grow at a slower rate than real GDP. So, meeting the fiscal deficit target becomes a challenge.

Wholesale price inflation has been in the negative zone for seven straight months, while retail inflation has been around 5%. Why don’t the two price gauges converge even with a time lag?

The main reason is that prices of crude oil globally have crashed more than those of other commodities, but prices of domestic refinery products haven’t crashed accordingly due to the phasing out of subsidies by the government. So, while the fall in global crude oil prices is getting reflected in WPI, domestic prices of refinery products are being reflected in the consumer price index (CPI), leading to a divergence in these two.

But even core WPI has been in the negative zone since March…

The reason value added has increased is because the proportion of purchased inputs to the producer’s total turnover has gone down. This is caused by two reasons: improved efficiency and weakening of commodity prices.

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