Welfare State measures do not hurt wealth creation

Prabhat Patnaik
In the ‘post-truth’ world we live in, the pervasive use of arguments based on chicanery should not surprise us. One such argument goes as follows: a high level of wealth inequality no doubt undermines the essence of democracy and must be avoided; but before we can think of bringing about a redistribution of wealth in society, we must first ensure that there is enough wealth to be redistributed, for which we have to provide incentives to the capitalists to ‘create’ wealth. Capitalists therefore have to be ‘incentivized’ to ‘create wealth’ in the interest of society, since it is the people at large who would be beneficiaries of what the capitalists ‘create’ and possess.
But whenever any talk of actual redistribution arises, exactly the same argument is repeated, namely that it would come in the way of wealth creation and hence severely constrain what is to be redistributed. Thus in the name of a future redistribution that never materializes, we remain engaged in ‘incentivizing’ the capitalists to ‘create’ more and more wealth, and to concentrate larger and larger wealth in their hands. This charade has gone on for so long that wealth and income inequality has now reached historically unprecedented levels both in the world at large and in our own country, making a mockery of our democratic aspirations.
When Jeremy Corbyn, the leader of the British Labour Party, presented a redistributive agenda for the forthcoming British elections, the Financial Times of London editorially opposed it on the grounds that “the assault on business is an attack on wealth creation”. How redistribution can ever occur without an “assault on business” remains a mystery; and if there is no redistribution and the growing wealth inequality is allowed to become more accentuated, then how democracy can survive meaningfully also remains a mystery.

The argument that any redistributive measure disrupts wealth creation and hence must be eschewed in the interests of society, is dishonest for two distinct reasons. One, it entails a perpetual postponement of redistribution; two, it is logically flawed. The proposition that government expenditure incurred by transfers to the working poor, or other welfare schemes meant for them, and financed by a tax on capitalists, reduces post-tax profits, and hence the rate of profit, and thereby lowers investment (wealth creation), is plain wrong.
This assertion may appear counter-intuitive. After all, if the government takes resources from the capitalists in the form, say, of taxes on profits and spends these resources on the working poor, then it seems obvious that the capitalists will be left with lesser resources after tax. But this is not the case.
To see this, let us consider an economy where, we assume for simplicity, there are no foreign transactions. (The opponents of redistribution do not invoke foreign transactions anyway.) Now in any economy divided into mutually-exclusive and all-exhaustive sectors, the sum of the deficits of all sectors must be zero. In the present case, the deficits of the government and the private sectors must together add up to zero. If the government finances larger expenditure through a fiscal deficit, then it must generate correspondingly an exactly equivalent amount of surplus in private hands. If the government matches its larger expenditure by larger taxation, namely its deficit remains unchanged, then the private sector’s surplus too must remain unchanged.
If we assume, realistically, that the working people, that is, the workers and the self-employed taken together, more or less consume what they earn, that is, always have zero deficit as a group, then larger government expenditure financed by a fiscal deficit necessarily raises capitalists’ (and other property owners’) surplus equivalently: the excess of their income over expenditure must rise by an exactly equal amount. And if larger government expenditure is financed through equivalent taxation, then it would leave the excess of income over expenditure of the capitalists (and other property owners), which is the same as the excess of their savings over investment, unchanged.
Since private investment in any period is determined by decisions taken earlier, larger government expenditure financed by equivalent taxation must leave capitalists’ (and other property-owners’) savings unchanged; since capitalists’ savings are a certain proportion of post-tax profits, it must therefore leave post-tax profits unchanged.
This happens no matter on whom the taxes are levied, even if the taxes are levied on the capitalists themselves. Hence, with no foreign transactions (or if the current account deficit remains unchanged) and if workers spend what they earn, post-tax profits remain unchanged if additional government spending is financed by equivalent additional tax revenue.
But, how this happens depends on how the additional taxes are raised. If working people are taxed to finance additional government expenditure, then, since they were spending the taxed sum anyway, there is no net addition to aggregate demand, and hence no increase in employment, output, or profits (whose post-tax level remains unchanged). But if capitalists are taxed, then matters are different.
Capitalism, except during major wars, is a demand-constrained system, in the sense that the economy always contains enough slack to permit a rise in output and employment in response to an increase in aggregate demand. Hence, larger government expenditure financed by taxes on profits, which brings about an increase in aggregate demand, raises employment, output, and, pre-tax profits. Indeed, pre-tax profits will rise exactly as much as would leave post-tax profits and hence the rate of profit, unchanged.
If the investment decision in the current period depends upon the current rate of profit, then this investment decision should remain unchanged. On the other hand, if the investment decision depends on the level of capacity utilization, then, since larger government spending financed by a tax on profits raises this level, the investment decision (and hence actual investment in future) should increase.
Likewise, if larger government spending is financed by wealth taxation, rather than profit taxation, the rate of profit will remain unchanged, which would leave the investment decision unchanged; but if the investment decision depends upon the level of capacity utilization, then it should actually increase. What is more, since wealth taxation is levied upon all forms of wealth, on money-holdings as much as on capital stock, it should act as a further stimulant for investment by inducing wealth-holders to move from holding money, which earns little or nothing, to holding capital stock, which earns a rate of profit.
It follows therefore that the claim that taxing capitalists amounts to an attack on wealth creation has no economic rationale. In fact, capitalists’ opposition to such taxing arises for a different reason, namely, that any expansion of the sphere of State activity, and that too for increasing the welfare of the working poor, constitutes a potential threat to the system. Capitalists oppose it not because it is economically damaging for their profits, but because they perceive this threat. Their opposition may express itself as an investment strike.
If a government is not to cave in to capitalists’ opposition expressed through such an investment strike, then it would have to use public sector investment as a counterweight. An honest effort to build a Welfare State within capitalism may thus set in motion a process that goes beyond capitalism itself; but the chicanery lies in pretending that Welfare State measures damage wealth creation per se.
The author is Professor Emeritus, Centre for Economic Studies, Jawaharlal Nehru University, New Delhi

The ‘Universal Basic Income’ Proposal

Editorial from Economic and Potitical Weekly

Imagine a world in which everyone is unconditionally given a subsistence-level income by the state. This, combined with access to well-functioning public services would be, to quote Jean Dreze, “a fool-proof way of safeguarding the right to dignified living.” The chapter on “Universal Basic Income (UBI): A Conversation With and Within the Mahatma” in the Economic Survey 2016–17 (ES) begins with this. But unfortunately, given self-imposed “fiscal prudence,” the proposed UBI, which is neither “universal” nor “basic”, requires the dismantling of the most socially necessary welfare schemes, namely, the Public Distribution System (PDS), the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and the Mid-day Meal Scheme. The envisioned UBI turns out to be no more than a small compensatory transfer (or income top-up) to a part of the population, and that too, one that will require the government to prune or do away with in-kind transfers of food, guaranteed minimum days of wage work, and other public social security measures.  

The desire is to stick to budget neutrality even as its conception is the most illogical part of the UBI vision. In the face of the monstrous economic inequality that plagues the country, surely a proper UBI can be financed from income and wealth taxation of the very rich, as also, from indirect taxation of socially less desirable economic activities. Given that India has one of the lowest tax to gross domestic product ratios in the world, more so with respect to direct taxes (that include wealth and corporate taxes), it is inconceivable why the policymakers of this country cannot envisage a UBI that builds on higher tax revenue collections to expand the fiscal space.

Instead, a UBI as seen in the ES is anchored on minimising fiscal cost and pruning the government’s social-welfare administrative machinery. The chapter argues that the current social security system in India is bulky, inefficient, and in large part misallocates resources, and that these “realities” necessitate a serious thinking-through of better ways of spending public money for social welfare. It emphasises the gross misallocation of resources under six welfare schemes, in two simplistic maps which show that the shares of welfare spending in the poorer districts are less than the shares of poor persons in these districts. The UBI, the authors of the ES claim, is a way of rectifying this imbalance. However, any such rectification would assume a targeted cash transfer, not a UBI.

Further, it must not be overlooked that each of these welfare schemes has underlying mechanisms that ensure a safety net against market uncertainties. The PDS entails the state’s interventions in agricultural commodity markets that have historically resulted in more stable prices and a semblance of income security for farmers. The political currency of the public procurement system and minimum support prices is but an indication of the significance of such market interventions. The Mid-day Meal Scheme has shown that cooked meals in schools encourage school enrolment, apart from providing timely nutrition. The MGNREGS not only promises minimum days of wage work, but also creates and helps maintain locally planned public infrastructure, protects against seasonality of work, and provides some bargaining power to workers in rural labour-market wage setting. In fact the ES does make a passing reference—“replacing the PDS will increase market prices of cereals the poor face. Similarly, phasing down MGNREGS might reduce market wages for rural casual labour”—but goes on to make a case against these interventions.

Between 2004–05 and 2011–12, the offtake from the Food Corporation of India (FCI) grew by 71%; and household purchases through the PDS grew by 117%, indicating greater, more efficient coverage, while leakages in the PDS have come down from 54% to 35%. The ES extrapolates the leakage figures up to 2016, which points to a further reduction to 20.8%, without accounting for improvements in technology and expansion of coverage that must have occurred in the last five years. There has been a rise in rural wages, which in part is attributable to MGNREGS. Undeniably, rural infrastructure and more recently, farm assets are being created substantially under this scheme.

What is important today is that provisioning of social security services and goods has become a matter of political importance even in India’s northern states, as it has been for decades in the southern ones. In fact, in a few of these states, corruption and leakages have been reduced in the PDS and the MGNREGS even as they cover a greater proportion of the targeted population. This needs to be emulated in other states. To say that “the time is ripe for serious discussion” around a UBI that would entail dismantling existing hard-won social welfare measures, does not seek to build on past gains or social experience. The past decade has shown that the implementation of social welfare programmes can be improved by the participation of beneficiaries, ensuring greater transparency and accountability, the involvement of concerned non-governmental organisations, a degree of political will, and a proactive local administration.

Editorial from EPW,  Vol. 52, Issue No. 6, 11 Feb, 2017

The Universal Basic Income’s time may have come

Madan Sabnavis

The Economic Survey has traditionally been a document which gives us the latest on the state of the economy and provides some idea on the prospects for the year. 

Two things have changed in the last few years. Firstly, we get relatively better data on a regular basis on almost all economic indicators which denude to an extent the novelty of this document. Secondly, some high profile economists occupying the post of chief economic advisor have tended to re-orient the document towards being academic and theoretical. In fact, this trend has also been noticed in the RBI reports which are no longer meant for the common man but are for the academician, as it is hard to understand the cobwebs strewn all over the place with scenario analyses and a lot of jargon thrown in. This is the new phase of economic reporting from the official side. The Economic Survey this year has also done away with the detailed tables which were extremely useful. 

Pros and cons

This year, the Economic Survey has focused on the concept of universal basic income. The UBI is part of the acronym lexicon that has been in vogue with the NDA government — take the case of a programme being called INDRADHANUSH, and a campaign named JAM. It is felt that acronyms make it easier to remember what they stand for.

Now, the UBI has been presented in the usual style of a two-handed economist, with the pros and cons of the scheme listed and open to debate. There is a view that it is good for the nation but it can be implemented only after studying the effects and working of such a venture. 

Assuring a basic income for each and every individual or family is laudable as this should be the goal of any government in a developing country. This is normally measured by success in the areas of unemployment and poverty. The UBI also talks about actually moving away from all kinds of direct and indirect subsidies and passing them on to individuals through cash transfers so that they have the freedom to choose their living standard. 

This programme on the face of it sounds jumbled because we are talking of a socialist doctrine of providing basic income to all but mixing it with the capitalist mode of doing away with subsidies. 

The state’s role

To better understand the dilemma we need to ask a broader question as to what is the role of the state? The government is required in any country for addressing three economic objectives: bring about redistributive justice, enter areas where the private sector will not find attractive and creation of social infrastructure. Presently the government attempts to perform all the three roles with different levels of efficiency and success. 

Now, UBI can be debated from two angles. The first is whether governments should be giving an income without getting anything in return — an unconditional transfer. In most countries, these transfers are linked to an objective. Taking up some employment or sending children to school can be a requirement, which is how most conditional cash transfers work. In our case MGNREGS is a good example of conditional transfer where one takes up a job card and gets paid a daily wage. It is a different issue that there frauds occur and the work done is rudimentary to the extent of being meaningless. But this can always be tackled through better delivery and linkages with productive work such as, say, construction of rural infrastructure.

Providing free money is detrimental to society as it creates a moral hazard (which has been acknowledged in the Survey discourse) and is not connected with the use of money by the household. Poor households in particular have different priorities and may not be spending the money the way an economist would assume. 

About services

The second issue pertains to which services need to be discontinued with the amount involved getting into the transfer scheme. The present direct schemes pertain to food, fuel, fertilisers and interest. Fuel subsidy has been reduced to a large extent, but we also remain very vulnerable to global crude oil prices movement which can make inflation nasty and affect the conduct of monetary policy.

The last time there was a crude price shock, inflation would have risen more prodigiously had the subsidies not been in place. Food subsidy creates a problem because prices vary by almost 75-100 per cent across the country. For instance, rice can cost anywhere between ₹15 and ₹30 a kg; so too wheat. How do we ensure that households get enough to spend on food? The PDS ensures that there is a fixed price for these essentials; by doing away with we can again see pressure on inflation as food prices increase once the market is open. Today, the PDS forms a benchmark for dealers as they know that by charging a higher premium the poor would move to PDS.

Now the argument for UBI also meanders into the indirect subsidies that are provided by the Government, such as health and schooling. Can the Government actually abandon these responsibilities? Even in developed countries healthcare, education, and urban infrastructure are provided by the government and subsidised though the quality of services would be very different, say, between the US and India. Governments have to create social infrastructure; they cannot say the private sector can provide the same as the latter caters to only the elite classes with several entry barriers being erected for those who do not have minimum spending power.

Economic viability

One conclusion is that while providing a minimum basic income to all is essential, the state cannot do away with the indirect subsidy involved in the creation of social infrastructure. Also, plain vanilla transfers not linked to conditions leads to a mismatch of priorities between the Government and the individual and must be avoided. The system of linking an income with an activity is necessary to make the schemes viable. 

The task ahead is to ensure that these ‘conditions’ are well defined in terms of being acceptable from the economic standpoint. In the case of direct subsidies, even as we revel in the success of cash transfers and limiting the same on some products, crude oil touching $150 a barrel in future will seriously impact inflation and can come in the way of monetary policy. Clearly, the Government needs to think through these contingencies before they occur so that the country is better prepared.

(The writer is chief economist at CARE Rating)

The hidden agenda of Universal Basic Income

G. Sampath

The idea of a universal basic income (UBI) has been gaining ground globally. While Switzerland held a referendum on it last year (it was voted down), Finland introduced it earlier this month. Media reports suggest that the government of India’s flagship Economic Survey this year is likely to endorse the UBI, setting the stage for its introduction.

 
On the face of it, an unconditional basic income for everyone seems a great idea. In the West, the UBI is being discussed as a solution to two problems: unemployment due to automation; and growing social unrest caused by extreme inequality and precarity. It is expected to solve the unemployment problem by decoupling subsistence from jobs, freeing human beings to realise their true potential, preferably through entrepreneurship. It would address the second by supplying monetary resources to access the necessities of life. This, in a nutshell, is the popular understanding of the UBI. The reality, however, is not so rosy.

The UBI debate in India has been a narrow one — restricted, for the most part, to financial viability. Its advocates argue that it is a more efficient way of delivering welfare, while its opponents hold that the fiscal burden would be too much. What hasn’t received adequate attention is the politics behind the UBI: who is pushing the idea? To what end? And why?

The UBI evangelists
The most eloquent advocates of UBI today are free-market enthusiasts — the same lot branded as neo-liberals for their advocacy of deregulation, privatisation, and cuts in welfare spending. Their guru, Milton Friedman, was an early advocate of basic income. Outside the academic realm, the biggest champion of UBI is the global tech sector. Silicon Valley billionaires such as Elon Musk, the founder of Tesla Motors, and Facebook co-founder Chris Hughes have publicly backed the idea.

Could it be possible that the global financial elite have finally sprouted a conscience? The reports of the UBI pilot projects conducted so far offer a clue. Invariably, they all present the same conclusion: giving cash to the poor is better than traditional welfare.

Of course, it would be wonderful if the problem of inequality and poverty were solved for us by a sudden moral awakening of the rich. Unfortunately, the current enthusiasm for the UBI is not the product of such a momentous development.


Not an add-on benefit
The biggest myth about the UBI, partly responsible for sections of the Left endorsing it, is that it is a redistributive policy that would reduce inequality. It is indeed possible to have a redistributive UBI. But it would need to fulfil two conditions: it must be funded by taxing the wealthy; and the existing entitlements to the poor must not be taken away. Such a UBI would actually be a socialist measure that would increase the bargaining power of the working classes by giving them an income cushion.

But neither of these conditions is met by any of the UBI designs being promoted today, either globally or in India. The much-touted Finnish experiment is restricted to the unemployed. It does not cover all working individuals. And it only replaces the already existing basic unemployment allowance and labour market subsidy — it is not an add-on benefit.

In India, too, the UBI is not an add-on. On the contrary, it is about giving in a different form (cash), and under one umbrella, what is already being given (in-kind and cash benefits) via different channels.

Back in 2008, in an influential paper in the Economic and Political Weekly titled ‘The case for direct cash transfers to the poor’, Arvind Subramanian, the present Chief Economic Adviser of the government, along with economists Devesh Kapur and Partha Mukhopadhyay, argued that the ₹1,80,000 crore spent annually on centrally sponsored schemes and assorted subsidies should instead be distributed as cash directly to 70 million households below the poverty line. Put simply, the UBI in India is nothing but the old wine of direct cash transfer in a fancy new bottle.

Its objective remains the same: to eliminate the public distribution system (PDS) and with it, the food, fuel, and fertiliser subsidies. The same old arguments for replacing the PDS with cash transfers are now being trotted out in favour of the UBI. The addition of the word ‘universal’ signals greater ambition but alters neither the substance nor the motive.

But let us take the arguments in favour at face value. What constitutes a basic income? Common sense dictates that it should be whatever is required to take care of basic life needs. A logical equivalent for this figure would be the minimum wage. The central government’s move last year to raise the minimum wage for non-skilled, non-agricultural workers to ₹9,100 per month was set aside following opposition from industry. Perhaps ₹9,100 per month is too luxurious an income to qualify as ‘basic’. The actual minimum wage in India is around ₹4,800 per month. Could we then expect at least this amount from our UBI?

While different numbers have been bandied about, there seems to be a broad consensus around the Tendulkar committee poverty line of ₹33 a day. This works out to a basic income of ₹1,000-₹1,250 a month or ₹12,000-₹15,000 a year. But even this modest figure is estimated to cost 11-12% of the GDP. In contrast, all the government’s subsidies put together account for only 4-4.5% of the GDP. This presents three options: one, the government makes up the deficit through additional tax revenue; two, it limits the fiscal burden by shrinking the UBI coverage from ‘universal’ to those below the poverty line; and three, it further shrinks the amount being doled out.

Given India’s narrow tax base, and a policy mindset hostile to the idea of extracting more tax revenue from the wealthy, we can rule out option one. So the UBI we get, if we get one, would be derived from a combination of the second and third options, which means both ‘U’ and ‘B’ are out of UBI, leaving us effectively with what we already have: cash transfers.

Most critically, one aspect is taken for granted by all the three options: the UBI will be funded primarily by the money allocated for CSS and subsidies. In other words, a basic income, however paltry, would help strengthen the case for the elimination or a significant roll-back of programmes such as the PDS, midday meal schemes, and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).


Why a UBI now?
There is no point reprising here the case against direct cash transfers, which economists such as Jean Dreze have made convincingly. It is nonetheless fascinating to see the emerging contours of a distinctive political project.

The Jan-Dhan Yojana set out to make every Indian accessible to global finance. The Aadhaar card set out to make every Indian identifiable and enumerable as data — the currency of global tech. The high mobile penetration has connected every Indian to the global digital network. An element that was missing was consumer behaviour, which the recent demonetisation sought to address, by force-feeding ‘cashless’ to a cash-dependent population. The UBI fits perfectly in this scheme of things, as it seeks to compress the whole gamut of welfare benefits into one, and mount it on a singular JAM (Jan-Dhan, Aadhaar, Mobile) platform.

But why a UBI now? One explanation could be the immense pressure on India in secretive free trade negotiations. The developed nations have for long wanted India to wind up its food security-related provisions — both state procurement of foodgrains, and their subsidised distribution via PDS. A UBI would pave the way for the elimination of these measures, dealing a death blow to food security and deepening farm distress.

Another is that the Indian state is stuck with welfare commitments it cannot renege on without political and legal consequences. The efficiency/inefficiency argument for scraping PDS and MGNREGS never acknowledges that these are rights-based social entitlements with specified outcomes — and that is not accidental. Shifting the welfare paradigm to UBI would loosen the bonds of legal and social accountability. Under the PDS, for instance, the state must provide a specified quantity of foodgrains to the poor no matter what. With UBI, it has the option letting the payout slide behind inflation, as has already happened with the old age and widow pensions.

In the final analysis, we need to answer a simple question: is the UBI about reducing inequality and poverty? If the answer is yes, then there are many things the state could do at a fraction of what the UBI would cost — from enforcing the minimum wage law, to releasing funds on time for MGNREGS. But if a dispensation hostile to these tried and tested anti-poverty measures develops a sudden zeal to eliminate poverty through UBI, a measure of scepticism is in order.

From Economic Analysis to Inclusive Growth

Kemal Derviş and Karim Foda

Most economies are seeking a recipe for inclusive economic growth, whereby high rates of investment, rapid innovation, and strong GDP gains are pursued alongside measures to reduce income inequality. Conservatives insist that growth requires low taxes and incentives such as flexible labor markets to encourage entrepreneurship. But reducing inequality requires higher levels of government spending and taxation (except when government is pursuing deficit spending to stimulate a depressed economy).

The Scandinavian economic model is often invoked to bridge this gap. The Danish “flexicurity” system, in particular, has historically delivered solid economic performance alongside low inequality. Leading economists such as Philippe Aghion have published excellent analyses of how this model could balance growth, equality, and overall satisfaction of citizens elsewhere in the world.


These economists argue that labor markets with few restrictions on hiring and firing, low taxes on entrepreneurship, and generous incentives for innovation are compatible with a relatively equal income distribution, high social spending by government, and equalizing social policies such as universal free education.

This model has sustained an ongoing debate in Europe, one that is now relevant in the United States, because Donald Trump’s new administration has promised to help globalization’s “losers” while improving innovation and growth. But in the US, it is far more difficult, politically, to argue for generous public spending on education, health care, and financial security for retirees, because doing so always raises the specter of high taxes.

An inclusive growth model would seem to have to square the policy circle. It would have to increase substantially public spending, particularly on education, unemployment benefits and training, and health.

It is useful to look at the numbers from the oft-cited Danish and Swedish examples. Generally speaking, these countries have excellent economic indicators. Although GDP growth is not higher than in the US, most people share a high standard of living, and surveys show that Scandinavians (particularly Danes) are some of the happiest people in the world. But, as the following chart shows, these countries also have some of the highest government spending- and taxation-to-GDP ratios in the OECD.
Hypothetically, if the US adopted Denmark’s universal free education policy, but kept its tax-to-GDP ratio unchanged, its fiscal deficit would exceed 6% of GDP. The US has run deficits that high only during World War II and the Great Recession of 2008-2009, when a huge stimulus package was implemented to spur recovery. So, just providing universal free education in the US would run the country’s deficit up to the highest level ever recorded in normal times.

In the context of this comparison, it would seem that the circle cannot be squared without a major macroeconomic shift. Scandinavian countries are smaller and can more efficiently collect revenues and administer public services. But even if the US approached this efficiency – a difficult feat in such a large and diverse country – social solidarity still would demand high effective taxes, as it does in Denmark and Sweden.

Another crucial component of the Scandinavian model is labor-market flexibility. On the OECD “Employment Protection Legislation” index, the US scores a 1.2 on a 0-5 scale, where zero indicates full flexibility. Meanwhile, France and Germany come in at 2.8, Italy at 2.9, and Denmark and Sweden at 2.3 and 2.5, respectively. This shows that, though Scandinavian labor markets are more flexible than elsewhere in continental Europe, the US labor market is far more flexible – and provides less security – than any of them.

Such broad static accounting suggests that we should proceed cautiously in applying lessons from the Scandinavian model to large countries like the US. Then again, to assess a model’s long-term impact on citizens’ welfare, we would need a more dynamic analysis over the course of at least a decade. Only then could we gauge how strongly investment and innovation would respond to incentives, how much free universal education would cost in the medium term, or how demographic structures would affect different social policies.

Economic analysis alone cannot settle the political debate between right and left. What it can do is help to narrow and focus that debate. The key is for participants on both sides to be more explicit about the values and objectives they believe that society should pursue, and to quantify their assumptions about how dynamic performance will respond to particular incentives. Only then can a democracy choose effectively between potential paths.

Good economic analysis can enable “constructive populists” to debate the “post-fact, fanciful populists” who seem to be on the rise, with a realistic alternative discourse – one that is transparent and based on credible expectations of economic policies and outcomes. In other words, economic analysis can facilitate good choices; it cannot make them.

Atal Pension Yojana: Pensions to the poor

D RAJASEKHAR, SANTOSH KESAVAN, R MANJULA
In the last two years, the Government has introduced several new programmes, some of which are variations of earlier schemes. One such is the Atal Pension Yojana (APY), which was earlier called Swavalamban Yojana NPS (NatioAnal Pension Scheme) Lite. The APY was introduced in 2015 for unorganised sector workers who do not have sufficient and reliable old age security. 

 
The scheme encourages unorganised workers to make regular small savings during their working years towards pension benefits later. This is an important policy shift away from social assistance schemes to contributory schemes. 

 
Design features
APY clearly spells out end benefits of the pension scheme. Monthly pension ranging from ₹1,000 to ₹5000 is guaranteed upon retirement if subscribers contribute the prescribed amount for at least 20 years. This is an improvement over NPS-Lite where the pension amount was uncertain. 

The Government provides co-contribution as incentive for five years to poor, unorganised workers not covered by formal social security schemes. APY is a public scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). The key functions of record keeping, administration and customer service are performed by National Securities Depository Limited. A Permanent Retirement Account Number (PRAN) is assigned to all subscribers. 

 
The scheme is tied to the broader mission of financial inclusion under the Pradhan Mantri Jan Dhan Yojana by using banks as intermediaries for promoting, administering and extending pension benefits to low income workers. With greater emphasis on e-governance, the scheme seeks to use mobile SMS reminders/alerts, electronic KYC-based registration and online exit, withdrawal, claims settlement processes to overcome last mile challenges and simplify the experience. 

 
Official statistics show that by March 2016 the scheme had registered 371 banks (public and private sector , RRBs, cooperatives,etc), enrolled 24.60 lakh subscribers, and was managing ₹506 crore of assets. The scheme registered the highest month-on-month subscriber growth (13.55 per cent) and asset growth (26.18 per cent) among all pension schemes in March 2016. However, unorganised workers covered by it are barely 1 per cent.

 
Slow to catch on
Stringent default penalties are a major impediment. If a subscriber misses six consecutive contributions, the account is frozen, after 12 months it is deactivated and beyond 24 months the account is permanently closed. Considering that APY is meant for unorganised workers with irregular income streams, this feature reduces the scheme’s effectiveness. 

 
Limited government co-contribution: Although co-contribution has been extended to 2019-2020, this could be availed of only by those joining before March 31, 2016. Given that the coverage of the scheme is less than 1 per cent, many unorganised workers joining the scheme in future cannot access it. 

 
Poor agent incentives: Banks are asked to administer APY so that new bank accounts opened under PMJDY could be used for promoting the scheme as well as expanding financial inclusion among the economically excluded. 

 
However, this will come in the way of the rural poor accessing the scheme due to low financial inclusion and low penetration of bank branches in rural areas. Moreover, incentives to banks are considerably lower than those provided in previous schemes since incentives have to be mutually negotiated, and shared between banks and business correspondents. 

 
Lower flexibility in exit and withdrawal: The exit process is rigid as the scheme permits premature withdrawals only in the event of death of the beneficiary or her/his being afflicted by a terminal disease. Subsequently, the exit option was given to the beneficiary if she/he gave up the government’s contribution and interest earned on his/her contributions. Considering that poor unorganised workers are highly vulnerable to workplace injuries, accidents and disability, this reduces the reach of the scheme.

Suggestions for improvement
Remove account closure for defaults: In the event of sustained non-payment, there can be a system by which subscribers are no longer entitled to a fixed monthly pension on retirement as per APY but can continue making suitable contributions to the APY account at his/her discretion to get different returns. At retirement, 40 per cent of the accumulated corpus can be converted into an annuity and the rest can be offered as a lumpsum.

Encourage mobile money payments: APY hopes to leverage PMJDY’s success to expand its coverage among low income workers. However, according to the RBI, while PMJDY has increased account density among underserved communities, account usage is low with nearly 35 per cent of such bank accounts having zero balance. This calls for the deployment of low cost and flexible mobile money channels, which is a newly emerging technology, to improve last mile access to banks for the rural poor. 

 
Ease of premature exits and withdrawals: APY should provide for partial withdrawal of the corpus in an emergency after a reasonable lock-in period of 5 or 10 years. Public Provident Fund schemes have a 15-year lock-in period prior to full withdrawal and allow 50 per cent withdrawal at the end of the sixth year. APY should introduce similar flexibility.

Enhance behavioural interventions: Behavioural interventions or ‘nudges’ have of late attracted significant attention as low cost policy tools to elicit desired savings behaviour. Studies around the world show that nudges such as peer comparison, commitment devices, goal-setting calendars and personalisation are effective in overcoming self-control issues and prompting regular savings. Although APY has incorporated SMS reminders and auto-debit facility, scope for embedding behavioural interventions into the APY design still exists.

These improvements are urgently needed to improve the coverage of unorganised workers and enhance old age security among them. 

Rajasekhar is a professor and Manjula a research officer at the Centre for Decentralization and Development, Institute for Social and Economic Change, Bengaluru. Kesavan is a founding trustee of Crosslinks Foundation, Bengaluru

An unkind cut for senior citizens

Alok Ray

The Government recently announced a significant reduction in interest rates on the so-called ‘small savings’ instruments — including various postal savings schemes, Senior Citizen Savings Scheme (SCSS) and Public Provident Fund (PPF) — to bring them in line with comparable bank fixed deposit interest rates. With rates likely to go down further, senior citizens, who depend on interest income for survival, are naturally upset.

The Government has stuck to its fiscal consolidation targets which the RBI considers a precondition (along with falling CPI inflation) for further cuts in the ‘repo rate’ (the rate at which RBI lends short-term funds to banks). 

Combined with the RBI dictum to banks to use ‘marginal cost’ (instead of average cost) of funds to determine the ‘base rate’ for lending, this should reduce interest rates for all depositors and borrowers across the spectrum. It implies that senior citizens would suffer more in the coming days.

Basic logic

What is the basic argument for bringing down interest rates for small savings instruments in line with bank interest rates? One major reason why banks fail to pass on the rate cuts to customers is that the effective interest rates on postal savings instruments, Senior Citizen Saving Scheme (SCSS) and PPF (specially if the tax benefits from PPF savings are taken into account) are significantly higher than those offered by bank FDs. As a result, even if the RBI reduces the repo rate, banks cannot afford to reduce the interest rates on FDs which, in turn, restricts their ability to lower interest rates to borrowers. So, in the interest of more efficient transmission of monetary policy, the RBI has announced substantial cuts in interest rates on postal savings schemes, SCSS and PPF.

Most economists would agree with the arguments advanced up to his point. The trouble arises because, in India (as in most developing countries), the interest rate instrument is used to promote more than one policy objective. 

In the absence of a workable social safety net, the interest earnings from accumulated savings serve as the only available means to protect the real income of senior citizens other than those receiving inflation-indexed monthly pensions. The across-the-board reduction in interest rates, even when justified in the interest of more efficient monetary policy transmission, may go against the objective of income stabilisation for the retirees.

Some economists argue that real interest rates (equal to nominal interest rates minus inflation) would remain the same when, along with reduction in inflation, the nominal interest rates are also being cut equally. Hence, there would be no adverse impact on interest earners. This argument is invalid since consumer prices are rising even when consumer price inflation is falling, unless, of course, we are considering a negative inflation rate (which is not the case in India). 

So, the nominal income from interest earnings would be falling while the nominal cost of living as reflected in expenditure on food, house rents, electricity bills and medical costs are rising or at best remaining the same. Clearly, the standard of living of the people depending on interest earnings for survival would be squeezed.

The question is, how to cushion the impact on less affluent retirees living on interest income, with least damage to monetary policy transmission. Several options can be considered. One, the interest rate on the SCSS may be left unchanged. Since one can invest only up to a maximum of ₹15 lakh in this scheme and even a 10 per cent interest would fetch only ₹1.5 lakh interest income a year, the major beneficiaries would be senior citizens with income well below the tax- exemption limit of ₹3 lakh a year. 

Given that only bonafide senior citizens can avail themselves of SCSS and that, too, up to a maximum total investment of ₹15 lakh, the additional interest cost on banks would be limited.

Finding solutions

There is much less justification for not reducing the interest rate on PPF which offers triple tax benefits (‘EEE’ meaning tax exemption on investment amount, interest earnings and withdrawal). Only relatively affluent people (not limited to senior citizens) with surplus income to save can make use of this scheme to save taxes. 

Each year, a person can invest up to ₹1.5 lakh in PPF, saving taxes of more than ₹45,000 (if in the 30 per cent tax plus surcharge bracket). Further, given that the interest income from PPF is totally tax exempt, the effective return from this instrument is much higher than all other schemes, including SCSS. Since all (affluent) people, irrespective of age, can invest in PPF, the additional interest cost and tax revenue loss could be a lot more than in the case of SCSS.

Raising the extra interest rate for senior citizens from the current 0.5 per cent to, say, 1 per cent, while reducing the general FD rates, is another possibility. 

Since the FD interest income is taxable, the biggest benefits would again accrue to poorer senior citizens below the tax exemption limit and progressively less for people in higher tax brackets. As postal deposit rates are being brought in line with bank FD rates of comparable maturity, the same extra interest benefit should be offered to senior citizens by post offices also (which is not the case now). 

All these modifications should be supportable on both equity and progressivity principles of public finance.

Apart from the economic justification advanced above, in a democracy, the electoral power of senior citizens (whose number is increasing with rising longevity) cannot be ignored. The recent roll-back of the Budget proposal for (partial) taxation of withdrawal from EPF, due to public outcry, is a case in point.

The writer was a professor of economics at IIM-Calcutta

The Aadhaar coup

Jean Dreze
The Aadhaar project was sold to the public based on the claim that enrolment was “voluntary”. This basically meant that there was no legal compulsion to enrol. The government and the Unique Identification Authority of India (UIDAI), however, worked overtime to create a practical compulsion to enrol: Aadhaar was made mandatory for an ever-widening range of facilities and services. It became clear that life without Aadhaar would soon be very difficult. In these circumstances, saying that Aadhaar is voluntary is like saying that breathing or eating is voluntary. Legal or practical, compulsion is compulsion.

Sweeping powers It took the Supreme Court to put an end to this doublespeak. In March 2014, the court ruled that “no person shall be deprived of any service for want of Aadhaar number in case he/she is otherwise eligible/entitled”. This was a very sensible interpretation of what it would really mean for Aadhaar to be voluntary. Throughout the proceedings, incidentally, the Central government stood by the claim that Aadhaar was a voluntary facility. The Supreme Court did nothing more than to clarify the implications of that claim.It is important to note that Aadhaar could work wonders as a voluntary facility. A certified, verifiable, all-purpose identity card would be a valuable document for many people. But the UIDAI has never shown much interest in the Aadhaar card, or in developing voluntary applications of Aadhaar. Instead, it has relentlessly pushed for Aadhaar being used as a mandatory identification number in multiple contexts, and for biometric authentication with a centralised database over the Internet. That is a very different ball game.
In concrete terms, the Bill allows the government to make Aadhaar authentication compulsory for salary payments, old-age pensions, school enrolment, train bookings, marriage certificates, getting a driving licence, buying a SIM card, using a cybercafé — virtually anything. Judging from the experience of the last few years, the government will exercise these powers with abandon and extend Aadhaar’s grip to ever more imaginative domains. Indeed, Aadhaar was always intended to be “ubiquitous”, as Nandan Nilekani, former Chairman of the UIDAI, himself puts it.
 

The Supreme Court order caused consternation in official circles, since it ruled out most of the planned applications of Aadhaar. The Aadhaar Bill, tabled last week as a money bill in the Lok Sabha and passed by it, is the Central government’s counter-attack. Under Section 7, the Bill gives the government sweeping powers to make Aadhaar mandatory for a wide range of facilities and services. Further, Section 57 enables the government to impose Aadhaar identification in virtually any other context, subject to the same safeguards as those applying to Section 7. 

Mass surveillance
Why is this problematic? Various concerns have been raised, from the unreliability of biometrics to possible breaches of confidentiality. But the main danger is that Aadhaar opens the door to mass surveillance. Most of the “Aadhaar-enabled” databases will be accessible to the government even without invoking the special powers available under the Bill, such as the blanket “national security” clause. It will be child’s play for intelligence agencies to track anyone and everyone — where we live, when we move, which events we attend, whom we marry or meet or talk to on the phone. No other country, and certainly no democratic country, has ever held its own citizens hostage to such a powerful infrastructure of surveillance.

If this sounds like paranoia, think again. Total surveillance is the dream of intelligence agencies, as we know from Edward Snowden and other insiders. The Indian government’s own inclination to watch and control dissenters of all hues has been amply demonstrated in recent years. For every person who is targeted or harassed, one thousand fall into line. The right to privacy is an essential foundation of the freedom to dissent.

Mass surveillance threatens to halt the historic expansion of civil liberties and personal freedom. For centuries, ordinary people have lived under the tyranny of oppressive governments. Compulsion, arrests, executions, torture were the accepted means of ensuring their submission to authority. It took long and harsh struggles to win the freedoms that we enjoy and take for granted today — the freedom to move about as we wish, associate with whoever we like, speak up without fear. No doubt these freedoms are still elusive for large sections of the populations, especially Dalits and those who live under the boot of the security forces. But that is a case for expansion, not restriction, of the freedoms we already have.

The Aadhaar Bill asks us to forget these historic struggles and repose our faith in the benevolence of the government. Of course, there is no immediate danger of democracy being subverted or civil liberties being suspended. Only an innocent, however, would fail to anticipate Aadhaar being used as a tool of mass surveillance. And mass surveillance per se is an infringement of democracy and civil liberties, even if the government does not act on it. As Glenn Greenwald aptly puts it in his book No Place to Hide, “history shows that the mere existence of a mass surveillance apparatus, regardless of how it is used, is in itself sufficient to stifle dissent.”
 

Uncertain benefits
The champions of the Aadhaar Bill downplay these concerns for the sake of enabling the government to save some money. Wild claims are being made about Aadhaar’s power to plug leakages. In reality, Aadhaar can only help to plug specific types of leakages, such as those related to duplication in beneficiary lists. It will be virtually useless to plug leakages in, say, the Public Distribution System (PDS), which have little to do with identity fraud. On the other hand, recent experience has shown that Aadhaar could easily play havoc with the PDS. Wherever Aadhaar authentication has been imposed on the PDS, there have been complaints of delays, authentication failures, connectivity problems, and more. The poorer States, where the PDS is most needed, are least prepared for this sort of technology. There are better ways of reforming the PDS. Similar remarks apply to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

I have seen some of this damage at close range in Jharkhand, where Aadhaar was supposed to prove its mettle. Aadhaar applications (in the PDS, MGNREGS, and even the banking system) have had poor results in Jharkhand, and caused much disruption. For instance, MGNREGS functionaries have cancelled job cards on a large scale for the sake of achieving “100 per cent Aadhaar seeding” of the job-cards database. MGNREGS workers have been offloaded by rural banks on Aadhaar-enabled “business correspondents” who proved unable to pay them due to poor connectivity. And the proposed imposition of biometric authentication at ration shops threatens to disrupt recent progress with PDS reforms in Jharkhand.

Seven years after it was formed, the UIDAI has failed to produce significant evidence of Aadhaar having benefits that would justify the risks. Instead, it has shown a disturbing tendency to rely on public relations, sponsored studies and creative estimates (including the much-cited figure of Rs.12,700 crore for annual savings on the LPG subsidy). To my knowledge, there has been no serious evaluation of any of the Aadhaar applications so far. Worse, some failed experiments have been projected as successes through sheer propaganda — business correspondents in Ratu (Jharkhand) and “direct benefit transfer” of kerosene subsidies in Kotkasim (Rajasthan) are just two examples.

No doubt Aadhaar, if justified, could have some useful applications. Given the risks, however, the core principle should be “minimum use, maximum safeguards”. The government has shown its preference for the opposite — maximum use, minimum safeguards. The Aadhaar Bill includes some helpful safeguards, but it does nothing to restrain the use of Aadhaar or prevent its misuse as a tool of mass surveillance. And even the safeguards protect the UIDAI more than the public.

The wizards of Aadhaar are fond of telling us that we are on the threshold of a “revolution”. With due respect for their zeal, a coup would be a more appropriate term. The Aadhaar Bill enables the government to evade the Supreme Court orders and build an infrastructure of social control. Further, it does so by masquerading as a money bill, pre-empting any serious discussion of these issues. This undemocratic process reinforces the case for worrying about Aadhaar.
(Jean Drèze is Visiting Professor at the Department of Economics, Ranchi University.)

Demographic dividend or damp squib?

CHARAN SINGH

The global economy is passing through a demographic crisis, with its growing ageing population. India, has an obvious advantage here, and could provide the world with skills and manpower. 

India has the world’s youngest workforce with a median age way below that of China and the OECD countries. The rest of the world, especially western countries, are ageing rapidly because of low fertility rates and increased longevity. Consequently, according to the Union government , the global economy is expected to witness a skilled manpower shortage of around 56 million by 2020. Thus, the ‘demographic dividend’ in India needs to be exploited to meet the skilled manpower requirements in India and abroad. 

The demographic dividend not only implies increased labour supply but also a challenge in finding capacity in the economy to absorb and productively employ extra workers. To make a larger number of people employable would necessitate large investment in human capital. Investment in educational and vocational training needs to be strengthened if India has to successfully reap the benefits of the demographic dividend.

In 2011-12, according to the Centre, in nearly 18 per cent of households in rural and 6 per cent in urban areas, there was not a single member in the age-group 15 years and above who could read and write a simple message with understanding. Similarly, the recent report by the National Sample Survey Organisation states that during the survey period of July 2011 to June 2012, nearly 25 per cent of males and 29 per cent of females in the age range 5 to 29 years did not consider education necessary to eke out a living. 

Again, nearly 25 per cent males in the rural areas and 33 per cent in urban areas reported that they did not attend educational institutions because they needed to work to supplement the household income. In the case of nearly 30 per cent females, the reason was that they had to attend to domestic chores.

In the case of vocational training, the situation is worse. Amongst persons aged 15 to 59 years, only 2.2 per cent reported to have had formal vocational training; 8.6 per cent received non-formal vocational training. As expected, the situation in rural areas was worse than that in the urban areas. Amongst rural males, the most significant share of vocational training was driving and motor mechanic work while for females, it was textiles-related work.

High expectations

The demographic dividend is expected to result in nearly 20 million people joining the workforce annually in the next 10 years. With the rising level of income, the expectations of people, especially the young, are also rising. The next generation of farmers want to be part of the growth India story and therefore out of the agriculture sector. To absorb such a large labour force, it is necessary to plan for appropriate vocations and employment opportunities. Narendra Modi recently observed that India will now need large number of ITIs, and a new ministry of skill development and entrepreneurship would coordinate the skill development needs of the country. The Pradhan Mantri Kaushal Vikas Yojana has been announced to encourage skill development for youth by providing monetary rewards. While all these efforts are encouraging, the fact remains that skill development strategy has yet not been successfully implemented. 

India’s workforce of nearly 484 million in 2012 could increase to 850 million by 2025, accounting for nearly one-quarter of the global workforce. MSMEs, with their flexibility and low cost, easily adapt to new technology and can help in strengthening the manufacturing sector. In fact, MSMEs have the potential to absorb the increasing labour force while helping to realise the potential of the Make in India strategy. The need is to explore new areas for MSMEs.

(The writer is the RBI chair professor of economics, IIM-B)

Let us now make more food in India

PULAPRE BALAKRISHNAN

Prime Minister Narendra Modi’s exhortation ‘Make in India’ would make perfect sense till we realise that by ‘making’ he means manufacturing. But could it be that his focus on manufacturing may come a cropper if we do not ensure that agriculture is placed permanently on a sound footing? The history of the great manufacturing nations that the PM has been visiting suggests that. So does recent experience here.

It would, of course, be politically correct to speak of the importance of agriculture at this point when farmer suicides have been in the news. Actually, though, the economy has been signalling for some time that all is not well with the sector. Note that I say ‘economy’, and am therefore not referring to agriculture alone. The performance of agriculture has an implication for a population wider than that contained by it. At least for five years, food price increases have driven economy-wide inflation.

That food-price inflation has persisted suggests that a structural factor is likely at work. The market mechanism can in principle eliminate inflationary pressure emanating from shortage by encouraging the expansion of the sector now made attractive by the increased profitability. That this is not happening with respect to India’s food sector points to structural impediments in place, ones the market cannot eliminate.

Food for thought

Food-price inflation has consequences for more than just economy-wide inflation. It can even impact the part of the economy close to our PM’s heart, manufacturing. This is evident from the reports that while inflation is at a four-month low, the index of industrial production is at a five-month low.

There is a plausible explanation for this. Food price inflation can crowd-out household expenditure on manufactures, leading to declining investment and thus demand for capital goods. Higher inflation also leads to real exchange-rate appreciation, rendering exports uncompetitive. So in many ways, a vibrant manufacturing sector requires a sound agricultural base.

The agrarian crisis in the country partly reflects the structural element in the problem of expanding agricultural production. It has two implications for economic policy.

The first is the message that if the production conditions are the constraint, then, trying to tackle the agrarian crisis by raising procurement price — as has been proposed — is tantamount to no more than feeding inflation.

The UPA 2 had discovered this fact the hard way. Apart from the fact that support prices are mostly confined to cereals, and the price rise is happening elsewhere, producers in India’s non-agricultural sector are not going to be mere spectators in the reduction in their real income. They constitute 80 per cent of the economy, and are likely to raise the price of their outputs to compensate for its reduction.

Now, not only is the original rise in the procurement price generalised across the economy, but also it will connect the inflation rate over time. For, the price would have to be raised again in the next round to restore parity with non-agricultural prices.

Thus, trying to shift the advantage towards the farmers by raising support prices cannot normally succeed.

To both improve the lot of farmers, and for the rest of the economy to reap the benefits of such a move, the yield of land must be raised continuously. This would require non-price interventions. Modi cannot be ignorant of these as they constitute what must count as governance, and he had promised to maximise it.

So, what are the areas within agriculture that require better governance? First and foremost, there is irrigation. Secondly, there is the issue of land policy. 

Watering land

Expanding irrigation has been the bugbear of governments in India. While estimates vary, we know for sure that the share of irrigated land in total cropped area is low. Increasing this share is vital as assured availability of water can overcome some of the disadvantages of small farm size.

Some years ago, the Economic Advisory Council to the PM noted that though the average holding size in much of East Asia was smaller than that in India, the share of irrigated land was much higher in the former. This accounts for the fact that these economies enjoy far greater food security that India does, and must have some bearing on their being world-class manufacturing nations.

However, while the slow growth of irrigated area may be a cause of the tardy expansion of food production in India, it has less to do with funding than with governance. In a study published by the RBI in 2008, Ramesh Golait, Pankaj Kumar and I showed that public expenditure on irrigation and flood control had gone up by over 100 per cent in real terms since 1991, with precious little to show for it on the ground. Low spending cannot account for the glacial spread of irrigation capacity in the country.

To see public expenditure on irrigation fructify, we would need governance encompassing conception, construction, supply and maintenance. It is not clear that farmers are part of the process right now, even as it would be wise to include them, for as potential users they have a stake in the success of the project.

Politicians tend to showcase high expenditure on irrigation, and have succeeded in turning such expenditure into a sacred cow so that querying outcomes is to be “anti-farmer”.

Land issues

The pressure of population has led to fragmentation of many farms to a level below economic size. Sizeable investment is now made difficult.

Further, at low output levels, any adverse fluctuation drives the farmer into poverty and debt, from which recovery is impossible without assistance.

There is a strong case for the prevention of further fragmentation of land by appropriate legislation. At the same time, legislation must also allow for tenancy, which is illegal in many parts of India.

In fact, the State should facilitate tenancy on reasonable terms so that necessary yield increase is not held back due to the uneconomic size of land.

Another issue is the alienation of agricultural land. There is a strong case for disallowing the conversion of farmland except in the rarest of rare cases. In fact, the proposed Social Impact Assessment is perhaps too narrowly conceived. It tends to privilege the rights of those deriving a livelihood from the land in question.

Actually, there is the question of the greater common good, from which point of view food security for the nation as a whole emerges as salient. Given the imponderables, especially due to climate change and the fact that grain production per capita is far lower here than in the developed world, an embargo on conversion, whether undertaken by government or owners, makes much sense.

While there is no need for Modi to put his enthusiasm for manufacturing on hold, he should seriously and urgently address the long-term prospects for our agriculture.

The writer is professor of economics at Ashoka University