THE SORDID PATRONAGE POLITICS OF ECONOMIC REFORM

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E.O. 12958: DECL: 08/26/2015
TAGS: PREL ECON EINV ENRG PGOV IN
SUBJECT: THE SORDID PATRONAGE POLITICS OF ECONOMIC REFORM
IN INDIA: THE NATIONAL RURAL EMPLOYMENT GUARANTEE BILL

REF: A) 2004 NEW DELHI 3270 B) NEW DELHI 1522

Classified By: CLASSIFIED BY AMBASSADOR DAVID C. MULFORD FOR REASONS 1.
4 (B) AND (D)


1. (C) Summary and Introduction: On August 24, both Houses
of Parliament passed the National Rural Employment Guarantee
(NREG) Bill with little opposition by any political party.
The Bill, which could theoretically cost the treasury as much
as USD 70 billion over 5 years, will now go to President
Kalam who is expected to sign it after a cursory review
process, thus delivering a key element of the Common Minimum
Program (ref A) adopted by the United Progressive alliance
UPA). The Bill was conceptualized by the National Advisory
Council (NAC),the academic think tank chaired by Congress
Party Chairperson Sonia Gandhi, who has championed its
passage to establish Congress as the party that provides jobs
to the poor. Congress party stalwarts clearly perceive it as
a political necessity to "prime the pump" with state and
local level party elements and key coalition partners in
order to keep the coalition together and preserve the rural
base that was key to their 2004 upset victory.


2. (C) Once passed, the NREG will become a platform to dole
out funds to key constituencies -- but it is also expected to
create enough jobs to create the semblance of progress among
the rural poor. Even many friends of the Prime Minister
concede that lack of delivery structures and mechanisms to
assure accountability make it unlikely that whatever funds
are actually spent will have a significant impact on
employment or rural poverty alleviation. Moreover, the NREG
is not even being portrayed as funding large projects, such
as the Works Progress Administration did during the
Depression. The benefit will instead accrue more to the
politically needy (and savvy) and to rent-seekers than the
economically needy. Neverthless, Left parties and leftists
inside Congress demanded passage of the NREG, and it became a
pre-condition to forward movement on economic reform put
forward by the "economists" in government, led by Prime
Minister Singh. Singh has made delivery of the massive
funding for the NREG conditional on sustained growth of eight
percent. This will require further economic liberalization to
which the Left has remained vehemently opposed. In India,
the politics of bribery go hand in hand with the politics of
economic reform, with real progress possible only if a
balance can be struck between parochial party interests and
reformist elements of the complicated NDA coalition.


3. (C) While driven mainly by Congress Party interests, the
left also supported the NREG Bill and will seek significant
benefit in its own key constituencies, especially in Kerala
and West Bengal, where the Left will compete with Congress in
state elections in 2006. At worst, the jobs plan is
political patronage run amok and horrid economic policy. In
an ideal scenario, the Bill may provide the cover Congress
party stalwarts and even the Left need tacitly to allow
divestment of shares in state owned companies (septel) and
partial opening up of the retail, insurance, pension market
and agriculture sectors -- the GOI's top priorities. As
Deputy Planning commissioner Montek Ahluwalia has told us
several times, once they break the bank, the leftists are
going to have to help us find ways to pay for it all. End
Summary and Introduction

GOI enacts Rural Employment Guarantee Bill
--------------


4. (C) The (NREG) Bill approved by both Houses of Parliament
on August 24 fulfills a key element in the Congress-led
government,s Common Minimum Program. The scheme enables
members of all rural households in 200 districts to get
employment for 100 days a year to start with. Initially, the
NREG would cost roughly USD 7.8 billion annually (one percent
of GDP),rising to about double this amount if fully
implemented. The Prime Minister has stipulated, however,
that funds will only be available if growth remains at eight
percent and has equated this level of growth with progress on
economic liberalization. Finance Minister Chidambaram has
said the scheme will be funded through a combination of
expenditure reduction (subsidies) and savings from existing
employment schemes. Full implementation would severely
compromise the GOI's Fiscal Responsibility and Budget
Management targets unless real expenditure cuts are made
elsewhere.


5. (C) As Embassy predicted when the UPA came to power, the
new economic leadership is using the budget and budgetary
"schemes" as the primary vehicle to force economic reforms.
The center has introduced "conditionality" in most of its new
budget allocations, especially to the states. This year,s
"no scheme left behind" budget (ref C) is noteworthy for its
effort to incentivize states to repeal antiquated and
anti-competitive regulations, reduce subsidies, and improve
fiscal management in exchange for access to central funding
allocations. This is in fact working, with nine states now
having repealed laws that inhibit development of private
agricultural marketing networks. At the same time, the
government is gradually tightening states, access to
off-budget funds through local cooperative banks and
constraining the use of guarantees to augment direct
spending. In the medium term, the government is promoting
the development of credit rating structures, combined with
reduced allocations from the center, to enable those states
and localities that successfully reform to tap debt markets.
This process will take years to succeed. The NREG is clearly
intended to placate the poor who perceive themselves as
sharing unequally the benefits of reforms vis-a-vis India,s
burgeoning middle class, now estimated by the Indian Planning
Commission to be growing at 40 million people per year (eight
percent growth). Congress Party leaders led by Sonia Ghandi
are pleading the case of the poor while economists in
government are scheming to force the pace of economic reform.


Main provisions of the amended NREG scheme
--------------


6. (C) The key provisions of the NREG are:

100 days of wage employment a year for all rural households
at a minimum wage of Rs 60 per day.

Initial roll out in 200 districts, expanding to 600 districts
in the next five years.

Priority for women, with 33% of the total applicants reserved
for women.

The center will contribute 90% of the funds for the scheme,
while the states will bear the remaining 10%.

All implementation expenditure would be through a central
employment guarantee fund and the government will also
transfer funds to the state employment guarantee fund.

Government to pay compensation to the states in case funds
are delayed, or jobs under the scheme are not provided.

The Panchayats would play the "principal role" in planning,
implementation and monitoring of the employment schemes.

At BJP,s insistence, Rural Development Minister Singh
assured Parliament that the government may introduce another
bill to ensure employment for urban households.

An "anti-corruption clause gives sweeping powers to the
Center to discontinue funds if any evidence of corruption is
found after investigation by any agency designated by it."

Rural Jobs Plan Threatens fiscal deficit
--------------


7. (C) Economists are concerned that the scheme,s gigantic
cost (as much as USD 70 billion over 5 years) has the
potential to widen the fiscal deficit, push up interest rates
and hurt the bond market. According to a well-known
economist and fund manager Surjit Bhalla, "The consequences
for Indian public finances would be huge ... and the
low-interest regime will be a thing of the past." Prime
Minister Singh is also concerned and is quoted saying, "The
combined fiscal deficit of the center and states at 10% of
the GDP was one of the highest in the world. All those
concerned with the governance should pool their experience to
ensure that the fiscal health of both the center and state is
not jeopardized."

Politics of the Bill
--------------


8. (C) The Congress Party wanted to claim ownership of the
NREG Bill to ensure that the Left do not draw political
mileage in next year,s Assembly poll and to rebuild
Congress' position as India's de facto party of national
governance. Buffeted by the Left, Sonia Gandhi boasted that
the Congress had taken up cudgels for the poor, calling the
passing of the bill was "a historic moment" that fulfilled
one of the UPA,s major election manifesto promises. The Left
Parties wanted to grab the credit for the Bill so they could
tell the people of West Bengal and Kerala that it was the
Left, and not the Congress, which was the moving spirit
behind the scheme. Sensing the determination of the Congress
leadership to push the Bill, the Left and the BJP made the
best of the situation by joining the race for credit sharing.
One well-respected businessman MP told us the bill was
horrid economics, but became a political juggernaut nobody
could afford to oppose. In the end, the NREG became the
litmus test of the UPA government's ability to delivery
tangible economic benefits to the rural poor who perceive
themselves as not having shared equally in the benefits of
rapid growth.

Activists join hands with Ms. Gandhi
--------------


9. (C) Activists in the National Advisory Council have
stepped in to fight Ms. Sonia Gandhi,s political battle.
Proponents of the scheme commented "the NREG is one of the
most daring and important initiatives of collective
responsibility in the world today. If the argument against is
that India cannot afford this kind of expenditure the
argument must be fought politically. By giving the poor a
small measure of dignity and the opportunity to contribute
their labor, we only offer a fraction of the entitlements the
privileged enjoy." While accepting that corruption has been
a major problem in the past with such schemes, including the
food for work program, these NAC members argue that the newly
passed Right To Information Bill could be used as an
effective tool to check the manipulations of the muster-roll.

Politics of Bribery
--------------


10. (C) Passed with unusual urgency, the Bill is the most
ambitious and uneconomic anti-poverty programs in the history
of India. Critics say that what benefit is delivered will go
to richer households who exploit the system to boost their
incomes, as has happened with a similar scheme in
Maharashtra. We believe that the scheme could help improve
employment trends and increase rural consumption marginally,
but do not expect a significant economic impact on rural
poverty alleviation or rural infrastructure development. The
benefit will accrue more to the politically needy and savvy
than the economically needy.


11. (C) Nevertheless, passage of the NREG is a pre-condition
to advance economic reform put forward by the "economists" in
government, led by Prime Minister Singh. Singh has made
delivery of funding for the NREG conditional on sustained
growth at eight percent. If the government sticks to this
position (which may well be doubtful down the road),further
economic liberalization will be required as the price for
fully implementing the NREG. In India, the politics of
bribery go hand in hand with the politics of economic reform,
with real progress possible only if a balance can be struck
between parochial party interests and reformist elements of
the complicated NDA coalition.
.

MULFORD