Delivering pro-poor development

Delivering pro-poor development
The government must take appropriate steps to reinvigorate the rural economy for both economic and political reasons
But for Prime Minister Narendra Modi’s relentless campaigning, inability of the Congress to highlight limitations in the National Democratic Alliance’s (NDA’s) urban development model, the role of None of the Above (NOTA) option, and copious amount of luck, the Bharatiya Janata Party (BJP) would have lost its Gujarat bastion. While it has traditionally been a darling in urban areas, the poor performance of the BJP in rural areas is telling. In predominantly rural areas, the Congress won 62 seats, against the BJP’s 43. This is despite the pro-poor rhetoric of the government.

While the BJP might have saved face owing to urban support in Gujarat, this was substantially due to the personal connect of the prime minister and the lack of alternatives, which may not be the case in the forthcoming state elections in 2018, particularly in Rajasthan, Madhya Pradesh, and Karnataka, and more importantly, in the general election of 2019. Creating a connect with urban and semi-urban trading community may particularly be difficult owing to continuing challenges with the goods and services tax (GST) regime.

It also appears that more young and first time voters are, albeit unsurprisingly, getting disenchanted with the BJP and attracted to other options. It is this set of voters which also migrates from the rural to urban belts in search of employment opportunities, putting pressure on urban resources. The competition for opportunities available in urban areas is expected to increase, which might add fuel to the building discontent, costing the BJP its urban support base. Coupled with this, an already dissatisfied rural voter might cost it an election.

A two-fold strategy would be required to avoid such collapse. First, the government should stop testing the patience of its urban voters. It needs to address genuine challenges faced by small and medium-sized traders in compliance with GST- related procedures, claiming refunds and credits, and address concerns around potential hounding by the National Anti-Profiteering Agency, and the e-way Bill. While the government has claimed making significant advancements in ease of doing business, the ground realities do not appear to support such claims. Availability of land, skilled labour and finance is still a challenge and avoidable compliance costs put immense burden on small industries and traders. Government obsession with technology-enabled start-ups, wherein success stories are few and far between, has completely ignored small-scale frugal innovation, such as low-cost farm mechanization equipment, which is awaiting support to scale up.

Second, the government must take appropriate steps to reinvigorate the rural economy for both economic and political reasons. This involves removing artificial barriers to growth of agriculture, and ensuring adequate opportunities exist for income generation in rural non-farm sector. Investments must be made in export-oriented agriculture value chains, modern storage and warehousing facilities, and knee-jerk reactions adversely affecting agriculture export must be avoided. The distortions in pricing of fertilizers and agriculture procurement, and restrictions on agriculture futures, need immediate review and correction.

In summary, the government will need to dismantle the disincentives to prosperity in rural and urban areas. Both areas suffer from different types of disincentives and thus, different strategies will need to be devised to deal with each of them.

So, is the government working in this direction? It appears not. Recently, the government has decided to reimburse banks the merchant discount rate (MDR) in respect of debit card/ BHIM Unified Payments Interface/AEPS (Aadhaar enabled payment system) transactions of less than Rs2,000 for a period of two years, with the objective of promoting adoption and usage of digital payments. It is estimated that the total MDR support would be Rs2,512 crore.

This measure assumes awareness and willingness of consumers and merchants to adopt digital payments, availability of basic infrastructure, and existence of payment acceptance infrastructure, which is unfortunately not the case. A deeper analysis would reveal that such distortion of market-based incentives might be counter-productive in the long term. As realized on the first anniversary of demonetization, the digital villages have reverted to old ways of using cash.

Despite digitization being a laudable objective, the country is currently grappling with more serious challenges, such as employment generation. And the government has recently announced a paltry package of Rs2,600 crore for a period of three years for employment generation in the leather and footwear industry, a move which clearly indicates its priorities.

At best, the government appears to be playing to the gallery and score points for its short-sighted efforts to promote digital payments in predominantly urban areas. The government must realize that tinkering with processes of doing business resulting in gains on global indices is not enough.

If it really wants to recover lost ground, it will need to help the rural and urban poor populace realize its untapped potential by implementing transformational changes in social sectors. This would include investment in areas like education, health and social security. Without these, India’s growth story is expected to be non-inclusive and short lived, similar to the fate which the government is staring at currently.