Give a boost to reverse migration

As soon as the euphoria of the decisive political victory subsides, the new government must pull up their socks. The coming budget is likely to be populist, of the ���thanks-giving��� sort. But immediately thereafter, three tasks must be undertaken: one, fiscal expansion with a close watch on the deficit to maintain the FRBM target at least over the trade cycle. Two, an accommodative monetary policy that stops expansion at the right time, keeping in view its multiplier and lagged effect on the economy, and three, ensuring inclusive growth by extending infrastructure (read, roads, education, health and sanitation, irrigation, market, micro-finance, technology, tele-connectivity) to rural India.

Huge deficits, followed by huge borrowings, crowd out private investment and raise interests, cascading slowly but surely into inflation and overheating. So averaging FRBM targets at least over a trade cycle is prudent. It is the quality of government expenditure that is more important than mere deficit numbers. Monetary policy, given its nexus with the fiscal policy, must accommodate fiscal expansion, but the present ample liquidity warrants instruments that encourage productive investment, and not just make cheap money available to all. Rates may be cut, but rather than across the board, more to the auto, infra, real estate sectors and indeed agriculture and agro-based industry. Even if 1% of the SLR is diverted towards timely loans to the rural sector, Rs 60,000 crore will be released into micro-finance. If government spends half the amount spent on farm loan waivers, with Rs 30,000 crore the whole country can have irrigation canals and farmers won���t need loan-waivers!

The overall policy must never lose track of inclusive growth for three reasons. One, the new government must deliver what they have promised; two, given the high income elasticity of demand in the economically weaker sections, an infusion of money into this segment would spur demand which, in turn, will drive the economy out of the present recession. And three, most Indian cities are bursting at the seams with loads of rural migrants arriving for jobs every day. The city infrastructure never seems adequate to accommodate the rural exodus. But during recession, these rural migrants, rendered unemployed, would be more than happy to return to their native places if only they can get work and the city lifestyle in villages. The former can be promised by fiscal policy, government programmes like the National Horticulture Mission making agriculture profitable. The latter can be taken care of by industry, targeting the rural market for sales after the saturation of urban markets and given the growing purchasing power of the village folk. We will then be ready to witness a reverse migration, bliss for all. We have the example of thousands of diamond workers returning profitably to agriculture in Bhavnagar and Ahmedabad.

Good economics is often seen as bad politics, but these seem to be days of a paradigm shift with Indian political focus shifting from furthering urban prosperity towards rural development, as is evident from Rahul Gandhi���s highly publicised visits to rural habitations and policymakers��� statements. The prime minister���s programme for the first 100 days emphasises insurance reforms, telecom consolidation and expanding NREGA���s scope. President Pratibha Patil, in her first address to the joint session of Parliament, highlighted the need to build an inclusive society and inclusive economy. With five long years in hand, blissfully, the new finance minister too won���t need to face tradeoff between short-run populism and long run growth with reforms.

Recent history indicates that there would be global food shortages and high food prices in future. Adam Smith���s ���invisible hand��� puts things right by balancing the mismatches in the marketplace by creating ���signals��� for economic actors to move in certain directions. It���s quite likely that the present financial crisis in advanced countries and a rather lacklustre IT sector in India, together with high food prices would signal a movement of talent away from the service sector, into agriculture, if it is rendered profitable, leading to reverse migration. So, good economics would be good politics too for a change!

(The author is Professor of Economics, Sinhgad Business School, Pune)