Monday, December 27, 2004

Guaranteeing employment

The Hindu Monday, Dec 27, 2004

This article rejects two widely held beliefs :

  1. It is quintessential to maintain a low budget deficit
  2. A higher budget deficit will cause a higher inflation

If this Government still has eyes to see and ears to hear the poor, it must be bolder with a much larger employment programme.

IT IS puzzling why even democratically elected governments find it so hard to attach utmost priority to the problem of unemployment.

It is putting the cart before the horse to talk about a range of human rights or enhancing individual capabilities, until some very basic needs such as food, clothing, shelter, and health are ensured for all citizens.

Theoretically, under the highly artificial assumptions of perfectly functioning markets, it can be shown that the free market would provide some solution. However even in theory, under the best of circumstances described by perfect competition, there is no guarantee that the distribution of income would be tolerable.

Even more strikingly, there is nothing in this branch of economic theory studying the properties of the price system, which specifies how long it might take for the market to reach its solution, if it reaches that at all (that is the system is stable).

Economists these days tend to be wary of ambitious employment generation programmes for two reasons. First, they believe there is not enough `money' because a ceiling on fiscal deficit must be respected. Secondly, often extrapolating from past experiences, they suspect this would become no more than a way of income transfer from the taxpayers, which would soon become unsustainable. On both counts, they are wrong in the present Indian situation.

There has never been any systematic statistical evidence in India either that a larger budget deficit results in higher inflation. So the link between budget deficit and inflation tends to be more imaginary than real, and for good reasons. A larger budget deficit by pumping more money into the economy would raise prices if goods and services do not expand proportionately.

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