US embassy cable - 05NEWDELHI6637

C O N F I D E N T I A L SECTION 01 OF 04 NEW DELHI 006637 
 
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TREASURY FOR SOUTH ESAT ASIAN NATIONS 
 
E.O. 12958: DECL: 08/26/2015 
TAGS: PREL, ECON, EINV, ENRG, PGOV, IN, Indian Domestic Politics 
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