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July 24, 2009

Why NREGS is good for the markets

In a column for Business Standard, Akash Prakash of Amansa Capital, feels the rising fiscal deficit - one of the catalysts for which will be more and more schemes that send money to rural areas - will ensure that that government pushes through economic reforms willy nilly.
..the clear takeaway (from the latest election) has been that success in transferring significant resources into rural India has delivered votes. Spend large chunks of money on social schemes targeted at rural India, ensure reasonable delivery of these schemes and you will get votes. Every political party has understood this message, and this trend of increased resource transfer towards the poor through enhanced social security schemes is here to stay. For example, the NREGA outlay has already moved up to Rs 39,000 crore, this will only increase further as the scheme gets extended to urban areas and wages are maintained in real terms. There is now the imminent launch of the Food Security Act, and we will see more such schemes given our poor development indicators.

...The question then comes to how will we fund all these schemes and social expenditure, and this is where the political imperative to ensure high economic growth kicks in. For the simple truth is that unless we get back to an 8 per cent-type GDP growth, we will be unable to simultaneously get the fiscal deficit under control and fund the required social sector outlays. Economic growth is the only tonic which can provide the revenues needed to fund our ever-growing social sector commitments. Politicians, I think, now understand this. They need to transfer large amounts of money in an effective way into rural India to get elected. The only way for that to happen is if the economy is robust and growing strongly. Thus everyone is aligned in ensuring the end outcome of high GDP growth (probably for the first time).

...Most of the reforms investors want to see — be it disinvestment, FDI limit hikes, education reform, tax rationalisation etc — will happen over the coming years. Maybe not in the next six months as investors want, but it will happen. We only reform with our backs to the wall, and the fiscal situation leaves us with little choice. Without serious structural reform we will not get the growth we need to fund our social commitments.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at