Public Work for Unemployed, Cash to Workers: Economist Arun Kumar's Tips to Tackle Post-covid Crisis

·5-min read

In ancient India, kings would build palaces and forts during droughts to provide employment to their subjects at a time of crisis. The Bada Imambara in Lucknow has a plaque testifying to this. US President Franklin D. Roosevelt used the New Deal programme, initiated in 1933, to start public works on a large scale to counter the effects of the depression in the US economy.

Economist, Arun Kumar suggests that the COVID-19 induced economic crisis in India also demands such large-scale public works to provide employment to many who are struggling to make ends meet. In his latest book, titled Indian Economy's Greatest Crisis, the author writes:

"...Another way that the government can give incomes to the unemployed is to start public works during periods of crisis. This is not done in most developed economies. But in India, this has been ongoing for a long time, given the problem of unemployment, especially in rural areas. The National Rural Employment Guarantee Act was passed in 2005. It led to the MGNREGS, under which a poor family could demand work in rural areas and get up to hundred days of work for one member at a predefined wage. This was to supplement the income they earned during the rest of the year.

It is a demand-driven programme, where any worker can ask the local authorities for work. Usually, the work is unskilled, such as work to be done on roads, making check dams or digging pits for rainwater storage.

In India, allocation for such work was increased so that those who had migrated back to the villages could get work under this scheme and earn a basic income. However, many workers who had migrated back were skilled and did not like the idea of doing manual unskilled labour at very low wages.

There has been demand to start a scheme similar to MGNREGS in urban areas as well, since so many workers who lost employment are living with their families in the cities. This problem has been persisting since demonetization, when the unorganized sector was badly hit for the first time (Kumar, 2018). Now the problem has become acute, with even the organized sector retrenching workers.

What kind of work can be allotted under the employment guarantee scheme? Both in the cities and in the villages, infrastructure is woefully weak and in need of upgradation (Kumar, 1994).

The unemployed can be set to build this infrastructure. Education, too, requires massive improvement, since it is weak in large swaths of the country, both in the rural and the urban areas. Schools lack buildings, teachers and facilities. Often, classes are overcrowded due to lack of adequate staff. The unemployed can be gainfully employed in construction, teaching, COVID-19-related contact tracing and other similar jobs. Thus, starting/expanding a public-works programme is a good way of generating both employment and demand to boost the sagging economy. "

Apart from investing in infrastructure building, in order to provide employment to those skilled and unskilled workers who are currently unemployed, Kumar also makes a case for cash transfer to those who do not have the means to support themselves at this time. Kumar writes in his book:

"In the US, 44 million— one third of the workers—filed for jobless claims in the first twelve weeks after March. To provide support to such people, governments transferred money into their bank accounts. This money was inadequate to support them but, along with the other money they could get for being unemployed and the food programme that was initiated, these workers could survive.

So, again, the basic thrust of this programme was to prevent societal breakdown and keep demand from collapsing completely. In India, poor women were offered Rs 500 per month for three months, along with things such as free gas cylinders for cooking. Families were offered free foodgrains and lentils. The programme could not cover all the poor but did help out some."

In his book, Kumar highlights the significant impact of the coronavirus pandemic on India and critically analyses the government's efforts to contain the virus and mitigate its adverse effects on the economy and society. Kumar writes,

"…to prevent businesses from collapsing, the governments have announced loan packages to businesses and the central banks have offered additional liquidity. A moratorium on the repayment of loans and interest payment has also been announced so that businesses can pay the money they owe the banks after a certain number of months. The idea is that, by then, the businesses will pick up again and start generating revenue. In India, a six-month moratorium was allowed. But this only postpones the day of reckoning, since the interest will keep mounting.

Interest on funds not repaid will also mount. In October, the government, prodded by the Supreme Court, offered to take the burden of the extra interest on the unpaid loan. If a business, when it restarts, makes little profit since demand is low, it will still not have the funds to pay the creditors and will eventually fail. Thus, for such businesses, the day of reckoning is only postponed.

The alternative is that a loan is given to the business by the government, and that is converted into equity when the business restarts. This is a more viable strategy. It is suggested that the equity be sold by the government in a few years, when the business gets going. It is also said that this way, the government also gains a certain premium. But this is going to be a messy situation if the governments have to take care of their investment in millions of businesses.

This scheme may also encourage crony capitalism, with the well-connected cornering a large share of the loans and many others not getting loans even if they are viable. In India, this could result in an increase in fraud.

If businesses collapse in spite of the loan, if demand does not pick up soon, the government will stand to lose the money it invested in these businesses. This is the reason banks are not lending to weak businesses even though liquidity has been pumped into the system to allow liberal lending. The chances are that many weak businesses will fail despite the loans being offered."

The above excerpts have been published with permission from Penguin Publishers.