This plan (with some caricature) goes thus: (a) Open a credit window so that local authorities (panchayats and municipalities) can borrow at very low interest rates for a class of projects that create public assets by employing those willing to work at minimum wages; (b) The interest rate on such loans would be zero if the RBI could monetise these loans by printing an equivalent amount of money. If this isn’t possible, say due to inflationary fears, the central government would subsidise, keeping the interest rate for this loan window lower than on central government borrowings; (c) The size of the loan window should have no upper limit. But, after an initial loan large enough to employ all those willing to work at minimum wages, subsequent loans would need to be backed by a properly assessed valuation of the public assets created by the projects financed via this window. These assets would be the only collateral required for further borrowing; (d) The local authorities would need to price use of assets thus created, but it would be low because of the low interest rate and employment at minimum wages; (e) Apart from the oversight by banks on assets created, there would be no further guidelines or monitoring by the central or state governments; (f) Instead, accountability would be maintained by giving citizens two rights: to obtain employment at minimum wages and a right to information on all aspects of local body finance and functioning.
Sounds crazy? But aren’t we already some way there through recent Acts on Rural Employment Guarantee and Right to Information? And does it really violate the two cardinal ideas mentioned above?
The idea that private investors get it more right than governments mainly says that governments are too distant from people to know what they really want. This plan relies on closeness of local bodies to people and their participation in project selection. It also addresses the oft- forgotten fact that private investment simply won’t create assets that do not pay, however useful they may be to the community concerned. On fiscal prudence, this is after all about matching liabilities to assets. All that the plan assumes is there is enough unmet need for public assets that people would be willing to pay for commensurate with minimum wage and low interest rate. Of course, Bhaduri, being Keynesian, adds monetised deficit financing to make a stronger case. But even if low interest rates require subsidy, is this really different from the tax cuts that have driven much liberalisation? And on the question of is it not too expensive to guarantee employment, Bhaduri’s is a simple answer. It won’t cost anything if there’s no unemployment. And, if there is unemployment, this will cost much less to remove than usual calculations that value idle resources assuming full employment.