Business Today

DMK's free lunches turn costly

N. Madhavan | Print Edition: April 3, 2011

Eighty labourers, both men and women, are at work at Thiruvanduthurai village in Tiruvarur district of Tamil Nadu, about 325 km south of Chennai. They are digging a pond - about an acre wide and six feet deep - funded under the Mahatma Gandhi National Rural Employment Guarantee Scheme, or MGNREGS.

Outside the work perimeter, two middle aged men look on, worried. P. Murugan and K. Govindaraj are farmers from the same village who have cultivated black gram in their fields. The crop is ready for harvesting but they have been unable to get enough farm hands for the job. "We have been trying to wean away people from this pond digging to work for us, but they refuse," says Murugan. "Almost half our crop is lost as it is already over-ripe."

The handouts…
  • Rice at Rs 1 per kg
  • Other food items at subsidised rates
  • Free dhotis and sarees for festivals
  • Free television sets
  • Free LPG stoves with gas connection
  • Cooking oil at subsidised rates
  • Free school education
  • Subsidised health insurance scheme
  • Rs 75,000 subsidy to convert each thatched hut into pucca house
  • 100 days of guaranteed work through MGNREGS
… And the fallout
  • Massive shortage of labour for both agriculture and industry
  • Sharp increase in the cost of labour
  • Farm output set to fall in the absence of mechanisation
  • Many local industries expanding outside the state
  • State in poor fi nancial condition, debt burden high
  • Government forced to augument revenues by selling liquor
  • Labour effi ciency taken a hit

No doubt private employers across the country are facing a serious labour shortage following the implementation of the MGNREGS. But in Tamil Nadu, the problem has been exacerbated by the ruling DMK government's unrestrained populism over the last five years. Today, a ration card holder in the state gets rice at Rs 1 per kg, several other food items like pulses and cooking oil at subsidised rates, a free gas stove along with an LPG connection, free school education for the children, free dhotis for men and sarees for women during festivals, a free TV set, subsidised health insurance and a Rs 75,000 subsidy to convert a thatched hut into a pucca dwelling.

With assembly elections in the state scheduled in April and electioneering in full swing, the DMK is banking on these very populist measures to offset the damage to its image caused by the 2G spectrum scam - in which one of its leading lights, former union telecom minister A. Raja is the key player - and bring it back to power. However, the measures have also had adverse consequences, creating not only a major labour shortage but leaving the state with a huge revenue deficit, which may stunt its growth in the long run.

In the last five years, Chief Minister M. Karunanidhi's government has spent Rs 14,626 crore on the food subsidies, Rs 1,219 crore on the free dhotis and sarees, Rs 3,922 crore on the free TV sets and Rs 660 crore on the free LPG stoves. It has earmarked Rs 12,000 crore for the housing scheme involving 1.2 million hutments.

The insurance scheme has provided around 2.70 lakh people treatment costing Rs 700 crore.

Labour pains
The freebies have made a deep impact on labour attitudes. "When you take care of almost all the basic needs of people, be it food, clothing, shelter, healthcare, children's education and even entertainment, there is little motivation for them to work hard," says a state bureaucrat, requesting anonymity. Together with the MGNREGS, the freebies have left the rural population too content to exert itself, he adds.

The contentment shows in the increasing liquor consumption of the state, claim some observers. In 2005/06, state revenue from liquor sales was Rs 6,087 crore. In 2009/10, it rose to Rs 11,606 crore, and is estimated to be around Rs 14,033 crore in 2010/11.

Though paddy fields await transplantation at Kovilvenni village in the Cauvery Delta, some prefer a game of dice
Though paddy fields await transplantation at Kovilvenni village in the Cauvery Delta, some prefer a game of dice
Labour shortage at harvesting time is so acute that many paddy farmers in the Cauvery Delta, which accounts for 30 per cent of the state's output, are shifting to less labour intensive and more lucrative crops - 26,000 acres have been given over to sugarcane, 10,000 to oil palm and 10,000 to a variety of bamboo without thorns. Fish farms have sprung up across 10,000 acres. Sign of the times: 10,000 acres of farmland have been converted into real estate. Around 15,000 acres simply lie fallow. "At this rate, we could face a major paddy shortage in the country in coming years," laments S. Ranganathan, General Secretary of Tamil Nadu Cauvery Delta Farmers Welfare Association.

Industry's problems
The welfare measures are hurting industry, too. Migration from the villages to the cities has dropped significantly. "Labour shortage has pushed up wage costs. We are forced to pay more," says Venu Srinivasan, Chairman and Managing Director of TVS Motor Co. Rural contentment across the state was even more evident when the government, in collaboration with the Confederation of Indian Industry, or CII, sought to identify 100,000 unskilled people in rural areas, whom CII member companies were willing to train and subsequently absorb. The state government, for its part, offered to bear the cost of training to the tune of Rs 50 crore. The salary promised was Rs 7,000 a month. Yet the rural response was cold. Around 40,000 people were identified with difficulty, of whom 11,000 were given appointment letters. Only 800 joined, the rest unwilling to leave the comfort of their villages.

Chief Minister M. Karunanidhi at a function to distribute free TV sets
Chief Minister M. Karunanidhi at a function to distribute free TV sets
The labour shortage has arisen at a particularly inopportune time as there has been a strong inflow of manufacturing investments into the state in recent years. According to M. Velmurugan, Executive Vice Chairman of the Guidance Bureau in the state's industries department - the nodal agency for attracting investments - Tamil Nadu attracted investments worth Rs 80,000 crore in the last five years.

Projects worth another Rs 30,000 crore are in various stages of discussion and approval. "Six of the top 10 auto majors are in Chennai with a capacity to produce 1.7 million vehicles annually. We are set to become the world's largest auto cluster,'' he says.

The demand for labour has grown so intense that the new investors, who pay more, are edging out traditional businesses. Old industries, such as textiles, are forced to expand outside Tamil Nadu. "We are not welcome any more. Tamil Nadu does not need the textile industry," says Manickam Ramaswamy, Chairman of Loyal Textiles, which has a capacity of 1.25 lakh spindles and 250 looms in the state. Labour shortage and extended power cuts have forced him to expand in neighbouring Andhra Pradesh where he recently put up a 25,000-spindle and a 200-loom unit. Rajapalayam Mills and Govindaraja Mills, too, have chosen to set up new units in Andhra.

During the DMK's tenure, Tamil Nadu's gross domestic product, or GDP, growth has declined from about 21 per cent in 2006/07 to 11.76 per cent in 2010/11. The state's revenue deficit is estimated at Rs 3,129 crore during 2010/11 against a revenue surplus of Rs 4,545 crore in 2007/08. Its public debt is set to cross Rs 1,00,000 crore in 2010/11. Yet state finance minister K. Anbazhagan claims there is nothing to worry about as the amount borrowed is within the state's capacity to repay.

Venu Srinivasan

There is a massive labour shortage. Industry has been forced to pay more to hire
Venu Srinivasan, Chairman and Managing Director, TVS Motor Co.
To be sure, despite the profligacy, Tamil Nadu has not touched bottom yet. As per the latest Reserve Bank of India study on state budgets, Tamil Nadu's ratio of debt to gross state domestic product was 24.2 per cent in 2008/09, which was better than that of some other big states like Maharashtra, Gujarat, Kerala and Karnataka. Economists, however, point out that the state's per capita social expenditure over the past five years, at Rs 3,200, is second only to that of Maharashtra and too high to be sustained indefinitely.

Already, one of the key themes of the Opposition in the current election campaign is that the DMK government has ruined the state's finances and is leading it into a debt trap. "Every child born in Tamil Nadu today carries a debt burden of Rs 15,000 on his or her head," said AIADMK leader J. Jayalalithaa during one of her rare appearances in the state assembly recently.

Noted agricultural economist, Professor M.S. Swaminathan, sums up: "Welfare measures are needed in India considering the large scale inequality. But there is a need to take a view in totality. On one hand we offer freebies and on the other take money away from the people through the sale of liquor. That is very unfortunate and counterproductive in the long run.''

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