Sunday, August 30, 2009

Who gets the PF?

Provident Fund (PF) is a form of Social Security in India. Employers and employees each contribute 12.5% of the Gross Income into this kitty, so that when the employee retires she gets the accumulated savings from her lifetime income. Casual labor is highly prevalent in India, especially in the construction industry where a good percent of the laborers are migrants who move across cities and states based on the demand. Until about 10 years ago, only salaried employees (aka those that get a pay-check once a month) were required to be enroled in the PF program. However, a decade ago, a new law was instituted (in the name of protecting contract labor) that made it mandatory for employers to start PF for casual labor as well. This is a ridiculous policy, since these employees do not have any permanent address, they are mostly illiterate and do not have bank accounts (PF funds are deposited only in bank accounts by the government at the time of maturity). Neither the laborers nor the contractors were happy with this situation and the contractors challenged the law in the courts. After 10 years of fighting, they lost. The contractors' argument (a very valid one) is that there was no way for them to track down these individuals to give them their PF when they retire. They asked the government to put in place a system to give these funds out and promised to contribute to PF once the system was in place. The government's answer.. "It is not your problem how the PF is given away. Your problem ends with depositing the funds with the government".
Of course to us economists it is obvious that these are enormous rents. Here's another twist to the story. The laborers do not care for the PF, all they care about is their money. So they have made it very clear to the employers that if their income is Rs.100, that is what they should get, not a penny less. So, the employers are doling out the entire 25% of the PF into the government kitty, and employing fewer contract labor. In addition, they create bogus employee records with the names of their current employees' family members, open accounts in their name, wait a coupla years, terminate the employee and get the money back.
What a shame and what a waste of entrepreneurial talent!!

Thursday, August 13, 2009

Nuggets of Economic Wisdom

I am constantly amazed at the wonderful grasp of economics the common Indian citizen has. In another wonderful conversation with my flatmate's parents, his mother demonstrated a keen grasp of the importance of incentives. We were talking about the construction boom in India and uncle told us how difficult it was to get labor to meet the demand for construction in their city Nagpur. I wondered why there was no migrant labor from North Indian states! Labor migration is common in India, and its not surprising either cause most migrants are from some of the poorest districts of the country. So it was surprising that even migrant labor was scarce these days. That is when aunty dropped this wonderful piece of information and tied it all economically. She said that the unemployed in those regions were now being awarded unemployment compensation. Thus if they were going to get money and food just to sit at home why would they migrate in search of work. I was totally amazed. Here was someone who had not had a single course in economics, who had been a house-wife all her life and yet understood economics so well!! If only the policy makers had half her economic wisdom India would become an advanced country in no time.

Wednesday, August 12, 2009

Property Rights in India

Last night my flatmate and I were discussing Indian Economics and Politics with his parents. He mentioned a property rights case his uncle is fighting in the courts that gives a clear indication of the nature of property rights in India. His uncle owns ancestral property in a North Indian State. The property includes a house and some land around it. Since the family has moved away to live in a different city, they used the house as an occassional vacation home. A little over a decade ago, the state government approached them to rent the property. They had no plans to rent the place and so they declined the over. A year after this episode, someone visiting the village noticed that the house that was supposed to be locked up was being lived in. The person living in the house was the State High Court judge. When asked to vacate the property, he refused saying the government had given him the property. The owners have been fighting a case against the government for 12 years now. It does not seem likely that they will get their property back.
The irony is that the justice system which is supposed to arbiter such cases is party to this property rights theft. For every single progressive step the country makes, it slides down several thanks to a judicial and legislative system that exists to loot the common man of his hard earned property. It is a miracle that progress occurs in India in spite of these blatant misuses of the law and non-protection of private property.

Monday, August 03, 2009

Please stop the pollution!!

Some study has shown that 70% of Calcutta residents suffer from respiratory problems, so the government has decided to ban vehicles over 15 years old. How did they establish the connection? I do not know why I am surprised! Such knee-jerk reaction is common in India. Anyone who has been to Calcutta will know that it is a highly polluted city, not different from other cities in India. One needs to be in Calcutta during the rains to appreciate the full nature of pollution due to overflowing drains causing people to wade in ankle or knee deep filthy water to get to school and work. Will they ban the rains next cause it causes so much water logging and consequent pollution? On a similar note, will someone also tell the current US administration that Cash for Clunkers is a bad economic idea. Its a classic example of applying Keynesian logic and suffering from the Broken Window Fallacy.