This largesse by the government, unfortunately, is being run by increasing India's current account deficit. In simple terms it means we as a nation spend more money than we earn in a year. The only way this can be done is by taking on additional debt. Again in simple terms, it means the government floats debt paper (fixed deposits) and the banks, institutions and the public buy it using their savings. Think PPF, NSC, KVP, Infrastructure bonds, T-bills etc.
This whole affair is not sustainable in the long run unless the country starts printing more paper currency thereby boosting inflation. And inflation, my friend, is the poison that kills slowly. Coming back to the employment guarantee scheme. The practice of giving away money (Rs 10,000 = 100 days x Rs. 100) to people is never a good idea. I am saying giving away because India's corruption is institutionalized so I am more or less certain that very little actual work is happening to justify this expense (refer: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/11/28/MNVB13VKMC.DTL).
In such a scenario, there has been a multifaceted impact. Here are the main ones:-
- Beneficiaries of this scheme are consuming more (primarily food) as they now have more disposable income resulting in spiraling food inflation.
- Unavailability of unskilled labor for most industrial and real-estate work thus jacking up the cost of most labor intensive production processes.
- Setting an extremely dangerous precedent for people that it is their right to get paid without having to work for it. This is another subtler version of the subsidy scheme and very very difficult for successive governments to remove and attract the "anti-people" tagging.
As a populist policy, this will probably win some votes but economically it is bringing the country a bit more closer to disaster!