Of the poor, by the poor, for the poor

I came across these comments made by Rahul Gandhi and they made me very angry. Lets consider what all our government already does for the poor:

- subsidized food grains, kerosene
- subsidized petrol, diesel costing approximately 1.3 lakh crore rupees last year
- subsidized work culture since government employees need not be afraid of being fired for not meeting work standards
- farm subsidies including no taxation on agricultural income, free electricity, government regulated fertilizer prices, free power and guess what - free money in the form of loan waivers
- subsidized/free healthcare at government hospitals
- subsidies in form of ailing and loss making government companies

At first glance our government comes across as very noble and seemingly the state of the poor people should be alleviated with all this. Then why have these long drawn policies not led to substantial reduction in our poverty rate? Infact when Nehru was absolutely pro-poor(to the extent of being anti-rich) our growth rate was at its lowest. What are the reasons for this anti-thesis? While many posts can be written on the reasons, I will start with the most basic ones:

• any robust economy is driven my a minority of the population. This means that in a country of 1+ billion people you cannot expect 70% of the people to be rich/middle class. Whenever the crest of growth of a country is reached, the consumption flattens and leads to deflation - many European countries and Japan is a good example of this. Currently only 3% of the Indian population pays their taxes. Government should try to increase their tax net to 10-20% over next 5 years. And it is this 10-20% which will be driver of the economy creating enough consumption demand to help alleviate poverty of the rest.
  

Lesson: stop throwing more good money behind bad money. Instead start new projects which pays for services _in lieu_ for something atleast.

• Huge GDP deficits: Insane government spending mostly in form of subsidies causes large GDP deficits. This means that country has spent more money than it has. Every government _raises_ such money by issuing bonds which are bought by banks, other governments, etc. The more your GDP deficit, the more interest you need to pay because your credit rating gets lowered due to heavy borrowing. This increases governments cost of expenditure and slows down growth in the long term.

• "false demand": I would stick my neck out and say that if we had lower subsidies we would be much less affected by the current economic crisis. Reason? Any economic cycle consists of cyclical booms and busts. Important thing is to throttle growth when it is driven by credit money. While the international fuel prices were going through the roof, demand in India wad at its peak because prices here were unaffected. Then suddenly the government realized that country's economy will crumble if we keep subsidizing oil and hence the prices were increased suddenly. This jolts the economy. If prices are decided by market fluctuations then demand also gets throttled at the right time. This way while growth may be slower, it lasts longer and we certainly would not need to see 50% stock market drop in 6 months.

• Giving freebies _for a lifetime_ sets a bad habit among the population. What is being implicitly said here is that if you are ready to accept a poor life we will feed you and keep you alive. We want to empower people, provide them with skills or education and until such time that they are learning you can shower them with freebies but please not forever.