This is a very important topic, so to answer many of these points from the canon of modern economics:
1. Price floors are net harms to economies. Overall growth and employment is reduced at the expense of artificially bolstering the farming industry, which otherwise would be seeing necessary cuts in jobs and profit margins. Re: American New Deal farm subsidies and Japanese rice subsidies.
2. Oversupplies are offset when the market is fully private, because the price mechanism is a consideration for all participants, not just those who are too rich to qualify for the public distribution system. As a result, Purchasing increases as prices decrease, which India doesn't like allowing.
4. Subsidies and freebies exist on the same continuum; when they mean that the government is paying for some portion of the price of a good, they create price floor pressures. Price floors create surpluses [1]. As a result, you have supply exceeding demand, and the country suffers as too much labor is put into producing the oversupply.
It can be debated all day whether social welfare systems are good or bad, but they are undoubtedly more effective when they support people in very broad ways (such as welfare providing money) rather than narrow ways (such as subsidized food) since the market distortion is more acute when individual industries are subsidized: prices, supply and employment are both distorted. It is natural for countries to reduce the proportion of their population that farms as they grow, and so it's an immediate consequence of that that many farmers need to be allowed to be unprofitable in their farming, so only the most efficient are left.
It is incredibly important that the market be allowed to do its work. Prices need to be allowed to go below the point of profitability for many producers such as farmers, because the industries otherwise become overstaffed and create surpluses, which is a far greater harm in the long run. The same for other employment systems, such as the NREGA you mentioned.
There exists a tradeoff between economic growth and how much the government forces employment over its natural level. If you look at [2], and replace the y axis with "Economic Growth level" and replace the x axis with "forced employment above natural equilibrium", you'll find that policies like NREGA are working to push India closer to point C than B. The same tradeoff curve exists for farming profit margins versus food distribution efficiency, and many other things.
But this is an excellent economic case, and it goes to show why well-meaning policies that seek to guarantee the welfare of the few that are most disadvantaged end up creating an overall worse effect--they cannot solve problems, they can only redistribute them across the rest of the economy. A population segment that is producing €1 billion under their GDP potential can be uplifted, and produce at that maximum potential, but at the expense of €2 billion of economic harm done to the rest of the economy. The net result is that overall, the country goes nowhere with its efforts to reduce poverty and create growth. So India's public distribution system may feed a million people, but only at the expense of a massive economic inefficiency, perhaps of the size that could have fed 2 million, or more. The net result is that everyone ends up a little hungrier and a little poorer than they would have otherwise been; and to now return to Kamaal's point, we can now see why these freebies and subsidies cause problems in the first place. They create the very poverty they were designed to solve.
The ultimate hallmark of market economics is the recognition that the few can only be saved at the expense of the many. It is only economic and technological growth that ultimately moved entire nation's populations completely above poverty lines, and so all efforts that take away from economic growth to instead give to subsidies and forced overemployment or price floors are also efforts that stop countries from ever moving past those poverty issues in the first place. So saving the few at the expense of the many, over time, undermines your ability to save anyone at all; and countries slide into despair, as those nations that tried the hardest to support the few in theory (such as communist economies) severely underpreform in comparison to free market economies, and eventually disintegrate. India is fortunate to be free enough to avoid that backslide, but it could solve its problems much faster if it were to look to market economics, and allow its problems to solve themselves.
I agree it distorts the market. The theory is sound, and also known. The PM and the FMs definitely know.
In practical terms though, when enforcement and justice dispersal is weak, the best business model is theft.
The point raised, doesn't address/account for the trust deficits, weak enforcement abilities, and uneven power structures which already distort market forces.
On top of that though, you do have social structure and ideologies that are hesitant to embrace full fledged market ideologies.
the politics ofmthe country can currently accept only incremental change.
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All in all, the lesson you mention has been learnt, you are watching its implementation. Being carried out, at a rate which doesn't tear a country apart, while members of government actively oppose them.
With government interventions I usually base my reasoning on these facts:
Income inequality is known to lower growth, and the development of industrial economies occurs concurrent with the growth of the middle class. The oft-praised Scandinavian economies are extensively socialized. However, it's also known that subsidies, benefits, etc. can create harmful disincentives and lower productivity.
So to whatever degree that markets are effective, socialist policies can add benefit within a certain kind of mix that lowers inequality without destroying productivity. And I agree that this doesn't translate directly to subsidies or targeted programs. These kinds of interventions are a powerful tool, but they need to work with the market incentives, not against them. That was the mistake of the Communist concept.
Modern thinking in this realm tends to look towards concepts like basic guaranteed income - instead of affecting firms(which, as we already know, will optimize emotionlessly, ignoring negative externalities) these concepts ultimately rely on the ambitions of the most motivated individuals outweighing the downsides of potential freeloading.
1. Price floors are net harms to economies. Overall growth and employment is reduced at the expense of artificially bolstering the farming industry, which otherwise would be seeing necessary cuts in jobs and profit margins. Re: American New Deal farm subsidies and Japanese rice subsidies.
2. Oversupplies are offset when the market is fully private, because the price mechanism is a consideration for all participants, not just those who are too rich to qualify for the public distribution system. As a result, Purchasing increases as prices decrease, which India doesn't like allowing.
4. Subsidies and freebies exist on the same continuum; when they mean that the government is paying for some portion of the price of a good, they create price floor pressures. Price floors create surpluses [1]. As a result, you have supply exceeding demand, and the country suffers as too much labor is put into producing the oversupply.
[1] http://upload.wikimedia.org/wikipedia/en/thumb/e/e9/Surplus_...
It can be debated all day whether social welfare systems are good or bad, but they are undoubtedly more effective when they support people in very broad ways (such as welfare providing money) rather than narrow ways (such as subsidized food) since the market distortion is more acute when individual industries are subsidized: prices, supply and employment are both distorted. It is natural for countries to reduce the proportion of their population that farms as they grow, and so it's an immediate consequence of that that many farmers need to be allowed to be unprofitable in their farming, so only the most efficient are left.
It is incredibly important that the market be allowed to do its work. Prices need to be allowed to go below the point of profitability for many producers such as farmers, because the industries otherwise become overstaffed and create surpluses, which is a far greater harm in the long run. The same for other employment systems, such as the NREGA you mentioned.
There exists a tradeoff between economic growth and how much the government forces employment over its natural level. If you look at [2], and replace the y axis with "Economic Growth level" and replace the x axis with "forced employment above natural equilibrium", you'll find that policies like NREGA are working to push India closer to point C than B. The same tradeoff curve exists for farming profit margins versus food distribution efficiency, and many other things.
[2]http://en.wikipedia.org/wiki/File:Production_Possibilities_F...
But this is an excellent economic case, and it goes to show why well-meaning policies that seek to guarantee the welfare of the few that are most disadvantaged end up creating an overall worse effect--they cannot solve problems, they can only redistribute them across the rest of the economy. A population segment that is producing €1 billion under their GDP potential can be uplifted, and produce at that maximum potential, but at the expense of €2 billion of economic harm done to the rest of the economy. The net result is that overall, the country goes nowhere with its efforts to reduce poverty and create growth. So India's public distribution system may feed a million people, but only at the expense of a massive economic inefficiency, perhaps of the size that could have fed 2 million, or more. The net result is that everyone ends up a little hungrier and a little poorer than they would have otherwise been; and to now return to Kamaal's point, we can now see why these freebies and subsidies cause problems in the first place. They create the very poverty they were designed to solve.
The ultimate hallmark of market economics is the recognition that the few can only be saved at the expense of the many. It is only economic and technological growth that ultimately moved entire nation's populations completely above poverty lines, and so all efforts that take away from economic growth to instead give to subsidies and forced overemployment or price floors are also efforts that stop countries from ever moving past those poverty issues in the first place. So saving the few at the expense of the many, over time, undermines your ability to save anyone at all; and countries slide into despair, as those nations that tried the hardest to support the few in theory (such as communist economies) severely underpreform in comparison to free market economies, and eventually disintegrate. India is fortunate to be free enough to avoid that backslide, but it could solve its problems much faster if it were to look to market economics, and allow its problems to solve themselves.