India living beyond means (May 3, 2009)

By Swapan Dasgupta

For the past 10 days or so, political circles in Delhi have been reporting the abrupt emergence of two new issues in the election campaign: the steep rise in school fees and the jump in the retail price of sugar. In short, what began as a lofty campaign on the leadership qualities of Manmohan Singh and L.K. Advani, the future potential of Rahul Gandhi and Narendra Modi and other personality driven issues, has in the final laps finally acquired a bread and butter focus—at least in the National Capital Region. Willy-nilly, these issues, which Kapil Sibal insists must not be politicised, have finally driven home the importance of the economy in future calculations of governance.

A small clarification may be in order. At one level the haunting fear of job losses and pay cuts –a reality in some sectors of the economy—has been agitating urban and suburban India for some time. Predictably, the ruling party didn’t want to focus on this facet of what they projected as India’s success story under an economist PM. But the Opposition also failed to capitalise on these fears—not least because the complexities of a slowdown weren’t sufficiently understood in the rush to promise development. The result was that the campaign lost its way in issues which, while of interest to those who think nationally, weren’t immediately apparent to those who judge politics through the prism of personal experiences.

The furore over school fee has, in a sense, highlighted the unreal assumptions of a political class which continues to act on the assumption that India’s growth story is uninterrupted. The generous pay increases awarded to government and deemed government employees by the 6^th Pay Commission was a factor behind the Congress success in the Delhi Assembly election last year. Unfortunately for the Congress, the resulting hike in the salaries of school teachers has prompted school authorities in the private sector to pass on the extra burden to the students and parents. Apart from the Rs 6,000 or so one-off payment that schools have asked from parents to cover salary arrears of teachers, private schools have raised fees for the next academic year.

The additional burden may not matter so much to government servants who are beneficiaries of the 6^th Pay Commission but has made life hellish for those employed in the private sector. The non-governmental sector has been the worst hit by the fall in growth rates from 8 per cent to below 4 per cent. Many private sector employees have experienced pay cuts of 20 per cent and some have lost their jobs. To this section, it is inexplicable that the government has rewarded its own employees handsomely while penalising those taxpayers who contribute to the government coffers. People don’t mind others doing well but they resent it if the burden of betterment has to be borne by only one section.

The iniquitous nature of this private sector-public sector divide can’t become a subject of political discourse because all politicians need the support of organised government employees. But civil society isn’t so inhibited, particularly since the public sector no longer occupies the “commanding heights” of the economy. They see the government as the problem rather than the solution.

The school fees issue is a foretaste of the problems the next government will have to confront. India’s fiscal deficit has touched something close to 10 per cent of the GDP—a level that international rating agencies find “unacceptable”. This is coupled by a mounting public debt which has touched nearly 80 per cent of the GDP. The bulk of this debt is the result of reckless government borrowing, particularly in the past five years. There are also reports that tax collections for the preceding financial year are down by nearly Rs 20,000 crore.

In this situation, the political temptation is to do either of two things: to continue borrowing recklessly till the point stage when the IMF has to intervene with a national bail-out package riddled with conditionalities; and to increases taxes to lessen the deficit, especially if the economy isn’t growing at the 8 per cent rate the PM has put his faith in. It is interesting that Britain, whose public finances are akin to India’s has raised the highest slab of taxation to 50 per cent and is considering approaching the IMF for assistance since there are few takers for fresh loans to the government.

Like in Britain, politicians in India are unwilling to consider another option: the sharp reduction of public expenditure. In an environment where every budgetary increase in support to government programmes is greeted by the thumping of desks in Parliament, the idea of cuts in public expenditure is anathema. Those who argue for less subsidies and an end to the profligate tax-and-spend culture are regarded as anti-development and dubbed reactionaries. In today’s intellectual climate it has also become fashionable to believe that Keynes is the resurrected guru. This also explains why there is scant regard for efficiency and accountability in government expenditure. The state can merrily spend Rs 200 crore and more in a wasteful advertising campaign and there are no eyebrows raised when evidence piles up about the leakages in the NREG programme.

The horrible truth that no one wants to confront is that India is living generously beyond its means. The country isn’t taking into account the fact that we can no longer afford to not put restrictions on the quantum of public spending and to monitor its efficacy. The school fees issue is a small pointer to the type of problems we are likely to confront if the political class continues to live in denial of a horrible economic crisis.

Sunday Pioneer, May 3, 3009