Saturday, June 05, 2010

Growth for some, handout for many (June 6, 2010)

Swapan Dasgupta

If economic indicators are any indication, India is a success story in an otherwise turbulent world. The Finance Minister has revealed that the GDP rose by 7.4 per cent in 2009-10 and, touch wood, will grow by another 8.5 per cent in this fiscal year. At a time when advanced capitalist countries are struggling to register a simple positive growth and there are concerns over the viability of the Euro, India seems a very good news story.

On such an occasion, it is bad form to be a party pooper and not least because the constituency for pessimism is forever shrinking. Yet, it is instructive to note that the judgments of economists tend to be increasingly short-lived. Some of us may recall that barely a year ago, just after the collapse of Goldman Sachs in the US and Northern Rock in Britain, the pundits recommended a return to old-fashioned Keynesian economics to salvage the world economy. The former British Prime Minister Gordon Brown imagined that a beleaguered Britain could spend its way out of the crisis. So for that matter did the other economist Prime Minister Manmohan Singh. He undertook a massive campaign of public expenditure, including Rs 70,000 crore of loan waiver to farmers and huge pay hikes for Central Government employees, just prior to his successful re-election campaign. Last July’s post-election Budget continued this trend and public expenditure rose by nearly 36 per cent.

The flip side of this spendthrift economics was the alarming rise in the fiscal deficit to 6.8 per cent of the GDP. In plain language it meant that the Government was spending far in excess of what it was earning and was approaching a stage when it would be approaching a debt crisis. This is precisely what happened to Greece earlier this year and what could have happened to Britain had Labour been re-elected last month. Fortunately, Finance Minister Pranab Mukherjee is not completely sold on populism and public expenditure rose by just 8.6 per cent in 2010-11 and the fiscal deficit was brought down to below six per cent. If the money earned from the 3G auction starts flowing into the treasury, the fiscal deficit will be around five per cent — a position that is moderately acceptable.

Whether it is the growing comfort level of public finances or extraneous political considerations that determined the timing of the re-establishment of the National Advisory Council is not known. But last week, and after the Prime Minister’s reiteration that the Sonia Gandhi-headed NAC is “not a super Cabinet but an advisory body”, 14 members of India’s version of the Star Chamber were appointed.

If the NAC is merely an “advisory body”, it is of little concern to the wider public who the UPA chairperson chooses to advise her. However, the choice of advisers (which is quite distinct from an expert body) is a commentary on a leader’s priorities and inclinations. The composition of this NAC is revealing. It is dominated by individuals who have experience of working with either Non-Governmental Organisations or multilateral donor bodies. In other words, its collective expertise lies in spending other people’s money. True, there are a couple of individuals who are familiar with productive wealth generation but it would hardly be unfair to suggest that their place in the NAC is not on account of their contributions to industry.

If the philosophy of Manmohan Singh is ‘inclusive growth’, the defining mantra of the NAC is inclusive spending. The implications of such an NAC are ominous. They suggest that profligate public expenditure in the form of ambitious, mega schemes run by an ever-expanding state is likely to be the signature tune of the UPA-2 Government. The money paid in taxes by the productive sectors of India is going to be expended on welfare schemes, aimed at nurturing a vote bank.

Reckless spending to bolster the image of a Lady Bountiful could have been tolerated had India been in a position to afford large charitable handouts. Unfortunately, there is no reason to be complacent. The total fiscal deficit (the Central Government plus the states) is nearly 10 per cent of the GDP. This means that the Government is borrowing huge sums of money each year, driving interest rates high, fuelling inflation and making it difficult for productive India to have access to plentiful and cheap credit.

It may be argued that this is not as bad as it appears since manufacturing grew by 9.3 per cent last year and services by 8.5 per cent. By contrast, agriculture, which still sustains some 60 per cent of the population, struggled to experience a 0.2 per cent growth.

However, it is recognised that the growth in manufacturing and services was achieved despite inadequate infrastructure. Compared to the requirements for sustained, robust growth, India has been deficient in its infrastructure investments. It has instead put too many eggs in the basket of short-term relief such as the non-asset building NREGS. Worse, these populist programmes suffer from enormous leakages and don’t necessarily provide a life jacket to those who need it the most.

The point is that India has enough welfare schemes and enough money allotted to them for the NAC to think about more innovative ways to spend more money. There is a need to consolidate existing programmes, tighten their efficiency guidelines and ensure that there are tangible assets created.

The inclination is to view programmes such as the NREGS as permanent monuments to politicians. Instead, it would be more satisfying if there is target by when the NREGS is no longer necessary because people have found productive, better paid employment all through the year. The money can then be better utilised in health care, education and providing old age pension to the needy.

A responsible approach to welfare implies that the NAC should be working for its own, time-bound dissolution.

Sunday Pioneer, June 6, 2010

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