Debating India

Spending isn’t shining

Friday 17 February 2006, by DEBROY*Bibek

Budget 2006: Hard to tell why we are doing well. Easy to start doing badly Bibek Debroy How is the economy doing? Pretty well. We have clocked real GDP growth of 8.5 per cent in 2003-04, 7.5 per cent in 2004-05 and perhaps 8.1 per cent in 2005-06.

This is a far cry from the mindset that believed the Tenth Plan (2002-07) target of 8 per cent was unattainable as also the NCMP’s (National Common Minimum Programme) target of 7 to 8 per cent. India is shining, even if the UPA hates that expression and even if there are some concerns about the current account deficit, global oil prices and hardening of interest rates. Why are we doing well? Probably no one knows. But here are some speculative propositions.

One, the Indian economy is less insulated now than between 1994-95 and 1996-97, when three successive years of 7 per cent-plus growth didn’t last. There is more import and FDI competition and Indian enterprise is more competitive. Two, investment decisions are more rational and many investments are financed through internal accruals. Three, inflation rates are lower. Four, the fiscal deficit is lower. The Centre plus state fiscal deficit is slightly over 7 per cent of GDP, not the 10 per cent commonly cited. Five, the savings rate is 28.1 per cent (2003-04) and will increase because of income and demographic effects. Six, lack of reforms at the Centre blinds us to the reforms happening in states. Seven, changes in sectoral composition of GDP add to growth. Eight, with a median age of 24, young India unshackles entrepreneurship in ways we don’t understand yet.

Within this India Shining, there is India Whining. That is the Left lament. Not quite true. We still have hard all-India poverty ratios only for 1999-2000. Beyond that, we don’t have large NSS (National Sample Survey) results. For 1999-2000, we have an all-India poverty ratio of 26.1 per cent and hypotheses about declining employment trends are also based on data for 1993-94 to 1999-2000. Later this year, we should have NSS data for 2004-05. Once that happens, one shouldn’t be surprised if the poverty ratio drops to 20 per cent and the employment trend is also reversed.

There is an absolute and a relative angle to all segments of society not gaining and the two are distinct. There are indeed warts in the distribution of trickle-down benefits of growth, but it will be difficult to generalise and argue that there haven’t been absolute improvements, even in rural areas. The interpretation of the 2004 election results as India Shining and Bharat Whining is incorrect. Given what has been happening in India since 1991, the rural/urban dichotomy doesn’t make sense. Two-thirds of consumer purchases and two-thirds of the filthy rich are in rural areas and this makes the case for taxing agricultural (and non-agricultural) income of rural households stronger. Poor farmers will be below the threshold. Deprivation is better understood geographically, not in rural/urban terms.

The conventional BIMARU (Bihar, Madhya Pradesh, Rajasthan, Uttar Pradesh) identification of backward states (in their undivided form) is also no longer tenable. Backward districts are a better idea. About 100 of India’s 600 districts are truly backward by any objective criterion. The National Rural Employment Guarantee Act has 200 identified districts, and this identification is somewhat arbitrary. You don’t quite know why some of these districts got included, except for political reasons. Alternatively, around 125,000 of India’s 600,000 villages are truly backward. What does one do about these backward areas? That’s a separate question. But to get back to the point, even in these backward states, districts or villages, it will be difficult to establish that there have been no absolute improvements. However, in relative terms, the improvements haven’t been proportionate to improvements elsewhere in society and this feeds the perception that some of India has been bypassed in the growth process. Incidentally, NSS data between 1993-94 and 1999-2000 don’t show any worsening in the distribution of personal incomes, though this is data on expenditure rather than income.

What have these developments got to do with the budget? Very little. The FM may pat himself on the back, in the course of the budget speech, for the GDP growth figures, but this 8 per cent trend has little to do with North Block and its policies. In fact, it has little to do with Central government policies. Government policies still have a lot to do with jacking up trend growth to 10 per cent, or dropping it to 6.5 per cent. At the core of the debate is the question of what we expect the government to do.

The government’s chief role should be to create a facilitating environment for growth, through ensuring rule of law and property rights and a stable tax and regulatory regime for increasing saving and investment rates, domestic and foreign. This includes competition, domestic and foreign. This government seems to be doing its best to prevent competition, the post offices being the latest example. What the government should not be doing is to introduce cesses with doubtful efficiency of public expenditure or increase EPF rates or announce a Sixth Pay Commission. Twenty million government employees don’t drive the economy; the 380 million who work outside the government do. It can be argued there is a role for government in providing physical and social infrastructure in areas where there is market failure and this is what the National Rural Employment Guarantee Act and Bharat Nirman will achieve. Had public expenditure been the answer, 100 districts or 125,000 villages would still have not remained backward. Indeed, the evidence of market failure is itself suspect. Today, most children, including poor children, are enrolled in schools (except Bihar, Jharkhand and Nagaland), not because of the Sarva Shiksha Abhiyan, but because of the spread of private sector provisioning. And because of the licensing raj that remains in school education, NIEPA (National Institute of Educational Planning and Administration) studies find that 25-30 per cent of schools in some states are unrecognised.

Given the NCMP and this government’s coalition structure, one didn’t expect privatisation or changes in Chapter V-B of the Industrial Disputes Act. But one did expect greater efficiency, accountability and transparency of public expenditure, on which nothing has happened except the Right to Information Act. The UPA may well convert India Shining to India Whining again.

The writer is secretary-general, PHDCCI

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