The only two changes subsequently are, defence expenditure
shot up significantly in recent years, and wage expenditure
of both the Union and State increased greatly with the acceptance
of Fifth Pay Commission recommendations. Economists, analysts
and politicians owe it to the country to evolve mechanisms
to break this logjam.
there are realistic and effective options still available.
But we need courage and skill to exercise them and achieve
tangible results. Let us take subsidies as an example. For
fiscal 2002-03, major union subsidies account for Rs 37,392
crore. Food subsidy alone will cross Rs 21,200 crore. Power
subsidies and losses (which will eventually be subsidized)
in States will probably account for Rs 40,000 crore. And
there are other subsidies in States too. Is there a way
of reducing these subsidies, retargeting them without inviting
massive social unrest and political opposition?
it is not easy. Desubsidization anywhere in the world has
always been painful, and politically risky. The peanut quotas
and resultant subsidies increase the price of peanut butter
in the US significantly. And yet, these quotas withstood
Reagonomics and Gingrich revolution. The rise of Solidarity
in Poland is linked in no small measure to the rising food
prices from 1970 onwards, eventually precipitating the collapse
of communism in Eastern Europe. The sudden increase in the
administered prices of food in December '70 led to riots
in the Baltic cities of Gdansk, Gdynia and Szczecin, and
Gomulka was ousted from power. His successor, Edward Gierek
had to again raise food prices in 1976, leading to violent
strikes in Warsaw and Radom. Fresh price rises in 1980 touched
off nation wide strikes, and that was when solidarity was
created at the Lenin Shipyard, Gdansk under Lech Walesa's
leadership as an independent, self managing trade union.
The rest is history.
there are ways of reducing subsidies in a politically acceptable
way. Let us suppose the administration of food subsidy (the
consumer part of it) is transferred to local governments.
We can actually quantify the amount of subsidy based on
the food grain offtake and price differential at the local
level. Then the Union or State can ask the local government
to retarget the subsidies to reach the deserving poor and
cut down on leakages. This will work if the subsidy amount
so saved is made available to the local government for other
desirable activities, say infrastructure building or social
expenditure. Once local government is assured of additional
resources based on performance (cut in subsidies), it will
have an incentive to reduce subsidies and unlock these resources.
The money saved can thus be used for schools, drains, water
supply, roads, health centres and sanitation. Since there
is a clear link between subsidy reduction and alternative
public goods and services, a powerful local constitutency
will be built favouring reduction in subsidies. In centralized
administration, there are only losers in subsidy reduction,
and no corresponding gainers. But once it is decentralized,
and savings are alternatively deployed, the same family
which loses a subsidy will gain directly through better
public goods and services. Or there will be as many or more
gainers as losers. We will then have achieved two objectives.
Subsidies would be reduced, and expenditure is directed
towards more desirable goals. This principle can be applied
to several subsidies - food, agricultural power, irrigation
key to desubsidization is creating alternative stake-holders
or alternative stakes at the local level. This is possible
only when we are willing to go outside the box, and redesign
institutions. A centraized democracy cannot exercise painful
options, because people perceive all pain and no gain. If
the taxes raised or resources saved are perceived to go
to a centralized, callous administration, or to fill the
huge hole called fiscal deficit, then people are unlikely
to accept desubsidization calmly. What appears to be a criminal
waste for an economist or administrator is often the real
income which sustains a poor family. When a family has to
make do with reduced income, it makes choices willingly
because all members know where the money is going. It is
easier to accept privation if you have alternative gain,
or if your loved ones get something in return. This applies
to individuals, families, and societies as well.
to apply these lessons, we need to redesign the Indian state
and reinvent the citizen-centered government based on the
principle of subsidiarity. Our fiscal crisis and governance
crisis are inseparable, and need to be addressed together.