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National
Coordinator of
Lok Satta movement and
National Campaign for Politicall Reforms
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Rural economy
and resource mobilisation
(November
19, 2004)
Most economists across the
world generally agree that India can grow faster if only certain
impediments to prosperity are removed. India's growth at a
reasonable 6-7% per annum, and being the world's fourth largest
economy in purchasing power parity terms testify Indian entrepreneurial
energies and ambition of the ordinary citizens. True, China
continues its scorching pace of growth, but there is every
reason to believe that we have the potential to match China's
growth in the coming years.
Yet, our growth potential,
due to many political and social causes, remains unfulfilled.
But let us focus on the resource crunch holding rural economy
back, overcoming which can accelerate growth. The verdict
of 2004 Lok Sabha election is primarily the result of the
anguish of rural India and its desire to join the growth process.
Irrigation, watershed development, roads, power, productivity,
value addition, storage, marketing and non-farm job creation
- all are crying for urgent attention. The National Water
Commission estimates that about Rs.100,000 crores is required
to complete the 444 on-going projects and create 21 million
hectares of new irrigation potential. Similarly, 75.70 million
hectares of degraded or drought-prone land needs investment
in soil and water conservation measures. Rural roads, improved
power distribution, better application of post-harvesting
technologies and modern marketing infrastructure - all need
huge investments.
All these are state subjects,
but states are strapped for resources. Their tax revenues
are barely sufficient to pay wage bills. Pension burden is
mounting, and within a decade, in most states pension payments
are likely to exceed wages for current employees. The selective,
hasty and unconditional approval of the huge wage increases
recommended by the Fifth Pay Commission in 1997 had devastating
consequences on states' finances.
Short-term populism and political
compulsions in states, such as power subsidies and incapacity
to raise taxes, have aggravated the situation. There are only
three measures to raise resources without increasing deficits
- wage reduction, de-subsidization, and raising taxes, fees
and user-charges. If all these steps become politically infeasible,
we reach a dead end. Low investment, poor infrastructure,
inadequate human development, absence of value-addition, inability
to create jobs, endemic poverty, rising strife and violence,
political instability and economic stagnation - all these
constitute a vicious cycle in which many states and regions
are trapped. What is happening in Bihar, Jharkhand, Eastern
UP, Telangana and Rayalaseema of AP, Vidarbha, and several
other pockets of India is not accidental. And if we do not
earnestly address the challenges of investments, economic
growth, sensible governance, and rule of law in these regions,
we would have proved the prophets of doom and advocates of
undemocratic solutions right.
Happily, there are practical,
democratic, acceptable, relatively painless ways of getting
out of the vicious cycle of poverty, unrest and violence.
Let us examine three possible approaches to raising resources
while reducing fiscal deficits: reducing subsidies; raising
taxes, tariffs and user-charges; rescheduling debts and utilizing
foreign exchange reserves; and properly directing union allocations.
Subsidy reduction is always
a painful exercise even in totalitarian regimes. The food
riots resulting from increased prices in Poland in the early
1980s eventually led to the rise of Solidarity under Lech
Walesa, and sowed the seeds of collapse of the Soviet empire
and communist regimes. Yet, unproductive subsidies absorb
resources from more critical areas of investment, and retard
growth. Food, fertilizer, and power subsidies together account
for nearly Rs.75,000 crores in India today. In the name of
food subsidies, the corruption and inefficiency of state agencies
are rewarded. A substantial reduction of this subsidy and
dismantling of the FCI and the regulatory regime will also
release vast resources. Where necessary, price support for
farmers can be provided by innovative mechanisms, and domestic
price level can be maintained by judicious application of
import tariffs, and liberal exports. Similarly, fertilizer
subsidies are a euphemism for freebies to inefficient industry.
Moreover, subsidy on urea is leading to excessive use of nitrogen,
at the cost of productivity. Removal of urea subsidy, and
allowing duty-free import of fertilizers will have the twin
advantage of saving precious public money, and containing
input prices. Power subsidies are complex, and have been discussed
earlier (Financial Express Oct 22, '04). The trick here lies
in metering of power, graded tariffs and well-targeted subsidies
to discourage overuse of power and precious ground water,
and decentralized management of distribution through franchises
at sub-station level. The savings on account of de-subsidization
must then be transferred to local governments for specific
infrastructure investments. Once people see direct and alternative
benefit at the local level de-subsidization becomes politically
feasible.
Raising taxes is always difficult.
A primary reason for George Bush's re-election is his tax
cuts. All economists agree that our low tax, GDP ratio will
not permit either sizeable investments or reduction of fiscal
deficits. The only acceptable and relatively painless way
of raising resources is taxation linked to specific services
and projects, like the education cess imposed recently. The
more local the taxes are, the easier it is to establish such
a link. And the stronger the link, the more willing is the
citizen to pay. In US, citizens who hate to pay federal income
tax gladly shell out vast sums towards education tax in their
local school districts. Similar principle can be applied to
healthcare. Local taxes and user fees can be raised in a variety
of areas provided the money goes directly to improve the services.
Such an approach has the added advantage of generating demand
for better services. Such innovative resource mobilization
involves empowerment of stakeholders and local governments,
along with creation of institutions to enforce fiscal responsibility
and accountability. Politicians and bureaucrats should realize
that empowering local governments strengthens - not weakens
- state governments.
Finally, the union is planning
to implement some form of employment guarantee scheme, and
provide additional resources for education and healthcare,
which does not guarantee outcomes. Employment guarantee funds
should be linked substantially with soil and water conservation
schemes. By definition, such watershed schemes help poorer
and drier areas. Allocations in social sector must be contingent
upon restructuring and improvement of delivery systems. In
many cities, the public expenditure in schools is of the order
of Rs.15, 000 per child per annum, and is at par with fees
charged by reputed private schools. Yet, the results are appalling
because of poor delivery system, lack of innovation and accountability.
The union government needs
to evolve a holistic approach to overcome fiscal and political
constraints and leverage its strengths in raising resources
and getting good value for the money spent to accelerate rural
growth.
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