Dr Bharat Jhunjhunwala
The immediate cause of the growth rate declining to mere five per cent is less investment. However, this is not an unexpected happening. It is a logical result of the development model espoused by Manmohan Singh.
The model is to first deprive the people of jobs by providing free run to big companies; then imposing taxes on these same companies and use that revenue to buy votes. The UPA won the last elections on the back of NREGA and loan waiver. Strategy for the 2014 elections is to buy votes through cash transfers. I favour cash transfers instead of in-kind subsidies. That said in either case government revenues have to be used for doles.
These expenditures have multiple ramifications. One, they edge out public investment. Two, the Government has to impose higher taxes on businesses to garner revenues. Note that UPA has consistently made efforts to raise the GDP-tax ratio. This leads to decline in business sentiments as is seen due to the Vodafone tax demand and the outcry against GAAR. Companies have fewer surpluses left with them for investments. Three, the Government has to borrow larger amounts from the market to fund these expenditures. This has led to hardening of interest rates and again hits at private investment. Four, the Government has tried to push the disinvestment programme. That is like selling the family silver for consumption purposes. All these policies stem from the idea that one can secure people’s good by first depriving them of their jobs and then providing them with doles.
This model has been espoused successfully by Western countries and pushed by economists like Amartya Sen. But the circumstances of the West and India are fundamentally different on one crucial parameter—GDP per beneficiary. The GDP of the United States in 2009 was USD 13,800 billion. The population was 320 million. Assuming 50 per cent welfare beneficiaries, welfare recipients would be about 64 million. The GDP per beneficiary would be about USD 86,000. The corresponding figures for India are GDP at USD 1,231 billion, population at 1.19 billion and 90 per cent welfare beneficiaries. I take this high figure for beneficiaries because almost every citizen receives some subsidy on diesel, fertilizers, food, health and education. The GDP per beneficiary works out to USD 1,100. The US figure is about 80 times that of India. Indeed the level of beneficiary payment is lesser in India than in the US. Yet there is a qualitative difference in the GDP per beneficiary in the two countries. The US circumstance is like taking water from a huge lake and supplying to 500 persons. The Indian circumstance is like taking water from a dug well and supplying to 5,000 persons. The well has to but go dry.
This is not to deny that the US is as much troubled with the welfare payments. These make for more than one-half of Federal Government expenditures. But do not forget that the US is facing low growth rates for many years. India cannot afford to follow the US model for two reasons: the GDP per beneficiary is low and compulsions for high growth are pressing.
We are saddled with Man Mohan’s another policy misdirection. The Government is providing free run to big businesses to ruin the common man and petty businessman. The huge handloom industry has been wiped out. FDI has been allowed in retail trade. These policies are leading to more unemployment. Forced land acquisition and easier environment- and forest clearances are adding to the pain. They may be good for industrial development but certainly not good for the affected people. The proposed Goods and Services Tax does not help. The imposition of one single rate of tax on the bicycle consumed by the poor and the Mercedes car consumed by the rich is certainly not pro-people even if it is pro-growth. These policies are adding to the pain of the common man and to burden on the welfare system. Man Mohan Singh should have taken the lesson from the US troubles with the welfare expenditures to cut them and find alternative ways of securing people’s welfare. Instead he is trying to implement those very policies with a greater gusto in circumstances that are much adverse.
Demands raised by the Indian businessmen for reviving the economy have to be assessed in this backdrop. First demand is that land acquisition and environment and forest clearances should be made easy; and GST implemented speedily. Indeed these will help raising investment but, as shown above, they will also add to the burden of welfare expenditures and higher taxation. The net impact on businesses is not likely to be very positive. Second demand is that rates of taxes should be reduced. In particular Minimum Alternative Tax should be applied restrictively and not to infrastructure. GAAR should be kept on hold. It is simply not possible for the Government to do this in view of its need to raise revenues. Third demand is for lower interest rates. This again is not possible in view of the burgeoning fiscal deficit incurred, largely, for buying votes. These propositions cannot help us attain high rates of growth because the welfare burden will continue to increase. I daresay Man Mohan Singh and his team of economists do not have a solution to this problem at all. They do not factor in the negative impact of the so-called pro-growth policies on people and consequently on the increased demand on the welfare system.
My suggestion is to put in place targeted restrictions on businesses for employment generation. Technologies that add small amounts to production but kill large number of jobs should be banned. Examples would be that of harvesters, excavators, bottled soft drinks and power looms. This would spontaneously create a large number of jobs, reduce the burden on welfare programmes and lead to lower rate of taxes being imposed on the businesses. Indeed there will be loss to businesses in these selected sectors but I reckon restrictions will have to be imposed only on few businesses.
Second suggestion is to move from unemployment to employment subsidies. Welfare programmes such as MNREGA and Indira Awas that aim to increase consumption directly should be replaced with employment subsidies. The Government should come up with a scheme to give tax relief and even subsidies to businesses having a high number of workers per rupee of value added. Simultaneously labour laws should be simplified. This will provide encouragement to businesses to employ larger numbers of workers in productive activities.
Third suggestion is to improve the quality of government expenditures. The present audit system has utterly failed. A system of external public audit is required. Public hearings should be done regarding the efficiency of senior government officials including the IAS and IPS. Suggestions like GST, lower taxes and interest rates are out of sync with the ground reality.