II
At this moment there are over 32 million tonnes of foodgrain
stocks in the economy. Since 20 million tonnes of foodgrain stocks are considered
adequate by the government (for this time of the year) as buffer-cum-operational
stocks, it follows that at least 12 million tonnes of surplus stocks are
lying idle with the Food Corporation of India. The existence of idle stocks
of foodgrains in a country afflicted by large-scale poverty and malnutrition,
is so palpably absurd that there have been proposals from time to time within
the government itself to get rid of these stocks by putting purchasing power
in the hands of the rural poor through a massive expansion in employment-generation
schemes.
Such an expansion of employment generation schemes will kill
several birds with one stone. First, it will bring down unemployment and
poverty; secondly it will get rid of the idle stocks which are currently
hanging like a mill-stone round the Food Corporation of India's neck; thirdly,
if such employment-generation schemes are properly conceived, then they
can add to social overhead capital in rural India and improve the quality
of life, or augment productive investment and contribute towards a larger
output in the future: since the decade of the nineties has seen a decline
in per capita foodgrain output in the country, the first decade since independence
to have done so, any addition to productive investment effected in this
manner, would be quite crucial. It follows, given all these possibilities,
that allowing idle foodgrain stocks to continue is extremely irrational;
it represents criminal waste in a poor economy like ours.
Why is it then that these foodgrain stocks are not being used
for employment-generation programmes? The answer is that such expenditure
will increase the fiscal deficit! All suggestions, even those emanating
from within the government itself, for reducing idle stocks through enlarging
employment-generation programmes have been turned down on these grounds.
Now, this is "supreme humbug". Let us assume, for simplicity,
that employment generation programmes require only labour and that labour
spends its wages only on foodgrains. If Rs.100 are spent on employment generation
through an increase in government borrowing (i.e. the fiscal deficit rises
by Rs.100), then these Rs.100 would be spent on foodgrains and hence (ignoring
minor complications like transport costs) the FCI's stocks would go down
by Rs.100. The FCI can then repay Rs.100 to the banks from whom it has taken
credit for stock-holding. It follows that as the government borrowing increases
by Rs.100 for financing employment-generation programmes, it reduces by
Rs.100 as a consequence of such programmes, so that the net government indebtedness does not change. What appears
as an increase in the fiscal deficit in this case is no actual increase:
it is only a consequence of the fact that FCI transactions do not figure
in the budget as a matter of convention
(indeed they used to figure in the budget until the early seventies). And
if there is no actual increase in the fiscal deficit, but only an apparent
one, then it cannot conceivably have
even the adverse consequences that the protagonists of financial orthodoxy
associate with larger fiscal deficits. If nonetheless there is opposition
to such a seeming increase in the fiscal deficit, then what else can one
call it but the "supreme humbug of finance"?
To be sure, I assumed above that the employment-generation schemes
required only labour and that labour demanded only foodgrains. But dropping
these assumptions only means that in addition to foodgrains there would
be some extra demand for non-food wage goods and for material inputs for
the employment programmes. Given the fact however that industry too has
been afflicted by a demand constraint of late, this would only mean that
Rs.100 of spending on employment-generation would clear less than Rs.100
of foodgrain stocks, while creating extra demand for industrial goods, and
bringing forth lager industrial output, from the remainder, which can scarcely
be frowned upon. True, in this case not all of Rs.100 would accrue back
to the government via the FCI; a part would materialise as private savings
and hence would entail an increase in the government's net indebtedness.
But objecting to this in a demand-constrained system is theoretically illegitimate:
it would still qualify, on Keynes-Kahn grounds, as "the humbug of finance".
The purveyors of humbug in this particular case often fall back
on a second line of defence. This states that the accumulation of surplus
foodgrain stocks is only a temporary phenomenon; if one enlarges employment-generation
(poverty-reduction) programmes now because of this temporary surplus, then,
once the surplus is used up, the poor would be back to square one. Enlarging
such programmes, which have got to be sustained, purely on the strength
of a temporary foodgrain surplus, would be irrational.
There are two immediate rejoinders one can make to this argument.
First, if employment-generation programmes are carefully planned, then they
can result in sustainable increases in foodgrain output, in which case the
temporary surplus can become the means of obtaining a permanent surplus
(though not necessarily of the same order) that can effect a permanent reduction
in poverty. Secondly, even if this were not the case and that the temporary
surplus can only bring temporary relief, what is wrong with temporary relief?
Beyond these however there is a more important point. Apart from
a brief interlude in 1992 and 1993 when the central cereal stocks, especially
wheat stocks, fell below the prescribed "norm" and necessitated
some imports, the level of these stocks has been well above the "norm"
throughout the 1990s. We are in
other words not experiencing any temporary surplus, but a more or less permanent
glut, and that too at a time when the per capita foodgrain output has shown
a declining trend, and the rural poverty ratio an increasing trend. The
economy has been transformed into a demand-constrained one, and it is this
context rather than any temporary foodgrain surplus which lends urgency
to the plea for an increase in the scale of employment-generation programmes.
It is incredible that in the context of this transformation of
the economy into a demand-constrained one, with the coexistence of huge
foodgrain stocks, large unutilised industrial capacity, reasonable foreign
exchange reserves (we shall discuss their adequacy later) and growing rural
poverty, the Finance Minister actually claims that reducing the fiscal deficit
is the primary task before the government, and that too when the ongoing
inflation rate is a mere 2-3 percent! It is even more incredible that he
gets away with this claim with not a single dissenting voice in the media.
This is indicative of the triumph of the humbug of finance in today's India.
III
My second example is logically analogous to the first one. There
is an almost unanimous view in government and media circles that India needs
foreign capital to develop its power sector. When in response to a High
Court ruling on a Public Interest Litigation recently, Cogentrix announced
that it would pull out of its proposed power project in Karnataka, it began
to be placated with unprecedented ardour. The Supreme Court was pressurised
into overturning the High Court verdict, the Central government came up
with counter-guarantees that Cogentrix, sensing its chance, started demanding,
and the President of Assocham wanted curbs on Public Interest Litigations
altogether! The clear impression
was given that the heavens would fall if Cogentrix pulled out. But the question
remains unanswered: why do we need Cogentrix (or Enron), and that too when
the domestic power equipment producer, BHEL, has large unutilised capacity
owing to lack of orders, when the technology of putting up power plants
is well-known to us, and when it is also well-known that the foreign producers
inflate their capital costs (owing to the system of guaranteed rates of
return) and produce power at a higher cost per unit than can be done with
Indian equipment.
The answer cannot be that they bring foreign exchange, since
the foreign exchange they bring is to cover the purchase of equipment which
they import; if we did not use their equipment we would not need this foreign
exchange in the first place. The only possible answer can therefore be that
they bring finance, that if they
were not entrusted with the task then the government would have to finance
these power projects from its budgetary resources, which typically would
mean a larger fiscal deficit. In short, power projects are being entrusted
to Multinational Corporations in order to avoid a larger fiscal deficit.
This once again is an example of what I have called the "supreme humbug
of finance" which is even more of "humbug" than what Kahn
and Keynes had demolished.
Suppose the government borrows Rs.100 and spends the sum on a
power project. Suppose for simplicity that the only cost of a power project
is equipment cost. Then these Rs.100 would accrue as sales revenue to BHEL,
a public sector undertaking. Suppose again for simplicity that the bulk
of the cost of power equipment production is in the nature of fixed costs,
then these Rs.100 would accrue to BHEL as operating surplus which would
be saved during the period, in the form, say, of bank deposits. Now, even
though the fiscal deficit appears to have gone up by Rs.100, the net indebtedness
of the government has not increased at all: the government on its budgetary
account has borrowed Rs.100, but holds these Rs.100 in the form of bank
deposits of a public sector undertaking. For the government as a whole the
liabilities and the assets have gone up identically, by Rs.100, leaving
its net indebtedness unchanged. The higher fiscal deficit therefore is only
apparent, a consequence of the convention that the transactions of public
sector undertakings are not part of the budgetary transactions. Even by
the logic of the votaries of financial orthodoxy therefore the adverse consequences
that are supposed by them to follow from higher fiscal deficits should not
be visited upon the economy in this instance.
