This
year's Economic Survey contains a new and unusual chapter,
entitled ''Micro-foundations of Inclusive Growth''.
It is unusual because it is largely theoretical, thereby
providing an addition to the generally descriptive review
of the Indian economy over the past year according to
the government's own perception. It also contains, possibly
for the first time in an Economic Survey, an explicit
statement of what might be described as the present
Government's economic philosophy and its approach to
certain crucial questions of economic policy. That this
is indeed the case was confirmed by the echo some statements
found in the Finance Minister's Budget Speech.
It is certainly welcome that the basic goal of economic
policy is identified as inclusive growth, recognising
that ''growth must not be treated as an end in itself
but as an instrument for spreading prosperity to all''
(p. 22). Inclusive growth in turn is given a more precise
definition than is usual, as growth that improves the
incomes and other measures of conditions of life of
the bottom 20 per cent of the population.
This inclusive growth is to be delivered by a change
in focus to an enabling government, which is seen as
''a Government that does not try to directly deliver
to its citizens everything that they need. Instead,
it (1) creates an enabling ethos for the market so that
individual enterprise can flourish and citizens can,
for the most part, provide for the needs of one another,
and (2) steps in to help those who do not manage to
do well for themselves'', for example by ''directly
helping the poor by ensuring that they get basic education
and health services and receive adequate nutrition and
food'' (p. 23).
It is immediately clear that this is a vision of the
economy in which it is taken for granted that the market
mechanism generally delivers the economically-desired
outcomes for most citizens, and the role of government
is therefore mainly to ensure that such markets function
smoothly and to take care of the stragglers ''for there
will always be individuals, no matter what the system,
who need support and help''. This vision excludes the
possibility of the process of market-driven economic
growth itself generating greater material insecurity
and impoverishment for a significant section. Trickle-down
is seen to operate for most of the population; for the
bottom fifth, the government has to step in.
Obviously, in such a framework, public delivery of essential
goods and services will necessarily be targeted to those
that are defined as poor. The chapter contains an eloquent
argument in favour of redefining the nature of public
delivery to minimise direct involvement of the state
in favour of market-based mechanisms such as coupons
and vouchers targeted to the poor. This is what allows
for the claim that more can be achieved with less fiscal
resources, by eliminating the administrative costs of
running large public schemes.
This would be a major departure from current practice,
with potentially far-reaching implications in a very
wide range of goods and services that are seen to constitute
essential socio-economic rights. It is impossible to
discuss all the different implications here, so I will
briefly consider only the interventions proposed for
the food economy. The arguments have wide applicability
with reference to other sectors as well.
Managing the food economy
There is an extended discussion on how to manage the
food economy, which is only to be expected given that
food price inflation is clearly the most significant
economic problem in the country at present. Yet the
discussion presents several different arguments which
turn out to be mutually inconsistent. In keeping with
the overall approach of an ''enabling'' state rather
than an actively interventionist one, it is proposed
to do away with the existing system of government food
procurement and distribution. It is argued that this
is prone to corruption, adulteration and similar flaws,
and that it is necessary to craft policy that takes
into account that people are the way they are (not always
ethically sound) and craft incentive-compatible policies
accordingly. So this is to be replaced with a system
of food coupons (of a certain value of money) given
directly to targeted households, that can be exchanged
for wheat or rice at market prices, giving the freedom
of choice to households about the shop from which to
purchase.
This proposal betrays some ignorance about the background
of the current food subsidy and the purposes of the
public system of food procurement and distribution in
India. These were (and fundamentally remain) to provide
farmers with a minimum price that covers their costs,
to ensure that basic food grain is transported from
surplus to deficit areas of the country, and to build
up a system of buffer stocks that protects the country
from international price volatility and external dependence.
It is because the market mechanism was found wanting
in achieving any of these goals that such measures were
deemed necessary – and the persistence of such measures
not only in India but in many countries across the world
(including most developed ones) suggests that this is
still the case. Food security within a nation as large
as India is not possible without ensuring the viability
of food production by domestic farmers and the existence
of a national distribution system that tries to reach
deficit areas quickly. There is no way that replacing
this with a system of food coupons to selected households
could achieve these basic aims.
There is of course the further question of how to ensure
that the public at large - and the poor in particular
- get access to affordable food. This too is a current
function of the Public Distribution System, but it has
been less than successful in meeting it for a variety
of reasons. The Economic Survey correctly recognises
the many problems in the existing system, but tends
to treat the entire system as homogeneous across the
country. There are states in the country (such as Kerala
and Tamil Nadu, and to a lesser extent Andhra Pradesh)
where the PDS is a strong, functioning and largely non-corrupt
system, and there are other states where the opposite
is true. Surely, policy makers need to study and understand
these differences if they actually want to make the
system work.
What is clear is that targeting tends to add to the
problems, not only because of the significant administrative
costs associated with identifying the poor and monitoring
them, but because of well-known errors of unfair exclusion
from and unjustified inclusion in the list of poor households.
That is why the states with more successful PDS are
those that have such a large number of declared below-poverty-line
(BPL) households that they are close to universal in
nature. The Survey argues that the Unique Identification
System (UID) will solve that problem, but that is to
believe that there can be a technological fix to what
is essentially a socio-economic problem. The UID card
only identifies a person; the description of that person
as belonging to a poor or non-poor household remains
as cumbersome, problematic, politically charged and
administratively challenging as ever.
The Survey does provide some useful and interesting
proposals with respect to managing the foodgrain stocks,
and correctly argues for a more flexible approach in
releasing stocks that is not only responsive to market
pressures but also anticipates them. Indeed, the need
to prevent foodgrain allocation from becoming a political
tool in the hands of the Centre vis-à-vis the
state governments is all the more pressing in the light
of recent experience. However, it should be obvious
that such a proactive role of the state in preventing
food price increases would not be possible at all if
the entire system is replaced with a system of food
coupons!
There is another comment with direct relevance to the
food economy that deserves to be noted. In keeping with
the overall perspective that markets generally know
best, the Survey argues for erring on the side of less
control whenever there is some doubt on the matter.
This is then used to suggest that a ban on futures trading
in essential commodities is unwarranted. ''An enabling
Government takes the view that if we cannot establish
a connection between the existence of futures trading
and inflation in spot prices, we should allow futures
trade.'' (p. 24) Yet there are least two flaws with
this argument.
First, as any econometrician would know, it is generally
possible to question any link between two economic phenomena,
and so the argument about whether future trading has
been associated with significant spot price changes
will definitely continue well after all the cows have
come home. Yet globally, the existence of contango in
commodity markets (when prices in the futures markets
are higher than the spot prices) associated with substantial
holding of long positions by index traders, has been
seen as indicative of speculation driving changes in
spot prices. It is next to impossible to provide a clear
and explicit link that will satisfy those determined
not to see it. Second, and perhaps more significantly,
there are important conceptual reasons to be wary of
allowing futures trading in any commodity in which there
is significant public intervention in the form of minimum
support prices etc., because these provide an easy floor
for speculators. So, this is not a case of allowing
something because we do not have enough information
on either side of the argument, but preventing speculative
activity that can cause great harm even as its possible
benefits are minimal.
Enabling markets and empowering the citizenry
There are several other issues that are discussed, for
which similar arguments could be made. But it is the
broader perspective underlying this chapter which deserves
more careful consideration. The goal is clearly benevolent:
improving the economic conditions of the bottom quintile
of the population. Yet the means that have been proposed
suggest a lack of awareness of the political economy
of both markets and government in India, and the social
and economic context within which policies are implemented.
This is somewhat surprising, because within the chapter
there is a discussion of the need to recognise extant
social realities, even though it is more concerned with
culture and social norms.
The point is essentially this: both markets and government
policies do not function in a socio-political vacuum
but within complex social realities in which power relations
are deeply entrenched. So, it is not that there are
individuals all operating on level playing fields, with
some having a few disadvantages such as lower income
and assets and less education. Rather, the processes
of striving for power, and keeping it, unfold through
the medium of markets. The impact of government policies
depends upon the extent to which they enable different
sets of actors with different power positions to fight
for their rights or advance their own positions.
That is why ''free'' market functioning tends to accentuate
existing inequalities, both social and economic. To
the extent that government policies are aware of this
and are designed to reduce this effect, they are more
successful. All economic policies therefore have distributive
implications, whether or not these are officially recognised.
A government that is genuinely enabling for the citizenry
as a whole, and for the poorest citizens, has to act
decisively in their favour, and also has to provide
good quality public services that the poor are not excluded
from.
In such a context, it is worth stepping back and examining
how much of the declared goal of inclusive growth in
the Economic Survey actually informs the most recent
policy statement of the government, the Union Budget.
Surprisingly, the most important initiatives constitute
direct attacks on the incomes of the bottom quintile
of the population: the hike in fuel prices and indirect
taxes, which will definitely increase the price of necessities;
the reduction in food subsidy; the embarrassingly small
increases in funds for agricultural schemes, especially
in the most devastated regions; the paltry amounts allocated
to education and health, which cannot possibly ensure
good quality public provision that reaches the poorest.
Conversely, the enabling aspect of government is very
clearly evident with respect to big business, in the
form of tax breaks, subsidies for agribusiness and the
like.
The problem is that enabling markets does not always
translate into empowering people: often the reverse
is the case. Clearly, whatever be the more sensitive
statements made in the Economic Survey, the basic philosophy
of the government has not changed from an obsessive
focus on growth at any cost.
|
