MacroScan (Printable Version) - The Development Disaster

The decade of the 1990s, about which there has been so much hype, was actually nothing short of an economic development disaster for India, when the real per capita consumption expenditure in rural India went down in absolute terms. The figure (at 1987-88 prices), which stood at Rs.164 in 1991, according to the National Sample Survey (NSS), was lower in every subsequent year of the decade, except 1997 when it came up to Rs.167; in 1998 it was Rs.153. It is not surprising that the headcount ratio of poverty for rural India showed an increase during the decade, reversing the declining trend of the 1980s. Such an increase in rural poverty in a country where rural poverty is already both massive and abysmal cannot but be called a disaster.

An important factor underlying this disaster was undoubtedly the sharp decline, relative to gross domestic product (GDP), in the development expenditure of the government. It is fashionable to decry government development expenditure as a "set of populist gimmicks" and to point to the large "leakages" that occur from such expenditure as it makes its way towards its ostensible target. But the fact remains that there is an unmistakable correlation between government development expenditure and the magnitude of rural poverty. Such expenditure, notwithstanding all "leakages", puts some purchasing power, directly or indirectly, into the hands of the rural poor; it does so inter alia by generating (again directly or indirectly) non-agricultural employment in rural areas. A curtailment in this expenditure both curtails the pace of (or even reverses) occupational diversification, and exacerbates poverty in the countryside.

This is precisely what happened in the 1990s. The reason for the relative decline in government development expenditure is not far to seek. From whatever data are available, it appears that during the 1990s the share of total government revenue in GDP (taking the Centre, the States and the Union Territories together) has not declined; the share of tax revenue has declined slightly but this has been offset by an increase in the share of non-tax revenue (including the surpluses of the much-maligned public sector enterprises). The share of total government outlay, however, has declined, since the gross fiscal deficit as a proportion of GDP has been curtailed. In addition there has been a change in the composition of this outlay, where non-development outlay (including, in particular, interest payments by the government) has increased at the expense of development outlay.

Now, the cut in the share of tax revenue, the curtailment in the share of fiscal deficit and the maintenance of a high interest rate regime are all associated with the process of economic "liberalisation". Once the economy adopts a more liberal trade regime, customs revenue, and hence by implication the overall indirect tax revenue, tends to fall relative to GDP. (It may be thought that cuts in customs duties could be offset by increases in excise duties, but this would be pushing the economy quite gratuitously into de-industrialisation). Once the economy opens itself up for capital flows, then (even in the absence of full convertibility of the currency) it has to worry about the "confidence of foreign investors", and in order to boost such "confidence" keep interest rates high and the fiscal deficit low.

In short, all the factors underlying the economic development disaster of the 1990s are associated with the policy of "liberalisation". The disaster, in other words, is a direct fallout of this policy. The usual justification advanced for "liberal policies" is that by attracting foreign investment they would lead to a faster rate of growth in the economy. The example of China is often invoked in support of this claim. Such invoking is not legitimate, since China's existing economic regime can by no stretch of imagination be called "liberal" in our sense; but let us leave this issue aside for the moment. There can scarcely be any dispute over the fact that China's phenomenal growth record is associated with its high investment ratios. It follows then that if "liberalisation" were to achieve higher growth a la China, it should be raising investment ratios here to start with. What is remarkable about the 1990s, however, is that the investment ratio has not shown an increasing trend; what is more, the ratio of gross capital formation to GDP has been lower in every year during the decade compared to the level attained in 1990-91. While the 1990-91 figure was 27.7 per cent, the figure for 1997-98 has been 26.2 per cent and for 1998-99 a paltry 23.4 percent. Thus, the economic development disaster of the 1990s has not even had a silver lining by way of an increased investment ratio that could put the economy on a higher growth trajectory.

It is shocking in this context that the Finance Minister should say that "the overall economic situation in the country was healthy" (The Hindu, February 13). But if his perception is flawed insofar as he ignores poverty, his prescription is inadequate insofar as he talks of tackling poverty. At the same meeting (of the Parliamentary Consultative Committee attached to the Ministry of Finance) he reportedly said that "the country had to work towards a growth rate of 7 per cent to eradicate poverty in the next 10 years." Between 1993-94 and 1998-99, as per the statistics provided by the Central Statistical Organisation (CSO), the country has already achieved a growth rate in excess of 7 per cent; in fact the growth rates for these five years were 7.8, 7.6, 7.8, 5.0, and 6.8 per cent respectively. Yet, at the end of these five years, rural poverty is perhaps higher than what it was at any time during the decade. To believe that five more such years would eradicate poverty betrays naivete.

Poverty does not get eradicated merely through higher growth. What is important in this context is the nature of that growth, in particular the extent to which growth is employment-augmenting, since it is the using up of labour reserves that is critical for poverty eradication. By the same token, however, an attack on poverty can be made directly through employment-generating schemes, which have nothing to do with growth per se but which, if properly devised, can stimulate growth through capital formation in the countryside. In other words, instead of making higher growth the primary objective and hoping that poverty eradication would become a mere fallout of it, policy in India can and should aim at making poverty eradication the primary objective and obtaining higher growth its fallout.

Fortunately, the conditions at present are favourable for a major thrust in this direction. The 1990s have also made the economy demand-constrained, that is, saddled it with unutilised industrial capacity and unsold foodgrain stocks owing to lack of suff icient demand; indeed the growing poverty and the inadequacy of aggregate demand represent two sides of the same coin. But this very fact, which has been a problem until now, can be converted into an opportunity if the government is willing to take a bol d policy initiative by stepping out of the theoretical straitjacket provided by the Bretton Woods institutions. At the moment there are more than 32 million tonnes of foodgrain stocks with the Food Corporation of India (FCI). This is 12 million tonnes more than the stocks that the government considers necessary for this time of the year. These 12 million tonnes of surplus stocks imply not only enlarged indebtedness for the FCI but also additional interest payments over and above what the FCI would have incurred for holding its "normal" stocks. These stocks exist owing to inadequate demand for foodgrains in the public distribution system (PDS), which in turn means that at the prevailing issue prices of foodgrains distributed through the PDS, the purchasing power of the rural poor is insufficient to lift these stocks.

The situation therefore offers an ideal an opportunity to launch a major anti-poverty initiative by providing purchasing power to the rural poor. Such an initiative, apart from effecting poverty reduction and bringing down surplus stocks, could, if properly conceived, result in substantial and useful capital formation in the countryside, in the forms of rural infrastructure, school buildings, and so on. It could even be combined with a programme for universalising primary education, since several of the infrastructural requirements of such a programme could be covered through the anti-poverty initiative. Moreover, as the foodgrain distribution accompanying the increased purchasing power injected through such an anti-poverty initiative would have to be done through the PDS, in large parts of North India, where the PDS is virtually absent, this would also provide an opportunity to instal or revamp the PDS itself. Since State governments that would neglect this task would fall behind in the implementation of the anti-poverty initiative and hence court political unpopularity, there would be some pressure on them to instal a reasonable PDS.

Two additional considerations favour such an initiative. First, the foreign exchange requirement of such an initiative would be virtually negligible, so that no extra pressures on the country's balance of payments would emerge as a consequence of it. This contrasts with virtually any other way of stimulating the level of economic activity in the country. Secondly, since large sectors of industry are in recession still, the complementary industrial products that would be required if such an employment-generation programme is undertaken can be easily provided; what is more, the demand for such products would help industry to come out of the recession and hence stimulate the generation of second-round employment. A major employment-generation programme can be one important component of the Budget. In addition, however, there is a need to revive of public investment, particularly in the area of infrastructure.

If the financial resources for such an increase in public investment are raised through direct taxes on the rich, so much the better. But even if the government is unwilling to raise larger tax revenue, given the fact that unutilised capacity exists in a host of public sector units producing equipment and c apital goods, it should still go in for increased public investment, financed, if necessary, through a larger fiscal deficit. As long as the deficit-financed public investment expenditure flows back to the public sector units, it cannot conceivably have any adverse consequences for the economy. No doubt, international speculators might get jittery in such a situation. But the Indian economy mercifully is not yet fully "liberalised"; sufficient instruments of control are still available to the government to deal with any adverse consequences of such nervousness. Besides, it is dangerous for the country if the government allows investors' jitteriness to come in the way of preventing an economic development disaster.



Themes > Current Issues	12.02.2000


The Development Disaster

Prabhat Patnaik

The decade of the 1990s, about which there has been so much hype, was actually nothing short of an economic development disaster for India, when the real per capita consumption expenditure in rural India went down in absolute terms. The figure (at 1987-88 prices), which stood at Rs.164 in 1991, according to the National Sample Survey (NSS), was lower in every subsequent year of the decade, except 1997 when it came up to Rs.167; in 1998 it was Rs.153. It is not surprising that the headcount ratio of poverty for rural India showed an increase during the decade, reversing the declining trend of the 1980s. Such an increase in rural poverty in a country where rural poverty is already both massive and abysmal cannot but be called a disaster. An important factor underlying this disaster was undoubtedly the sharp decline, relative to gross domestic product (GDP), in the development expenditure of the government. It is fashionable to decry government development expenditure as a "set of populist gimmicks" and to point to the large "leakages" that occur from such expenditure as it makes its way towards its ostensible target. But the fact remains that there is an unmistakable correlation between government development expenditure and the magnitude of rural poverty. Such expenditure, notwithstanding all "leakages", puts some purchasing power, directly or indirectly, into the hands of the rural poor; it does so inter alia by generating (again directly or indirectly) non-agricultural employment in rural areas. A curtailment in this expenditure both curtails the pace of (or even reverses) occupational diversification, and exacerbates poverty in the countryside. This is precisely what happened in the 1990s. The reason for the relative decline in government development expenditure is not far to seek. From whatever data are available, it appears that during the 1990s the share of total government revenue in GDP (taking the Centre, the States and the Union Territories together) has not declined; the share of tax revenue has declined slightly but this has been offset by an increase in the share of non-tax revenue (including the surpluses of the much-maligned public sector enterprises). The share of total government outlay, however, has declined, since the gross fiscal deficit as a proportion of GDP has been curtailed. In addition there has been a change in the composition of this outlay, where non-development outlay (including, in particular, interest payments by the government) has increased at the expense of development outlay. Now, the cut in the share of tax revenue, the curtailment in the share of fiscal deficit and the maintenance of a high interest rate regime are all associated with the process of economic "liberalisation". Once the economy adopts a more liberal trade regime, customs revenue, and hence by implication the overall indirect tax revenue, tends to fall relative to GDP. (It may be thought that cuts in customs duties could be offset by increases in excise duties, but this would be pushing the economy quite gratuitously into de-industrialisation). Once the economy opens itself up for capital flows, then (even in the absence of full convertibility of the currency) it has to worry about the "confidence of foreign investors", and in order to boost such "confidence" keep interest rates high and the fiscal deficit low. In short, all the factors underlying the economic development disaster of the 1990s are associated with the policy of "liberalisation". The disaster, in other words, is a direct fallout of this policy. The usual justification advanced for "liberal policies" is that by attracting foreign investment they would lead to a faster rate of growth in the economy. The example of China is often invoked in support of this claim. Such invoking is not legitimate, since China's existing economic regime can by no stretch of imagination be called "liberal" in our sense; but let us leave this issue aside for the moment. There can scarcely be any dispute over the fact that China's phenomenal growth record is associated with its high investment ratios. It follows then that if "liberalisation" were to achieve higher growth a la China, it should be raising investment ratios here to start with. What is remarkable about the 1990s, however, is that the investment ratio has not shown an increasing trend; what is more, the ratio of gross capital formation to GDP has been lower in every year during the decade compared to the level attained in 1990-91. While the 1990-91 figure was 27.7 per cent, the figure for 1997-98 has been 26.2 per cent and for 1998-99 a paltry 23.4 percent. Thus, the economic development disaster of the 1990s has not even had a silver lining by way of an increased investment ratio that could put the economy on a higher growth trajectory. It is shocking in this context that the Finance Minister should say that "the overall economic situation in the country was healthy" (The Hindu, February 13). But if his perception is flawed insofar as he ignores poverty, his prescription is inadequate insofar as he talks of tackling poverty. At the same meeting (of the Parliamentary Consultative Committee attached to the Ministry of Finance) he reportedly said that "the country had to work towards a growth rate of 7 per cent to eradicate poverty in the next 10 years." Between 1993-94 and 1998-99, as per the statistics provided by the Central Statistical Organisation (CSO), the country has already achieved a growth rate in excess of 7 per cent; in fact the growth rates for these five years were 7.8, 7.6, 7.8, 5.0, and 6.8 per cent respectively. Yet, at the end of these five years, rural poverty is perhaps higher than what it was at any time during the decade. To believe that five more such years would eradicate poverty betrays naivete. Poverty does not get eradicated merely through higher growth. What is important in this context is the nature of that growth, in particular the extent to which growth is employment-augmenting, since it is the using up of labour reserves that is critical for poverty eradication. By the same token, however, an attack on poverty can be made directly through employment-generating schemes, which have nothing to do with growth per se but which, if properly devised, can stimulate growth through capital formation in the countryside. In other words, instead of making higher growth the primary objective and hoping that poverty eradication would become a mere fallout of it, policy in India can and should aim at making poverty eradication the primary objective and obtaining higher growth its fallout. Fortunately, the conditions at present are favourable for a major thrust in this direction. The 1990s have also made the economy demand-constrained, that is, saddled it with unutilised industrial capacity and unsold foodgrain stocks owing to lack of suff icient demand; indeed the growing poverty and the inadequacy of aggregate demand represent two sides of the same coin. But this very fact, which has been a problem until now, can be converted into an opportunity if the government is willing to take a bol d policy initiative by stepping out of the theoretical straitjacket provided by the Bretton Woods institutions. At the moment there are more than 32 million tonnes of foodgrain stocks with the Food Corporation of India (FCI). This is 12 million tonnes more than the stocks that the government considers necessary for this time of the year. These 12 million tonnes of surplus stocks imply not only enlarged indebtedness for the FCI but also additional interest payments over and above what the FCI would have incurred for holding its "normal" stocks. These stocks exist owing to inadequate demand for foodgrains in the public distribution system (PDS), which in turn means that at the prevailing issue prices of foodgrains distributed through the PDS, the purchasing power of the rural poor is insufficient to lift these stocks. The situation therefore offers an ideal an opportunity to launch a major anti-poverty initiative by providing purchasing power to the rural poor. Such an initiative, apart from effecting poverty reduction and bringing down surplus stocks, could, if properly conceived, result in substantial and useful capital formation in the countryside, in the forms of rural infrastructure, school buildings, and so on. It could even be combined with a programme for universalising primary education, since several of the infrastructural requirements of such a programme could be covered through the anti-poverty initiative. Moreover, as the foodgrain distribution accompanying the increased purchasing power injected through such an anti-poverty initiative would have to be done through the PDS, in large parts of North India, where the PDS is virtually absent, this would also provide an opportunity to instal or revamp the PDS itself. Since State governments that would neglect this task would fall behind in the implementation of the anti-poverty initiative and hence court political unpopularity, there would be some pressure on them to instal a reasonable PDS. Two additional considerations favour such an initiative. First, the foreign exchange requirement of such an initiative would be virtually negligible, so that no extra pressures on the country's balance of payments would emerge as a consequence of it. This contrasts with virtually any other way of stimulating the level of economic activity in the country. Secondly, since large sectors of industry are in recession still, the complementary industrial products that would be required if such an employment-generation programme is undertaken can be easily provided; what is more, the demand for such products would help industry to come out of the recession and hence stimulate the generation of second-round employment. A major employment-generation programme can be one important component of the Budget. In addition, however, there is a need to revive of public investment, particularly in the area of infrastructure. If the financial resources for such an increase in public investment are raised through direct taxes on the rich, so much the better. But even if the government is unwilling to raise larger tax revenue, given the fact that unutilised capacity exists in a host of public sector units producing equipment and c apital goods, it should still go in for increased public investment, financed, if necessary, through a larger fiscal deficit. As long as the deficit-financed public investment expenditure flows back to the public sector units, it cannot conceivably have any adverse consequences for the economy. No doubt, international speculators might get jittery in such a situation. But the Indian economy mercifully is not yet fully "liberalised"; sufficient instruments of control are still available to the government to deal with any adverse consequences of such nervousness. Besides, it is dangerous for the country if the government allows investors' jitteriness to come in the way of preventing an economic development disaster.



© MACROSCAN 2000