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SUBODH VARMA TIMES INSIGHT GROUP
Once upon a time in Mumbai, or Bombay as it was then called, a
group of seven farsighted industrialists and an economist met to draft
a blueprint for India's economic development. The year was 1944, three
years before the British actually quit. The document would later
become famous as the 'Bombay Plan'. Under Jawaharlal Nehru's
stewardship, India's economic policy was largely derived from this
document. The Bombay Plan called for an actively interventionist state
policy in order to achieve two primary objectives: doubling
agricultural production and increasing industrial output five-fold.
This was to be achieved by the government of newly independent India
by investing Rs 100 billion over the next 15 years. Prime Minister
Manmohan Singh, who was a student of economics at the time, described
other important features of the Bombay Plan at an event to mark its
60th anniversary: "The Bombay Plan laid great emphasis on public
investment in the social and economic infrastructure, in both rural
and urban areas; it emphasised the importance of agrarian reform and
agricultural research, in setting up educational institutions and a
modern financial system. Above all, it defined the framework for
India's transition from agrarian feudalism to industrial capitalism,
but capitalism that is humane, that invests in the welfare and skills
of the working people." As this peek at India's economic history
shows, public investment in social infrastructure has always remained
a primary objective — at least on paper. Even when Manmohan Singh, as
finance minister, was dismantling Nehru's legacy and opening India's
doors to the world and embracing liberalisation, he stressed on the
continuing need for government to spend on sectors like education and
health. "A vast number of people in our country live on the edges of a
subsistence economy,'' he said in his Budget speech in July 1991. "We
need credible programmes of direct government intervention focusing on
the needs of these people. We have the responsibility to provide them
with quality social services such as education, health, safe drinking
water and roads."
The reality, though, is different. Successive governments at the
Centre have surreptitiously been pruning public investment in a clutch
of crucial sectors while maintaining the usual rhetoric about "wiping
every tear from every eye".
Recent high-visibility programmes launched by the UPA government
seem to have hiked spending on social sectors such as education,
health and sanitation. There also appears to be an increase in
spending on economic services like agriculture, rural development
(which includes the Mahatma Gandhi National Rural Employment Guarantee
Scheme), energy and transport. However, as a proportion of the GDP,
central government expenditure on social and economic services has
suffered a certain decline since 1992, the beginning of the 8th Plan,
when expenditure on these was 7.3 per cent of GDP. It soon declined to
7.1 per cent in the 9th Plan (1997-2002) and further to 7.009 per cent
during the 10th Plan (2002-07).
This is spending by just the central government. Total public
investment derives from both the central and the state governments. If
one looks at combined expenditures, public investment in health and
education has virtually stagnated — if taken as a share of total
expenditure or of GDP — even though the absolute amount being spent is
increasing. As a share of GDP, the combined expenditure on education
and health was 4.3 per cent in 1990-91 and 4.28 per cent in 2007-08.
Why is this significant?
Till the slowdown in the Indian economy last year as a result of
recession in the advanced countries, India had exhibited dramatically
high growth rates of GDP. The peculiar nature of this growth was that
it was highly concentrated among high income groups and corporates,
says Surajit Mazumdar, professor at the Institute for Studies in
Industrial Development, a New Delhi-based think tank. This led to
increasing revenues for government — tax receipts increased from about
15 per cent of GDP in 2002-03 to 18 per cent in 2007-08. In short,
government had much more money at its disposal for spending.
"Since 2004, the government faced a special situation in which it
was possible for it to somewhat increase its expenditures in areas
that had been neglected for a long time without coming into conflict
with the objectives of keeping taxes low as well as controlling the
fiscal deficit. Expenditure growth could, in such circumstances, be
allowed to keep pace with high GDP growth without increasing the
public expenditure to GDP ratio. This is precisely what happened till
the global crisis disrupted the situation — with the deficit having
now increased, the familiar old story of the need to rein in
government expenditure is back," explains Mazumdar.
In other words, so long as the country saw high GDP growth and the
government was flush with funds, expenditure rose — albeit marginally,
by only that tiny bit more to keep pace with the increase in GDP. In
actual terms, there has been no real swing away from the policy of
keeping public expenditure low. The proportions are virtually the same
as earlier, showing minor increases.
The result of this tight-fisted policy shows up all around, but
it's most sharply visible in the standards of living of the bulk of
India's population. In a majority of sectors that affect the common
man directly — like education, health, agriculture, nutrition,
housing, roads and transport — there is increasing disarray and
shortage caused by insufficient investment. Simultaneously, there is a
rise in private expenditure on heads such as education and health. As
per the National Account Statistics, private final consumption
expenditure on education and health increased from 2.79 per cent to
4.55 per cent of GDP between 1990-91 and 2007-08.
While the government has tried to introduce the so-called
'public-private-partnership' (PPP) model in many of these sectors in
an attempt to woo private investment, the results are a uniform
deterioration of services and facilities. PPP has also been tried in
building roads and highways with disastrous results. Over half of the
country's vast road network lies unmetalled because of lack of
investment. Private investors are not interested as there are no
returns here.
In many areas, like in housing, a piecemeal or creeping
privatisation has taken place de facto, with government agencies
becoming mere brokers. Take the Delhi Development Authority (DDA).
Even as the capital faces a housing shortage of over 1.2 million
units, Delhi's largest landowner has transformed itself into the
biggest land broker. In 2006-07, it spent just 1 per cent of its total
expenditure on building flats and shops. On the other hand, it derived
18 per cent of its huge income from land deals and 32 per cent from
investment of its reserve fund.
According to estimates by the Planning Commission, there is a
housing shortage of nearly 25 million units in urban India, requiring
about Rs 3.61 lakh crore in investment. Since 99 per cent of this
shortage is in the economically weaker sections (EWS) category, there
is virtually no possibility of self-financing. Only an active
government policy of providing affordable housing can mitigate this
situation.
Neglect of sectors like education and health, in the fond hope
that the private sector will step into the breach, is a very short
sighted policy. In all advanced countries, the basis of prosperity was
laid by first ensuring that citizens got their basic rights — health,
social security, education, care of the elderly. Even today, most
advanced democracies spend a huge amount, and a considerable portion
of their GDP, on these sectors.
According to the latest (2009) data from 26 countries of the
Organisation for Economic Cooperation and Development (OECD), the
average net social expenditure by governments (on health, education,
social security, etc) is 25 per cent of the net national income. The
range was from 9 per cent in Korea to 33 per cent in Germany and 35
per cent in France. Comparing India with the OECD may seem unfair, but
what do we make of the fact that even Sri Lanka and Bangladesh spend a
larger proportion of their budgets on health, for instance, than we
do? Clearly, there is an urgent need to increase public spending on
the social sector to ensure basic human dignity.