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| 'Cutting food subsidies is appalling' | | Q&A: C P Chandrasekhar |
| Aditi Phadnis / New Delhi Mar 07, 2010, 00:50 IST |
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 The 2010-11 Budget is just a pretense at striving towards equity, C P Chandrasekhar, economist and professor at Jawaharlal Nehru University, tells Aditi Phadnis
Inclusive growth would appear to put to rest the contradiction between equity and growth. The Budget illustrates the argument that through policies that are more inclusive you can actually expand markets. What do you think?
This was one of the arguments for land reforms in the 1950s and 1960s — that if you give land to the tiller, you generate income at the bottom of the pyramid and expand the mass market for manufactures.
This is one notion.
Then there is the notion that there exists a set of things that you must do that will lead to generalised growth.
But all forms of growth will leave one set of people behind. So, the state has to make sure that they are able to participate in the process through intervention aimed at inclusion.
We saw in the Economic Survey and the Budget 2010-11 mention of an enabling environment for growth through state intervention directed at those who get left behind.
You could think of a situation where intervention could be more positive — by generating growth of a kind that is in itself more participative and ensures an equitable system. That would be my preference. But I didn’t see too much evidence of that in these two documents.
There was a time when trade liberalisation was opposed by many economists because it was thought to provide markets for the West. But, in India’s case, trade liberalisation has resulted in deeper engagement with Asia, suggesting that the theory that liberalisation will increase dependence on the West is not really accurate. In the current environment, you can even argue that despite liberalisation, India has been spared the full effect of the recession.
Regarding the effects of the global recession on GDP growth, there can be a degree of optimism because the recession here has not matched the devastation seen elsewhere.
But we cannot ignore the fact that there is a loss of stimulus provided by exports. Exports had till very recently shown a decline for many months.
There are other reasons why we cannot say that because India’s trade is increasing with Asia, we are decoupled from the West and buffered from the crisis.
Services exports form a large part of our exports and these still depend on the western markets. Also, barring commodities like iron ore, other exports are directed at developed countries and have been hit.
And then, if you look at Asian trade, while intra-Asian trade is substantial, there is a pan-Asian platform from which the final export is largely directed to the developed countries. This is why there is a global imbalance, illustrated by China’s trade surplus with the US.
So why did we do better than other economies? It is because of the expansion of domestic demand. What would otherwise have been a problem for this fiscally-conservative government — the increased expenditure, not just on salaries but on payment of arrears mandated by the 6th Pay Commission — came as a gift. This became part of the so-called stimulus. We must admit that there was an increase in expenditure and an associated deficit that sustained growth.
Hasn’t there been a thinking that we must consider why India has a deficit? If it is for the right reasons, a high deficit need not be such a bad thing. In India’s case, we are spending on the social sector... but then there is also the problem of inflation.
First, I don’t think the problem of inflation stems from the deficit. In a country where you have large unutilised resources, especially labour resources, deficit spending need not affect prices, unless there are serious supply constraints.Some sectors in India, such as agriculture and food production, are facing supply-side constraints. What you need to do is to address that rather than blame the deficit. In fact, you should use deficit spending to relax such constraints. If you neglect agriculture for long, capital formation in rural areas will suffer, leading to these constraints.
So, to say that the deficit is the source of inflation is wrong. This inflation stems from supply-side constraints and liberalisation of trade and an ineffective public distribution system aggravate the situation by generating a speculative spiral.
The government has taken a decision on fertiliser subsidies that used to go to the rich farmers. It has dismantled that system but says that it will spend more on creating rural employment through NREGA and building rural infrastructure. What’s wrong with that ?
What is a subsidy? In a set of areas involving public production or public provision, the price the state charges is inadequate to cover the costs incurred in production or provision. So, this has to be covered by a Budgetary subsidy.
But prices charged by the government cannot be treated as similar to that charged by a commercial organisation. These prices must be seen as one component of a larger tax-cum-subsidy regime. Whether a subsidy is good or bad, right or wrong, has to be assessed in terms of its role in state policy. Providing subsidies for food in a country with substantial poverty and massive malnutrition is, I think, easily defended. Second, when the government provides a tax concession, as is reported in the table on revenue forgone in the Budget documents, it is giving subsidies, much of which go to the corporate sector and the rich. Seen in this light, I think it is appalling that you give Rs 50,000 gratis to those who earn Rs 8 lakh and above — when nobody asked for it — and yet, you cut food subsidies, as has happened in this Budget.
The argument that we need to cut fertiliser subsidies that ostensibly go to the rich farmers who benefit from higher procurement prices, which inflate food prices, is also faulty. To start with, farmers are not benefitting from higher food prices. Evidence shows that the margins between farm and wholesale prices and wholesale and retail prices are going up, with benefits going to the traders. Fertiliser use matters for production and reducing subsidies can have adverse effects on agricultural production costs and output, which we cannot afford. Reducing subsidies on the ground that they don’t reach those they are meant to serve is to avoid the problem.
There has been a criticism of financial sector liberalisation. But now, even the West has been saying that India’s policy of cautious liberalisation was sensible. So, what are your differences with India’s financial sector liberalisation programme?
That India was more cautious on the financial liberalisation front when compared with some other countries and benefitted from that is true and needs to be appreciated. But over time, liberalisation has indeed been underway and the official case today for financial liberalisation in this country sounds as if the global crisis did not occur or that the lessons learnt from it were of no relevance to India. That, I think, is a problem.
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