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Friday, Feb 25, 2005

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Opinion - Leader Page Articles

How human would the human face be?

By N. Ravi

The budget and economic policy can be understood in terms of two competing visions, identified with Jagdish Bhagwati and Amartya Sen.

"The more things change, the more they remain the same" is a witticism attributed to the French writer, Alphonse Karr, and this is probably true of the debates over the budget and economic policy. If in an earlier period the rhetoric of the debate turned on whether a policy or a proposal was pro-poor or pro-rich, the current debate is about the human face, whether it is dominant or is lacking. When just before assuming office as Prime Minister Dr. Manmohan Singh declared that, "Reforms are needed, I have always said that, but economic reforms with a human face that give India's common man a real hope," he was emphasising both that the reform process would continue and that he would heed the new mandate that called for greater attention to the needs of the poor. The Left too even while opposing several of the liberalisation policies has declared it is not opposed to reforms but that they should have a human face.

The implication that the reforms carried out till recently had somehow lacked a human face was not lost at least on economists, and the foremost advocate of reforms, Jagdish Bhagwati, was quick to argue that globalisation and reforms do have a human face in that they have made a massive dent on poverty and improved the conditions of women and children. Thus the terms reforms and human face with their semantic virtues of improvement and compassion have been embraced by everyone across the ideological spectrum, from those who advocate the pursuit of rapid growth to those who insist on programmes that address the needs of the poor directly through income transfers. The question at budget time, though, remains: how human is the human face going to be.

It is perhaps more useful to speak of the budget and economic policy in terms of two competing visions of the immediate future that are not very different in terms of essentials but have distinct emphases. The first is the drive to prosperity by opening up to global trade, removing constraints on domestic initiative and industry, bringing in foreign investment, selling or closing down public enterprises, and maintaining a stable fiscal and monetary environment. This approach would focus on faster growth for the removal of poverty but it is not oblivious to the composition of growth and would also emphasise the development of the rural economy and of labour intensive industries to provide employment.

The second would lay stress on empowering the poor to take advantage of the new opportunities so that they are not left behind and inequality does not worsen as the middle classes and the rich march ahead. This approach would emphasise expanding the role of the state in providing economic and social opportunity for the poor through education, basic health care, gender justice, land reform and micro-credit even while calling for state withdrawal from areas such as industrial regulation where its over-activity has been harmful.

At the risk of some simplification, the first approach can be identified more with Jagdish Bhagwati, and the second with Amartya Sen. Their positions are of course much more nuanced than the labels free marketer and left would suggest — Sen is also an advocate of the market for the opportunities it offers while Bhagwati lays emphasis on the role of the government in providing safety nets for the vulnerable. Yet Sen is regarded as representing the conscience of economic policy while Bhagwati offers the prescription for prosperity.

The pursuit of high growth even in itself is not devoid of a human face, essential as it is for the rapid removal of poverty. Here the Finance Minister is on a fairly good wicket, with the growth rate projected to touch 6.9 per cent this year on top of the 8.5 per cent during the recovery of last year, and the savings rate has shown a heartening upturn. Yet he cannot afford to shy away from tax changes and reforms needed to spur savings and investment in industry and agriculture to reach the 7 to 8 per cent growth rate. With direct tax rates already down, the scope for stimulating growth through tax cuts is quite limited though here even small changes would have a disproportionate impact either for the good or for the bad on the animal spirits of industry and the stock markets which have an insatiable appetite for concessions. The foreign direct investment of $6 billion that India received in 2004 contrasts with the $62 billion received by China (according to figures compiled by UNCTAD) and is a measure of the potential in this area. Raising the limits for FDI in new areas even within the National Common Minimum Programme's committed sectors of infrastructure, high technology and exports is not going to be easy, given that the government has not been able to bring into effect the higher limit of 49 per cent for insurance announced in the last budget.

Growth in the last two decades has had a significant impact on poverty — though the official figures that show a sharp fall in the proportion of the population below the poverty line from 36 per cent in 1993-94 to 26 per cent in 1999-2000 have been challenged as methodologically flawed, there is little dispute that there has been a significant reduction in poverty. In the areas of building rural infrastructure, basic education, basic health care and access to credit that are vital in providing opportunities to the poor as well as in other social sectors the last budget increased the allocations sharply though it remains to be seen how much of the increased outlay — derived from the education cess of 2 per cent on all taxes and the Rs.10,000 crore allocated through the Planning Commission — has actually been spent.

A new approach of guaranteeing 100 days of work in a year at the minimum wage for a member of every family was promised in the National Common Minimum Programme (NCMP) and following the announcement in the last budget, a bill has been introduced in Parliament. The state assuming the obligation to provide work to everyone is not quite a new concept — it dates back to eighteenth century England when parishes were required to run workhouses where the unemployed were put to work. An ideal public employment scheme, according to John Stuart Mill, was one that would be available to everybody but "leaves everyone with a strong motive to do without it if he can." The rural employment guarantee bill before Parliament has been criticised as falling far short of the NCMP promise — it would extend in the first instance to only 150 of the poorest districts without a committed time frame for nation-wide coverage, would apply only to rural areas and would not be bound by minimum wage laws — but even in its present form, it represents a fiscal consolidator's nightmare. A nationwide scheme is estimated to cost Rs.25,000 crore to Rs.36,000 crore but its votaries would suggest cuts in defence spending, collection of tax arrears and even deficit financing as ways to raise the money. The danger is that hard headed votaries of fiscal prudence might offer it as a grudging concession to the soft hearted, and might not take it up wholeheartedly.

An even greater danger is that the additional funds will be thrown at more of the same type of "anti-poverty" projects where, as Rajiv Gandhi once noted, just 15 per cent of the money reached the beneficiaries. The scheme itself would be a test of governance in the rural areas across the country. Equally with finding the resources, as much effort would need to be put into the framing of the schemes, in the choice of the projects and their operation, introducing transparency and local monitoring together with a widespread awareness among the targeted poor of their entitlements.

If the employment guarantee scheme is bound to strain the limits of fiscal prudence, the Fiscal Responsibility and Budget Management Act mandates the elimination of the revenue deficit by 2008-2009. This is a self-limiting mandate in the manner of the oft invoked analogy of Ulysses getting himself tied to the mast to prevent himself from being lured by the music of the sirens and steering his ship to destruction into the rocks. The elimination of the revenue deficit would free a massive 3 per cent of the GDP for investment in the social sector but a beginning in that direction needs to be made this year.

The trinity of Prime Minister Manmohan Singh, Mr. Chidambaram and Mr. Montek Singh Ahluwalia who are now shaping economic policy are reformers whose natural instincts have been held in check by the practical realities of having to contend with the demands and sensitivities of the Left. The contours of the budget would be shaped by how far Mr. Chidambaram would go in testing the limits of the Left's tolerance of the reform agenda and how exactly, with the human face of his budget, he would be able to persuade them not to act as brakes on reform. It is clear though that he cannot afford to play safe and come out with a lackadaisical even if non-controversial budget.

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