Kerala   

State can show the way forward: Patnaik

C. Gouridasan Nair

Says primary focus should be on the agriculture front IT, tourism and so on are fairly obvious and easier areas in which the State can do well. But one should not lose sight of the traditional industries. While making the atmosphere congenial for private investment, we must also think in terms of alternative mechanisms for carrying out investment, says the eminent economist.

Giving a prescription for State's financial health.

THIRUVANANTHAPURAM: Prabhat Patnaik, eminent economist, who is set to take over as Vice-Chairman of the State Planning Board, is all praise for the innovative spirit of Keralites, and believes that Kerala can show the way forward for the rest of the country in creating alternative mechanisms of investment suited to the State's needs and capabilities. He faults Central encroachment into States' fiscal freedoms for the fiscal crisis gripping the States, and feels that Kerala should, even while looking at information technology (IT), tourism and other new growth areas, focus on the agricultural sector to revive its economy and keep it on the growth trajectory. The following are his answers to four questions posed to him in an exclusive interview to The Hindu here on Sunday.

Kerala must be a complex challenge for you given the situation in which the State finds itself in a globalised world. How do you perceive the Kerala economy as it stands today?

I have been to Kerala before. I have come here form time to time. I was the chairman of the second State Finance Commission. In that capacity, I have some amount of understanding about the Kerala economy of that period. Of course, there is a difference between the Kerala economy of that period and Kerala economy now. A basic difference between then and now is the fiscal crisis. There are, of course, very complex reasons for this fiscal crisis, but I believe one of the reasons for the fiscal crisis is the agrarian crisis. When you have a crash in the prices of crops, the income in the agricultural sector goes down and consequently that has a recessionary impact on the economy as a whole, which also implies that the Government's capacity to raise revenue goes down. In fact, this fiscal crisis coincided exactly with the collapse of global prices of crops and that has also naturally had its impact on the planning process.

During the first three years of the Tenth Five Year Plan, there was no increase in the Plan expenditure. So, in real terms, there was a marginal decline in Plan expenditure. During the subsequent two years, about which we don't have actual figures, there was a certain jack up in the Plan expenditure. So, basically, there can be no denying that the planning process has suffered on account of the fiscal crisis. The other thing that has happened is a substantial centralisation that has taken place with the freedom of State Governments to formulate their priorities, to go about doing things in the manner they think is the best has been substantially curtailed. Not only with regard to Plan size but also the composition of the Plan with regard to the tax rates because all of them are part of the VAT [value-added tax] system where taxes are Centrally fixed. So, the first difference between then and now is the fiscal crisis and the second, the substantially reduced autonomy as far as the States are concerned. Now, these are things that one has to contend with, but, on the other hand, I believe that in Kerala, there is still sufficient scope to actually give thrust to the planning process. And I don't think the encroachment into the State's rights on account of the Central interventionism is something that is not an irreversible process.

We are at the beginning of a new Five Year Plan. Do you think this is a good opportunity to make a new beginning, both in terms of planning and Kerala's development options?

I certainly think so. I also think that in the context of Kerala, we should not think only in terms of the conventional avenues of growth and development that are thought about whenever development issues come up, but we must be innovative. Anyway, this is a State known for its innovativeness. The People's Plan Campaign was a sign of innovativeness. The Total Literacy Programme was another symptom of innovativeness. In this State, there is a lot of innovativeness, a lot of creativity. I think we must think of new ways. For instance, when we look at the agricultural sector, the point is not just the short term one of providing help in the context of the present agrarian crisis. The agricultural sector has to be put on a deep footing altogether and that requires a degree of thought, including on organisational basis of agriculture, which actually would strengthen the material basis of the State's economy.

People talk about IT, tourism and so on, which are, of course, fairly obvious and easier areas in which the State can do well. The other thing, however, one has to not lose sight of the traditional industries. If I may put it in a different way, what has tended to happen in different States in India is that the emphasis on IT, the emphasis on attracting industries has gone to a level where they have ended up neglecting the rural and agrarian sector. Now, that is something we cannot afford to do. I think fundamentally we have, even while moving to new arrears like IT and so on, ensure that the traditional material production basis of the Kerala's economy is not only made to survive but also strengthened by giving it a new dynamism.

You spoke about Central interventionism and its encroachment into State's rights. The last time one heard anybody speak about Centre-State fiscal relations was way back in early 1990s. Everybody appears to be rushing to fall in line with the Central or World Bank prescriptions. How do we tackle this situation?

Let me begin by recounting some facts. If you look at the decade of the 1990s, you will find that the Central Government's tax revenue as a proportion of GDP [gross domestic product] went down over the decade. If you look at the State Governments, all States together, their tax revenue as a proportion of the GDP did not go down. In fact, the States performed better as compared to the Central Government. At the end of the decade, most State Governments were in a serious fiscal crisis. How come? Several States had done reasonably well in terms of tax mobilisation, certainly better than the Centre. All of them land up in a fiscal crisis! Firstly, of course, there were the reduced Central transfers. And the other thing that happened is that the Centre charged extraordinarily high interest rates on the debt that the States contracted vis-à-vis the Centre, including on Central Plan assistance! In the case of a number of States, in fact, the interest rates charged on whatever loans the Centre was making available to the States was higher than the State Domestic Product growth rate. That is a recipe for a fiscal crisis.

Not surprisingly, all of them were caught in that. It is in that connection that most of them, just to keep their head above the waters, went to ADB, went to World Bank and all kinds of lenders. Once they went to ADB and World Bank, the standard prescriptions that the Centre was implementing came to be implemented vis-à-vis the States. Additionally, it is enormously unconstitutional — many people have written about it — that the Finance Commission makes availability of resources conditional upon the States adopting a certain set of measures like power sector reforms. This is a legitimate due of the States! It is their right to get these funds and pursue policies they wish to pursue! So we have had a gross abridgement of the rights of the States. They are now dictated to about what they should or should not do. The decision to have uniform VAT rates across the country has also meant reduction of the States' right to change the taxation rates as they wish to. Essentially, this means that no matter what political party you choose, no matter what Government you choose, no matter what kind of ideological position they opt for in the elections, all of them are constrained to pursue the same policies because all of them are tied by the same conditionalities!

Unlike most other parts of the country, Kerala does not have a private sector in the productive side of the economy. It is almost a situation where a private sector has to be discovered and there is all this talk about attracting private sector investment. What role do you see for the private sector in an economy like Kerala's?

Under the new dispensation, the States are now vying with one another to give concessions to the private sector. In the process, they are undercutting one another to such an extent that it is actually so totally irrational, so disastrous. I know of States that have given away even Rs. 1,000 crores in the form of tax concessions in order to attract private investment. But it is not as though they have succeeded in getting more private investment because the other States are doing the same. You actually find Andhra Pradesh and Tamil Nadu fighting to get a Volkswagen plant. So, effectively, if attracting private investment becomes the be-all and end-all of your development effort, then, you have States engaging in this kind of cutthroat competition amongst them and all of them end up being losers.

This is a point that has been made by some economists associated with the World Bank itself. We must wake up to this fact. I think we must have some rules regarding the degree to which the States can offer concessions. We cannot just have a free for all.

Now, coming to the question you have raised, of course, I think Kerala, like other States, must make private investment possible. In other words, it should provide a congenial atmosphere for private investment.

But, of course, if private investment comes, well and good and if it does not come, you cannot pack up your bags and say well, sorry, we cannot have development. So, while making the atmosphere congenial for private investment, we must also think in terms of alternative mechanisms for carrying out investment.

Now, one thing in which I have a certain amount of interest is, for instance, reviving the cooperative sector.

Whether in traditional industries or in agriculture, they can, in fact, provide an alternative not only to the public sector, in the sense of a completely State-owned sector, but also the private sector because, as I said, while you can make the atmosphere congenial for them, you have no means of enforcing that they come and invest in the State.

So, these are some of the innovative things that you have to think in terms of alternative arrangements because other States in India don't really have it the same way. Kerala can actually show the way forward.

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