By Jean Drèze (special guest contribution)*
Once upon a time, around the end of the Second World War, there was a naive view in development economics that growth was mainly a matter of capital investment — building dams, roads, railways and so on. Further, since the private sector was not equal to the task, the state had to take the lead. So, India’s first Five Year plans were largely about state investment in infrastructure. Human capital, as economists, call it today, was badly neglected.
This development strategy had little to do with Nehru — it was common around the world at that time and enthusiastically supported by economists, including many who are now ferocious critics of so-called Nehruvian socialism. Anyway, it had some results: prolonged economic stagnation under the Raj gave way to the so-called “Hindu rate of growth” (about 3.5 per cent per year) of the 1950s and 1960s. But clearly, something was missing.
Capital, growth and development
Among early voices of dissent was none other than economist and future Nobel Laureate Milton Friedman, who came to India in 1955 and submitted an enlightening “memorandum to the Government of India” where he warned against “policies that increase physical investment at the expense of investment in human capital”. Some Indian economists were on the same wavelength, notably B.V. Krishnamurthi, who wrote a sharp note of dissent on education policy in the same year, where he castigated the government for applying “the calculus of the private grocery merchant to a matter like education”. Another dissident, from a very different point of view, was Dr. Ambedkar, who saw mass education as essential for the liberation of the oppressed. The critics, however, were sidelined and India is still paying a heavy price for it today.
Later on, further advances in development economics vindicated these critical thinkers. Needless to say, physical capital is important for growth. But so are human capital, economic institutions, and also other things – for instance social norms – that we do not understand very well. Further, growth is not the same as development, in the broad sense of an improvement in the quality of life and expansion of human freedoms. Growth can be an important tool of development, but the extent to which growth translates into development depends both on the character of the growth process and on various forms of public action. For instance good nutrition, which is essential for the quality of life, depends a great deal on public action in fields like nutrition education, safe water, health care and much more.
Emphasis on infrastructure
Oddly, the recent Budget of the National Democratic Alliance (NDA) junks these insights and goes back to the days of Jawaharlal Nehru, when growth and development sounded synonymous, physical capital was thought to be the key, and human capital took a back seat. Growth, we are told, is the overriding objective of economic policy — the rest will follow. And the key to growth is “infrastructure” — or rather, a certain kind of infrastructure that the corporate sector supports. Further, infrastructural investment has to be done mainly by the government. So, public investment in infrastructure (mainly roads and railways, à la Nehru) gets huge funds, and most other things get squeezed with the notable exception of defence. Health and education, in particular, receive unprecedented shock treatment.
The revived emphasis on infrastructure is not the NDA’s idea. Montek Singh Ahluwalia, the one-man pillar of economic policy under the United Progressive Alliance government, already had grand plans for infrastructural investment — one trillion dollars of it, no less, over the five years of the Twelfth Plan. What is new is the idea that infrastructure should come from public investment. Unlike Nehru, Montek wanted a large share of infrastructural investment to come from the private sector under public-private partnerships (PPPs). But now it’s all about public investment again. That sounds a little odd, considering that the public sector is disparaged to no end in the business media. So where does that come from?
The answer is given with admirable clarity and frankness in the Finance Ministry’s “Mid-Year Economic Analysis 2014-5”, authored by Chief Economic Advisor Arvind Subramanian. The report candidly states that “the banking sector is increasingly unable and unwilling to lend to the real sector”, because its balance sheets have been ruined by Rs.18 lakh crore of failed or stalled projects — mainly infrastructural projects in the PPP mode. “In this context,” says the report, “it is imperative to consider the case for reviving public investment as one of the key engines of growth”. In other words, after raiding public sector banks and leaving it to the taxpayers to clear the mess of “non-performing assets”, the corporate sector is now counting on the public sector to provide it with world-class highways and other infrastructural facilities — at the expense of the taxpayer once again.
Raghuram Rajan, star economist and no-nonsense Governor of the Reserve Bank of India, had some strong words on this state of affairs in recent months. In a lecture at the Institute of Rural Management Anand (IRMA) on November 25, 2014, he pointed out that the Indian corporate sector enjoyed something approaching “riskless capitalism”, and appealed for “a change of mindset, where the wilful or non-cooperative defaulter is not lionized as a captain of industry, but justly chastised as a freeloader on the hardworking people of this country”. The Finance Minister, however, is more sympathetic to corporate interests. Not only is he obliging the corporate sector’s demand for world-class infrastructure at public expense, his Budget Speech also calls for a new PPP model of infrastructure development with a “rebalancing of risk”, where “the sovereign [i.e. the government] will have to bear a major part of the risk”.
Fallout for social sector
Predictably enough, corporates have been falling over each other to praise the Budget during the last few days. The fallout for the social sector, however, is catastrophic. For the first time ever, critical social programmes like school meals and the Integrated Child Development Services (ICDS) have come under a heavy axe. The gap is to be filled, we are told, by State governments using their enhanced share of national tax revenue. Anyone with a minimal understanding of Centre-State relations is likely to hear alarm bells. Also, it is not clear how State governments are supposed to make instantaneous adjustments in their 2015-6 Budgets to fall in line with this cold turkey approach.
Perhaps the worst victim of this Budget squeeze is the health sector. As is well known, public spending on health is lower in India than in almost any other country in the world, as a proportion of GDP. This year, it may go down not only as a proportion of GDP, or in real terms, but even — for the first time — in money terms. Incidentally, in the previous Budget, Finance Minister Arun Jaitley announced a grand plan for “universal health assurance”. There is not a word of it in last week’s Budget speech. Instead, the Minister now promises a new grand plan for “universal social security.” As before, there are no specifics, no timelines and no budgetary commitments worth the name.
The most worrying aspect of this squeeze is that it was greeted with glee in the mainstream media. It signals, we are told, a welcome shift of emphasis from “handouts” to productive investment. But the big-ticket handouts, like subsidies for the privileged, actually remain, despite some proposed changes in the mode of delivery. Social programmes that can make a real contribution to people’s well-being and productive capacity, on the other hand, face severe budget cuts. Welcome back to the Third World.
(Jean Drèze is Visiting Professor at the Department of Economics, Ranchi University.)
*This article was previously published in The Hindu, March 5, 2015.