RE: [nukkad] 'The Indian government spends much too little'

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Mr. A Shrivastava wrote:
"The fiscal problem is inseparable from the basic problems of the economy,
the problem of empowering the majority of the population"

(VK) True. But how do we go about 'empowering the majority'? Surely not by
restricting the economic activity through licence raj. 

(AS) First, no country in modern history has succeeded in becoming rich and
powerful without an active shaping of economic policies by the government, a
shaping of concentrated advantage in particular sectors of the economy. It
is not that the government can and should pick specific sectors for
development. What the government does is to break bottlenecks and actively
create conditions for convergence towards certain sectors where the national
economy can concentrate its
scale and skills. 

(VK) Agreed. That is what the 'new project' was all about to begin with.
Governments should lay down policy, allow individual and collective
activities within certain parameters, monitor and catch those who overstep
the parameters with a view to give exemplary punishment to them. Instead to
trying to do everything by itself, Governments should only create
environment in which individuals can engage in legitimate economic activity.
Rather than 'controlling', the Government should be giving direction to the
economy and facilitate growth through productive economic activity of the
people. We have been conditioned to look up to Government for anything and
everything and therefore feel uncomfortable when the Government withdraws
from the 'controlling' activities.  

(AS) The second flaw in the project is that it abandons the majority of the
population to disempowerment. The educational needs of this section remain
relegated to the informal economy. 

(VK) The flaw with this argument is that it ignores the fact that the 'old
project' also abandoned the population to disempowerment. The problem is not
with the 'new project' but with vested interests throttling the 'new
project' with the result that majority not only did not get the advantages
of renewed economic activity but also lost the 'subsidy based advantages' of
the 'old project'. India went about 'liberalization' half-heartedly - we
lost the advantageous part of the 'old project' and we didn't go far enough
to gain the advantages of the 'new project'.  
 
(AS) The third defect in the project is that in the absence of economic
empowerment of the majority, the majority would sooner or later strike
back. Unless there is a productivist alternative, there will be a populist
alternative and politics will continue to be played out as a pendulum swing
between orthodoxy and populism. 

(VK) Again, I don't think we can attribute this 'defect' to the 'new
project'. Instead, it is attributable to our falling between two stools and
lack of commitment to the 'new project'. True, economic and educational
empowerment of citizens (not just majority) should be the aim of the
Governments; but how much did the 'old project' achieve in that direction?
'Empowerment of majority' can come only from productive economic activity by
the citizens and cannot be handed down even by an all powerful Government.
Government's job is to facilitate such productive economic activity by the
citizens. I think the 'new project' was oriented in that direction initially
and we lost direction succumbing to pressures from short-sighted populist
politicians wanting to  continue citizens' dependency on the 'system' and
'control' citizens' activities. It is also interesting to note that the
criticism of 'new project' is about its failure to undo (in 10 years) the
economic stagnation sustained by the 'old project' for 40 years. 

(AS) The fourth aspect is that the new project imposes contradictory demands
on the national government and makes it impossible for it to solve the
problems of public finance. Orthodoxy demands that the government restrain
public spending. The truth is that in a country like India, the government
spends much too little. 

(VK) More than 'too little spending by Government', the problem is that too
little of that little money reaches the intended beneficiary. I recall a
former Prime Minister's (RG) remark that for every rupee spent by Government
only 15 paise reach the beneficiary. He was not talking about overall
Government expenditure. His reference was to expenditure on poverty
alleviation schemes of the Government. 

(AS) It also receives far too little by way of taxes. It cannot increase tax
collections by increasing taxes on the minority that pays taxes. It can do
so by extending the tax base. This can only be achieved by bringing those in
the informal sector into the market economy. 

(VK) No doubt.

(AS) So, contrary to what is often claimed, the fiscal problem is not a
technical preliminary or a problem of accounting or a consequence of lack of
self-restraint on the part of the government. The fiscal problem is
inseparable from the basic problems of the economy, the problem of
empowering the majority of the population and providing them the instruments
of effective economic and political action. 

(VK) True but we must also remember that fiscal indiscipline is one of the
basic problems of the economy. Borrowing money for investment in development
projects may be prudent development strategy if the investment is productive
enough to service the debt. But borrowing money for meeting day to day
expenditure? You can't live on borrowed money for ever. Now debt servicing
takes a substantial chunk of revenue. What is left after that goes to
salaries leaving too little for development expenditure. That is the price
you pay for living beyond your means. 

(AS) If this is the problem, wherein lies the solution? What are the
alternative policy prescriptions that are available to the government?
The alternative I propose is along the following lines. We first need a
national government (VK: having clear VISION & courage to implement that
Vision AND) willing to defy the whims of international finance (VK: &
economically unviable domestic populist pressures)  because it can rely on a
high tax yield and the transformation of savings into productive investments
rather than its dissipation into a financial casino. Then we need a social
policy that gives absolute priority to education, which defines minimum
standards of investment per child and performance per school. The social
policy has to back these standards by bringing about a trans-federal system
of supervision and intervention involving the national, state and municipal
governments. 

(VK) I fully endorse your prescriptions. To implement it, we need a few
Statesmen among the ranks of ruling and opposition politicians. And that is
a tall order.



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