Time for bold action - II

By Nirupam Bajpai and Jeffrey D. Sachs

THE UNION Government needs to give greater attention to, and provide larger resources for, primary education and primary health. It has to do more to raise literacy levels and provide greater access to basic health services. It has a particularly critical role in spreading literacy and access to primary health care so that all can participate in a meaningful manner and benefit fully from India's economic transformation. Much higher levels of literacy could be achieved through creative use of Information Technology (IT), better school attendance and other policies with a clear focus on inclusion of girls and other traditionally-disadvantaged groups. The economic and social returns from such an initiative would be huge. Evidence from across the world suggests that high levels of literacy have helped raise economic growth rates and reduce fertility rates. Public health campaigns are also required to combat major infectious diseases, especially the incipient AIDS epidemic.

Rather than providing across-the-board subsidies on food which tend to get dissipated in corruption, administrative costs, and lower prices for the wealthy, in part these programmes could be targeted at school children, by guaranteeing one nutritious meal a day for every child in every school throughout the country. Schemes such as mid-day meals should be expanded. However, the current scheme does not envisage any re-targeting of subsidies as we suggest. Not only would this help to target the aid to needy households, but would also provide a vital economic incentive for poor parents to send their children to school.

Expenditure on educating girls is perhaps one of the most productive. It helps bring down both fertility and infant mortality rates. The impact on the former is seen to be significant and similar in most Indian States. Besides, higher female literacy would be instrumental in raising the status of women in society. The Central Government needs to provide enhanced transfer payments to the States to help support primary health and education. This may be done on a matching-grant basis, so that State Governments are given an incentive to increase their own effort in these areas. In addition, some part of the privatisation revenues could be earmarked for primary health and education. Briefly put, a reorientation is required in the Government's social policy - with high priority for human resource development.

India's growth strategy should focus heavily on exports. Export- led growth in services is one of the most interesting developments, and export-led growth in manufactures, the more traditional textiles and apparel, in electronics and other labour-intensive operations remains an area where India could do a lot more. India's export environment suffers from several institutional weaknesses. India's labour laws, noted unfavourably in the 1999 Global Competitiveness Report, make it very costly to fire staff in enterprises of more than 100 workers. The result is that formal-sector firms (those that are registered and pay their taxes) are loath to take on new employees, and the vast majority of employment is informal, in small, tax-evading, inefficient enterprises. Equally remarkably, legislation continues to restrict the entry of medium or large firms, or the growth of small units into medium or large enterprises, in several areas of comparative advantage. Thus, garments, toys, shoes and leather products continue to be reserved largely for small-scale producers.

India's tax and tariff structures also remain anti-export biased. The high overall tariff rates, especially on intermediate products used by exporters, impose a heavy indirect levy on export competitiveness. Further, the Union Budget for 1998-99 had imposed an additional non-modvatable levy of 8 per cent on imports, later reduced to 4 per cent. There are duty drawback systems to reduce this anti-export bias, but such programmes are administratively burdensome and often too costly to use effectively. Finally, the regulatory attitude to foreign direct investors, who could fuel India's export drive, continues to be ambivalent. The Government promotes FDI on the one hand, but then maintains regulations against full foreign ownership or insists on lengthy approval processes, on the other.

The development of industrial parks for exports should be intensified. Private developers need the freedom to acquire urban and semi-urban land to develop infrastructure in support of exports. The Government must take measures to reduce export costs, including private-sector provision of port services; zero tariff ratings on capital and intermediate goods imports used for export (based on an effective duty exemption scheme); enhanced export-oriented infrastructure especially roads to the airports, reliable power supply, and telecommunications facilities to support export zones. As suggested by the Abid Hussain Committee, the reservation of labour-intensive activity for the small-scale sector should be scrapped.

In addition to labour-intensive manufacturing exports, India has a clear and growing capacity in service-sector exports based on information technology. Here, as in labour-intensive exports, Government policy could do much more to spur export growth. On the plus side has been the Government's long-term commitment to the IITs. More recently has been the Government's support for Software Technology Parks (STPs), in Chennai, Bangalore, Pune, and other cities, which are the IT-industry equivalent of the EPZs in manufacturing industries. There are serious negatives, however. The continuing state monopoly of VSNL in international telephony hikes the costs of telephone and IT services and affects India's international competitiveness in the IT sector. India's telephone density is abysmally low, at around 1.3 per hundred in 1995, compared with around 62.6 per hundred in the United States. Charges for domestic long distance and international telephone calls in India are among the highest in the world, largely due to lack of competition. Physical infrastructure for data transmission (e.g. optic fibre cables) remains underdeveloped despite some recent progress.

India is becoming one of the most important players in the IT sector which is the fastest growing foreign exchange earner. The Government could do more for this industry, not through direct subsidies necessarily but actually through liberalisation, facilitating lower-priced telecommunication services by allowing new entry of major international players who would lay down a tremendous optic fibre network in India and increase the bandwidth available for businesses. The Government should find resources to support basic science and R&D in this sector because India has world-class engineers and scientists who could keep it in the forefront of this new technology.

To sum up, action is needed on several fronts to attain and sustain higher rates of GDP growth. These are: greater openness of the economy; dereservation of items from the small scale sector; deregulation of the private sector including liberalisation of labour laws and exit policies; de- monopolisation of infrastructure; and decentralisation of policy- making.

Fiscal deficit remains high. Ominously, the ratio of internal public debt to GDP has continued to rise, and the debt service burden has grown even faster because of rising interest rates. Evidently, expenditure reform has lagged behind tax reform. The expenditure-GDP ratio needs to be brought down considerably. The composition of Government spending is skewed towards unproductive, current expenditures and away from basic infrastructure as well as vitally-needed human resource development, especially in the areas of primary health and education.

(Concluded)

Send this article to Friends by E-Mail

Section  : Opinion
Previous : Rebuilding the party system
Next     : Whither tolerance?