Nation building at a discount

By Prem Shankar Jha

Uncharacteristically for these pre-Musharraf days, a leading daily carried two lead stories on its front page on Saturday that were economic and not political. The first informed its readers that India's GDP had grown last year not by the 6 per cent that the Government had been asserting so cosily, but by a mere 5.2 per cent. The reason was not just a downward revision of the estimate for growth in agriculture, but a steady decline in industrial growth through the entire last quarter of the fiscal year. It went on to point out that this was continuing because the Government's attempts to revive investment by lowering interest rates and offering other sops had failed.

The second story was a revelation made by the Minister for Programme Implementation, Mr. Arun Shourie, that no fewer than 13 State governments did not have the money to pay the salaries of their bloated bureaucracies. As a result, they have given up trying even to maintain the capital assets built up in the past - roads, primary health centres, schools and irrigation systems. The question of adding to them no longer arises.

Mainly political

It took me only a few moments to realise that these were not, in fact, two stories but one and that the story was not economic but political. The real story is that the governments of this country, both in the States and at the Centre, have given up trying to build the Indian nation into a prosperous and viable entity. They have done so because all of their members spring from an intermediate class of economic predators, for whom the purpose of acquiring political power is to appropriate as much of the assets of the country for themselves and their networks of kinsmen and clients, as time and lack of scruple permit. Mr. Shourie is somewhat of a political freak, for he continues to believe that the purpose of government is the well being of the governed. That is why he is still capable of feeling anguish.

Both the bankruptcy of the State governments and the dead flat calm in investment spring from a single cause - the ruthless profligacy of the State governments - not of any one but of all governments. Since 1989-90, the last normal year of the old closed economy, the share of the Central and State government spending on development has fallen from 21 per cent to less than 12 per cent of the GDP. In spite of that, the combined fiscal deficit of the Centre and States is 3 per cent higher (after adjusting current data to make them comparable with those for 1989-90) than it was then. Since this has to be covered by borrowing from the household sector, there has been a net shift of over 12 per cent of the GDP from investment to consumption. This has been literally given away in a massive splurge of subsidies that has no parallel in any serious nation of the world.

Fall in planned investment

The sharp decline in developmental spending has meant an especially steep fall in planned investment. This, as the Planning Commission warned last year, is one of the main causes of the failure of private investment and consequently the decline in industrial growth. But it is only the lesser part of the explanation. The greater part is the high interest rate regime forced upon the country by the rising fiscal deficit. Today, in terms comparable to 1989-90, the fiscal deficit has climbed to nearly 12 per cent of the GDP. To finance this, the Government has to borrow from the banks. The more it borrows the higher is the interest rate it has to pay. This has pushed up the cost of borrowing for private investors to prohibitive levels.

During his budget speech, the Finance Minister, Mr. Yashwant Sinha, said that real interest rates had climbed from around 3 per cent before 1997 to between 6 and 8 per cent in 2000-01. That is why the Government took steps to bring down the interest rate by 1.5 to 2 per cent. But in reality, if one excludes fuel prices, inflation has been less than 3 per cent for the past two years. As a result, the prime borrowing rate today is still an astounding 7 to 8 per cent in real terms. For all but a few manufacturers, it is 2 to 3 per cent higher. No one in his right mind would take a long term loan at such rates. That is why the Government's tepid reduction of interest rates has not caused even a flicker of revival in investment.

Profligacy of States

The main cause of the relentless rise in fiscal deficit has been the profligacy of the States. Ever since 1961 employment in the State and local governments has been rising by around 400,000 a year. This continued unchecked despite the growing fiscal crunch of the 1980s. As a result, employment in the State and local governments rose by 3.6 million between 1981 and 1991 and despite the much harder budget constraints introduced after 1991, by another half a million between 1991 and 1999.

Add to this the host of subsidies that the States have insisted on giving, such as special incentive payments to farmers over and above the support prices fixed by the Commission on Agricultural Costs and Prices, a bottomless tolerance for the theft of power, and the massively subsidised provision of power and irrigation to the rural sector, and it is no surprise that they now account for fully half of the fiscal deficit of the Indian state.

What tipped them over the brink into bankruptcy was the need to match the increases in salaries granted to Central government employees by the Fifth Pay Commission. That is why they now cannot even pay their bloated bureaucracies. But the seeds of this bankruptcy were sown relentlessly over the previous three decades.

So how is a rising and unsustainable fiscal deficit a political and not economic problem? The answer is that the sacrifice of investment in favour of consumption that it involves is in reality a sacrifice of the country's future for a larger share of the cake in the present. Lack of investment means fewer jobs for the youth who enter the job market year after year. It means a slower growth of savings in the future, and it also means an inability to pay for key nation-building functions such as defence.

In sum, what is at a discount is the nation itself. With the final demise of dominant party democracy, whatever developmental, nation-building impulse there had been in the government of the country - whatever desire to catch up with the rest of the world in economic well being, and to be respected in the community of nations - has withered away. Today and as far ahead as one can see into the future, every Central government will be a hostage to State leaders whose support they need to stay in power. The State chief ministers and party leaders may be good Telugus, or good Bengalis. But they are not good Indians.

Send this article to Friends by E-Mail

Section  : Business
Previous : Rupee tumbles to new low
Next     : Sanmar Engg.'s value systems hailed