Bank on public investment

By C. Rammanohar Reddy

WE CAN be forgiven for being bewildered on hearing the Prime Minister announce from the ramparts of Red Fort that ``...after some introspection my Government has decided to give a new pro- poor, pro-village and pro-employment orientation to our economic policy''. What then were the policies that the Government had been following so far supposed to be? Or is this an explicit acknowledgement that the existing approach is anti-poor and anti- employment? To be fair to Mr. Atal Behari Vajpayee, the professed change in course follows an admission that while economic liberalisation has benefited the country, ``the fruits... have not adequately reached the poor and people living in rural areas. Inequalities have increased''. This still does not suggest a new and credible approach. It is more likely to be political expediency at work - a failing Government falls back on what it thinks is a time-tested way to regain popular support. But such a change of heart has rarely struck a chord in the electorate. The only Government that did succeed, that too just once and for a brief period, was Indira Gandhi's regime in 1969-71 when it hit on the `Garibi Hatao' slogan.

The bleak mood on the economy now runs so wide and deep that the Government is desperately looking for anything that will lift spirits. We have a plummeting industrial growth rate, slow employment growth and a contraction, not expansion, of exports. The industrial slowdown has now extended for more than five years, barring the temporary revival in 1999- 2000. The only positive economic indicators today are low inflation and large foreign exchange reserves. Those who expect the gloom to lift with an agricultural `bounty' this year are mistaken. If there is a bumper harvest, which at this stage is not even certain since so much of peninsular India has suffered a rainfall shortage, it will not necessarily result in higher rural incomes, which could boost the demand for manufactured products and therefore lead to an economic revival. If the collapse in farm prices last year continues this year, an agricultural revival in quantity terms could be the cause of distress and not the source of optimism. At times there is even an air of resignation as in describing the Indian slump as part of a global phenomenon. Such explanations are only rationalisations. The Indian economy is not yet so closely integrated with the world that it can be directly impacted by the global slump. Second, when the going is good one cannot take credit for a `unique' Indian path (like escaping the effects of the East Asian crisis of 1997-98) and when things turn bad blame global economic trends.It is possible to climb out of the present slump at home. There is now a growing admission, even if a very grudging one, that the only way in which economic growth could revive is by a substantial increase in public investment, especially in infrastructure. This reverses, at least temporarily, years of flirtation with the idea that private investment could become the main channel of investment in infrastructure. This is where, whatever the motivation, Mr. Vajpayee's declarations on August 15 could herald in a very modest way the beginning of the end of a decade of neglect of public investment. There is no mistaking the desperation behind the announcement of a number of new anti-poverty schemes. The NDA Government has acquired the reputation of announcing innumerable programmes, few of which ever see the light of day and those that do are so poorly devised that they are ineffective. No wonder then that the Prime Minister has had to also declare next year (2002? 2002-03?) as the `Year of Implementation'. But all said and done what is important is the formulation of two new programmes, one a concrete scheme and the other a statement of intention. The consolidation of rural employment programmes and their expansion in the form of the Rs. 10,000-crore food-and-cash work programme, the centrally-sponsored Sampoorna Grameen Rozgar Yojana (SGRY), is a belated acknowledgement that the cereal mountain of 60 million tonnes should be put to productive use. The second positive development is the realisation that the banking sector, by depriving the unorganised sector of credit, may have contributed to the present sluggishness in the economy.

One can fault the new food-for-work programme for coming so late and for using only five of the 60 million tonnes of cereal stocks. One can also be pessimistic and predict that the SGRY will go the way of many rural development programmes - with leakages, poorly-planned projects and unspent allocations. This may well happen, but one should not grudge the beginning that has at least been made to launch a huge rural infrastructure programme. The allocation of Rs. 5,000 crores for the cash component of the SGRY will be 40 per cent more than what is now being spent on rural employment schemes. Implemented with proper planning and care, the SPGRY could well revitalise the rural economy with investments in small irrigation projects, afforestation, watershed development and construction of schools, all of which are expected to generate additional employment of as much as 1,000 million person-days a year. In addition, the use of food stocks should have some impact on under-nutrition in the project areas. It is indicative of the dominant discourse on the economy, which has been about the so-called `second generation reforms', that the introduction of the new SGRY has received scarce comment in the media.

There are now three major infrastructure projects. Together, they could give a considerable boost to economic activity. Besides the new food-for-work programme, there is the rural roads scheme, the Rs. 5,000- crore Pradhan Mantri Gramin Sadak Yojana, launched last year. And the largest one, financed by the diesel cess, the Rs. 55,000-crore National Highways Development Project, which now seems to be the only major project that is under execution although it has begun on a small scale. The big `if' in two of them is about funding by the Central budget. With the revenue collections of the Centre falling to catastrophic levels, the Finance Ministry could end up using a lack of resources as a convenient excuse to make such small allocations that there will be little impact on the economy.

A large public road and rural infrastructure programme is not the only thing that can now be executed. A closely argued proposal made recently by Dr. S.L. Shetty, Director of the EPW Research Foundation, in the pages of the Economic and Political Weekly, is for a bond-financed investment of Rs. 75,000 crores over the next five years in railways, power, major irrigation projects and urban transport systems. The first query will naturally be what about the fiscal constraint? Dr. Shetty's proposal is based on the utilisation of funds with the banking system and not with the Government. Today, with the demand for credit from industry so low, the banks are flush with funds which they use largely for subscription to Government securities. And Rs. 75,000 crores can be lent to the infrastructure sectors without stoking inflation. The next question will be, how will these sectors repay these loans? The answer is that lending to these sectors will be tied to a revision of tariffs and user- charges, such as a re- balancing of rail tariffs. The argument is also that these sectors, starved for resources and desperate to expand their capacities, will be quite willing to carry out tariff revisions. Such a huge investment programme will simultaneously provide a demand fillip to domestic industry on a scale that will surpass that generated by the three rural development and highway programmes.

It has been fashionable to talk of ``changing our mindset'' about a controlled and planned economy. Perhaps it is time to turn that approach on its head. What we need to do is change the mindset by ending all that talk of `second generation reforms' and placing emphasis now on a public investment-driven revival of the economy, especially Indian industry.

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