Government budgetary transfers, particularly when elections are approaching, always catch the wrath of newspaper columnists. Given the timing of such announcements, few would swear by the sincerity of the government. But isn’t there a clear rationale for social sector transfers in the form of the pensions for the unorganized labour, health insurance for the poor and the National Rural Employment Guarantee Programme for the unemployed? Contrary to the tall claims against the politics and the economics of the same, spending of this sort goes a long way in ensuring that the social fabric is held intact, nay, the victims of the process of globalization get their due.
The widening of income inequalities engendered by the process of globalization has been empirically validated by several studies, India being no exception. While capital is free to move to any part of the world, the same does not hold for labour. In fact, the immigration debate in the mother country of all immigration, the US, has seen strange bedfellows. That it has raised social sector spending, even as it tries to pursue an inclusive model, ought to be welcomed, not dismissed with the usual social Darwinistic disdain that’s characteristic of the colonial era, given the restrictions on migration globally.
The post-independence developmentalist state has always been compelled to cherish a favourable attitude to the disadvantaged and the poor, and one of the primary reasons behind the waning of famines in free India has been the presence of a free press and regular elections. In this sense, electoral votes deservingly play an important role in the composition of government expenditure in our country. Studies have indubitably shown that the increase in employment expenditure in the 1980s helped tighten rural labour markets, thereby assuring a decent wage rate in many areas —which also helped create more non-farm jobs. So, asking for re-engineering the model for employment guarantee is one thing, rejecting it outright due to the kickbacks and contractors is another. Why throw out the baby along with the bathwater?
Vociferous critics—on the grounds of the leakages in the system—of the generosity in government grants to the poor are often mute spectators of the huge concessions to the propertied —land allotted for free for industrial development, tax breaks in special economic zones, etc. The government decision in 2006 to do away with long-term capital gains tax alone lost the exchequer at least Rs7,500 crore in a single financial year, apart from continual leaks... This, too, is a transfer: but to the propertied and the financially literate, who, as it is, are gaining from the asset market boom in the liberalized economy. The rate of the securities transactions tax, collection for which is the most cost-efficient, was reduced from what the government initially proposed—just because of the effective lobbying by Dalal Street through the pink press.
In the initial years of economic reform, the tax to GDP ratio had declined for several years, thanks to the umpteen tax concessions for the relatively well-off sections, as well as the special concessions to industry in the form of incentives or tax holidays. It is worth recalling that during the 1990s, the fiscal deficit was reduced purely by cutting capital expenditure that could have aided infrastructure development. Yet, so sad is the state of our political economy that the mute spectators have the audacity to claim that the expenditures on the welfare of the poor are unwarranted.
That said, spending on social sectors has been continually declining. A recent article, co-authored by the finance minister of Kerala, cogently argued that the revenue and fiscal surpluses generated by various state governments were purely, thanks to their readiness, to cut social sector spending, as they were bound by the Fiscal Responsibility and Budgetary Management Act (FRBM). No wonder, a state such as Bihar has been lowering its expenditure on health and education even as it started on a low base.
Given the inelastic sources of revenue for state governments, binding them to the balanced budget doctrine and FRBM norms spells doom for social development in the long run. Modern growth theories have clearly underlined the need to invest in education and human capital for long-run growth. This retreat of the state will seriously dent the growth process and further widen disparities. It would only be humane to welcome all government decisions to transfer resources to the poor. Leakages can be reduced if the delivery mechanism is decentralized and there is proper vigilance. Also, the movement for the right to information has been doing wonders in Rajasthan, for instance.
One view that seems to be gaining currency is that social sector activities should be left to NGOs, but in our country, the scale of this sector is still too low. Besides, there are no studies that cast doubt on the relative cost-efficiency of delivering services in the government sector. We ought to be cautious about reneging on the developmentalist state, which alone would be able to address the concerns of the marginalized sections, suffering from multiple deprivations in our society.
Krishnakumar S. is lecturer, department of economics, Sri Venkateswara College, University of Delhi. Comments are welcome at firstname.lastname@example.org