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The misplaced fiscal push

The misplaced fiscal push
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First Published: Mon, Dec 08 2008. 10 29 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Mon, Dec 08 2008. 10 29 PM IST
I had originally planned to write on suitable long-term policies for inclusive growth. But terrorism in Mumbai has prompted me to somewhat change the topic.
The most valuable writing on inclusive growth, in my opinion, has been by Hernando de Soto. In his first book, The Other Path (1986), he explained how, in his native Peru, the lack of property rights—in particular, clear title to land—hampered the progress of the poor. He calculated the number of days and/or number of procedures it takes for activities such as starting a business, filing for bankruptcy, registering a property. Twenty years later, the main feature of the World Bank’s Annual Survey of Doing Business is the computed estimates of these measures for different countries, and rankings for them.
Illustration: Jayachandran / Mint
In his second book, The Mystery of Capital (2001), de Soto stressed that poor countries are not poor in capital, as orthodox development economics stresses. Rather, the capital is tied up in illiquid title to land and in the value of assets locked up in litigation. The best policy for an emerging economy is to spend on legal infrastructure and do what else it takes to ensure that the court system clears the backlog of various civil and criminal cases. Clearing the backlog of criminal cases will save some lives; clearing the backlog of civil cases will provide a boost to business and growth.
As the world economy slips into recession, governments are increasing spending and providing huge fiscal stimuli to get their economies going. This is an opportune time to discuss what should be the government’s spending priorities.
Adam Smith, the classical economist, stated in The Wealth of Nations that the first “duty of the sovereign” was on the expense of defence and the second on the expense of justice. In our case at present, the task of defence against Pakistan is closely bound up with getting the criminal justice system to clamp down on internal terrorism. Smith listed “the erection and maintenance of those public works and institutions which are useful but not capable of bringing in a profit to individuals” as only the third duty of the sovereign. Niranjan Rajadhyaksha has insightfully pointed out last week in his column that Kautilya, the Indian equivalent of Adam Smith, argued in Arthashastra that the first duty of a ruler is to protect the life and property of citizens.
Unfortunately, our government has not functioned along these lines in recent years. The United Progressive Alliance (UPA) government has been spending massively on NREGA (National Rural Employment Guarantee Act) and on the Golden Quadrilateral Project to build roads. Economists will keep debating the benefits of such spending. These schemes are both meant to boost the purchasing power of the poor by food-for-work programmes, and to build roads and other infrastructure that constitute a critical input for growth.
However, even before the 26/11 attacks, the priority accorded to these schemes was not justified. In our Constitution, the right to life is a fundamental right, as it should be. By contrast, the guarantee of a job and the right to freedom from hunger, which the UPA has been pursuing via its NREGA food-for-work and other schemes, are dubious goals. In general, freedom from hunger is better achieved through market transactions, not by government spending.
We all make mistakes. What is critical is how soon we recognize the mistakes and change course. Judged by the huge stimulus package, amounting to Rs32,000 crore, announced on Sunday by the government, not much has changed with regard to the priorities for public expenditure.
To begin with, an additional Rs20,000 crore non-Plan expenditures has been announced. This is straightforward Keynesian pump priming. A slew of measures have been announced to boost faltering exports, in particular a Rs350 crore additional allocation for export incentive schemes. The Central value-added tax rate has been cut by 4%, meant to stimulate the automobile sector. To boost the small and medium sector, credit guarantee for projects up to Rs1 crore has been provided for projects without collateral. Sops for those who take home loans of up to Rs20 lakh have been promised.
Clearly, the time was overdue for a massive reorientation of spending to ensure the police and the criminal justice system function better. India has one of the lowest ratios of policemen to population in the world (0.95 per 1,000). On top of that, many of them are on special duties.
Granted, outlays do not result in outcomes, a point that should be emphasized repeatedly. There are many cases now coming to light of failure to spend sanctioned money on proper police equipment. But these considerations apply to infrastructure spending as well. Allowing for leakages, with better equipment and training, many police lives would have been saved in Mumbai.
Overall, Sunday’s stimulus package has failed to reorient itself to the basic task of the government—ensuring the safety of life and limb of the people. We first need huge doses of inclusive public spending, or IPS, that will also bump up demand now. That is also the acronym of the Indian Police Service.
This is based on an article prepared for a seminar last week at Christ University, Bangalore, on policies for inclusive growth. The author is a professor with IIM Bangalore. Comment at theirview@livemint.com
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First Published: Mon, Dec 08 2008. 10 29 PM IST