This is a year when good economics can surely be good politics because there is only the Bihar state election later in the year. The government is also freed of its coalition constraints, with the Left not only having been marginalized but also in somewhat dire straits even in its strongholds; it faces the danger of an implosion as well. I am sure the Congress party leadership realizes that there cannot be a better opportunity for presenting a landmark Budget. This will burnish the party’s developmental credentials and take off the populist image that has unfortunately come to characterize the previous and perhaps even the present Congress-led governments.
Can Pranab present a magical budget? Find out on Livemint.com’s Budget 2010 microsite. Click here
The economy and the country needs a “reformist budget” to regain the growth momentum and also to tackle the growing threat of a Naxalite movement which feeds on poverty, inequality and bad governance. The government was plain lucky that its two successive electorally oriented budgets in 2007-08 and 2008-09, which let the fiscal deficit rip, helped stave off the global and domestic downturn. But now it is critical to boost sagging private investment demand, to substitute for public expenditure-induced household consumption. Public expenditure has to be restrained to prevent public debt crossing prudential limits, resulting in higher interest rates and a negative impact on investment intentions.
Therefore, the best way forward would be to use the Budget to tackle some of the well-known constraints on pushing up both domestic and foreign investment. The most important of these at this stage, given our demographic imperatives, is to liberalize entry into the education sector, especially the vocational and higher education segments. They have to absorb the growing population of children coming out of the primary education that has now been fortunately universalized. Simultaneously, mechanisms to ensure the quality of curriculum and instructions in the form of multiple independent accreditation systems have to be put in place. Creating another monopoly to replace the existing University Grants Commission or the All India Council for Technical Education will not address the problem. Significantly larger resources should be allocated for teacher training programmes, as there is a woeful shortage of adequately trained teachers both in secondary and higher education.
The pervasive subsidies culture is the other major factor that discourages investment—whether private or public—in areas where this is urgently needed, such as rural infrastructure or expansion of energy supplies. This culture, built up over the decades, has turned subsidies into entitlements rather than time-bound measures designed to address a specific circumstance such as a natural disaster or chronic exclusion. Today, subsidies cannot be reduced for fear of unleashing a political backlash by an opposition that is perpetually on the lookout for tripping the government on populist issues.
But as alluded to earlier, at the present time, the government need not bother too much about these opportunistic opposition moves—this will not have too much traction in the public domain either, because the media is thankfully beginning to encourage a discussion on sensible options. It is time young leaders such as Rahul Gandhi take the initiative in reaching out to other younger members of Parliament (MPs) across party lines to roll back this pernicious subsidy culture. They will serve the country’s interest immensely by generating a consensus that subsidies should be aimed only at those below the poverty line and for regions that are either severely lagging or strategically important. Subsidies should not become entitlements for the so-called aam aadmi, a euphemism for the burgeoning middle class. That is neither desirable nor fiscally feasible.
Subsidies yield short-term gains at the expense of longer term national objectives of employment generation and equitable growth. A ready example is the railways budget itself. The extensive cross-subsidization of passenger traffic— by overcharging on freight—reduces resources available for investment in improving the commuter rolling stock, bringing in new technology such as high-speed trains that can transform the economic geography of this country, and upgrading signalling technology to improve safety—all of which are much needed. It also raises industrial costs and renders the Indian industry globally uncompetitive and unable to lower prices, something that can release new demand and help generate economies of scale.
By restricting subsidies to commuters and poor passengers who travel only locally, railways will see more investment that will directly contribute to faster industrial growth and employment generation, and better connect backward regions to growth hubs. All this will help equity and growth simultaneously. With at least 250 million young people expected to join the workforce by 2025 (fewer than two Plan periods), continuing with subsidies that pander to the middle class and only yield short-lived electoral gains can prove to be socially very costly. Because these potential entrants to the workforce, if unemployed, will inevitably swell the ranks of Naxalites or religious fundamentalists. A political case against the pernicious system of subsidies and populism must be made by our younger MPs to avoid the trade-off between good economics and good politics.
Rajiv Kumar is director and chief executive of the Indian Council for Research on International Economic Relations. These are his personal views. Comment at firstname.lastname@example.org