It requires a great deal of optimism to believe that India’s fiscal deficit will not breach the 4.6% of gross domestic product (GDP) mark this year. Going by the trends, the current account deficit too, is likely to breach the psychologically important 3% of GDP mark. To top it all, the rupee has witnessed a historical low against the dollar
All this marks a remarkable change in the country’s economic climate. Barely six months ago, high inflation was, perhaps, the single biggest concern. True, the fiscal deficit number looked rather optimistic, but overall, matters were under control. So what has changed in this period? If you are the finance minister of the country, clearly a worsening global environment has a role to play in the emergence of these adverse conditions. Another answer could be that supply constraints in the economy are creating macroeconomic imbalances. Both statements are true, but do not shed any mechanistic light on the problem. They are only a surface manifestation of a quiet crisis that is brewing in India.
In the welter of data, one tendency can be discerned clearly. Since 2007, the ruling coalition in New Delhi has gone out of its way to turn private goods into public goods. That lies at the root of the macroeconomic imbalances seen today and likely to be witnessed in the years ahead. Classically, a private good—a loaf of bread is a good example—is something which its owner can exclude others from consuming. Food, petroleum products, employment and electricity are all in this class. A public good, in contrast, is one such that what one consumes does not lead to any decrease in anyone else’s consumption of it. Clean air, scenic beauty, national security, justice and equality of opportunity are public goods. The United Progressive Alliance (UPA) has been busy these past years in changing—actually inverting—these definitions. It has turned “excludable” goods —i.e. when a person can’t consume a good unless he pays for it—into non-excludable ones. All by ensuring an identical, rock-bottom, price for everyone. That is the UPA’s innovation.
One-by-one, it has turned goods such as petrol (and diesel), electricity, employment (through the Mahatma Gandhi National Rural Employment Guarantee Scheme, or MGNREGS) and now food—quite possibly during this session of Parliament—into public goods. This has not only greatly distorted prices of various goods in India but, even more worryingly, is also mutating incentives out of shape. Correcting the latter, unlike correcting prices, is not a matter of tinkering with macroeconomic variables, but requires altering the fabric of society. This can’t be done by changing budgetary allocations or by changes in monetary policy. Once set, they can shave off growth substantially without anyone noticing it.
Some examples are in order. Consider food first. In any normally functioning food market (for simplicity, consider foodgrains), prevailing prices are the result of a demand and supply equilibrium. To ensure a measure of equity, governments intervene and reprice food downwards for the poor. The question is that of drawing a line. Today, the UPA government believes in wiping this line clean. The impending National Food Security Act (NFSA)—when fully implemented—will ensure that 65% of Indians get dirt cheap food. This will lead to a disastrous reordering of incentives among farmers. Today, 62% of operational landholdings in the country are less than 1 hectare. If food prices are reduced drastically below what farmers get for their output, as is likely when NFSA kicks in, this class of producers will overnight lose any incentive to grow crops. Even today, they consume a large fraction of their output. But post-NFSA, they will simply queue up in front of a ration shop. The burden of production will fall on a shrinking pool of farmers. The government’s grabbing hand will be ready to snatch as much grain as it can from them. To do so, it will have to play ball with inflation on the one hand, and ever increasing minimum support prices on the other hand. This jugglery can’t be executed for all times.
Employment is another good example. In the labour market, demand and supply conditions determine the wage level. If wages are low, it is not because employers derive pleasure in employing labour cheaply, but on the prevailing demand and supply conditions. Today, the bulk of the country’s unskilled labour force is eligible for a guaranteed 100 days work under MGNREGS. Such is the scale of this programme that it has led to labour shortage in an otherwise labour-surplus country. From construction to farming, rising input prices are translating into higher output prices. From food to finished houses, the secular rise in prices has a wage floor at their root.
Something similar has happened in the case of fuels as well. These goods are sold at ridiculously low prices that are identical for everyone—making them virtually non-excludable. This has bled state-owned oil companies almost to the point of ruin. This year, oil under-recoveries are going to touch Rs1.32 trillion. This story is repeated in many other sectors.
The hour is late. 2014 is visible on all political screens. But even now, there is time for the UPA to give up its silly attempt of turning private goods into public goods.
Instead of doing that, it would be much better for the country if it makes genuine attempts at providing true public goods—ones that have positive externalities. Two examples come to mind, education and infrastructure. It can do that, or it can continue with what it is doing . The latter course will be ruinous: for fiscal reasons today and by endangering future productivity by distorting incentives of a great mass of Indians.
Siddharth Singh is editor (Views) at Mint.
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