The death of 29 policemen in an ambush by Maoists in Rajnandgaon, worrisome as it is, is a cause for calm introspection in a very different domain. It should force citizens and economists who fret over the size of the fiscal deficit to think in a different direction.
The deficit (for fiscal 2010) stands at Rs4 trillion in absolute terms—some 6.8% of the gross domestic product. It is feared that the government’s borrowing programme to plug it will crowd out private investment and force a northward march of interest rates.
An estimated Rs53,227 crore, or roughly 13% of the fiscal deficit, will go towards funding flagship programmes such as the National Rural Employment Guarantee Scheme (NREGS) and the National Rural Health Mission (NRHM).
When one factors in food, fertilizer and petroleum subsidies and other assorted expenditure on the poor, the figure may well cross the Rs1 trillion mark, or roughly a quarter of the fiscal deficit.
A more productive way to look at this expenditure, which is no doubt a big reason for the gigantic fiscal hole in government finances, is to see it as a security premium. Large swathes of India are caught in the vortex of ultra-Left violence. In the journey from peaceful places (such as New Delhi) to violent ones (such as most of southern Chhattisgarh), lie way stations such as Lalgarh that have the potential to engulf the areas surrounding them. Expenditure on NREGS and NRHM have the potential to quell this political fire. These represent a premium that has to be paid to keep the country secure for economic progress.
Such arguments often rile well-meaning, if mistaken, Leftists. There is no reason they should. For one, there are serious doubts if NREGS expenditure can create assets that can generate income for the rural poor. There are also doubts on the sustainability of NREGS. Massive expenditures of the kind being incurred now can only be sustained so long as there are very good political returns on them. Governments are likely to either run into fiscal trouble or simply get exasperated at the durable nature of poverty in the countryside. It is the economic logic of such schemes that is wrong, not the political arguments in their favour.
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