BackNot guns or butter but roads or dal
Not guns or butter but roads or dal
PremiumPhoto: Sunil Saxena / HT
New Delhi: Economists call it constrained optimization. It is when the goal set is ambitious but resources are few—the famous guns or butter dilemma. What will you spend on, given a limited purse but competing needs? The question that stares the finance minister, as the chief financial officer of India, in the face is: roads or arhar dal. His understanding of the issue was reflected in the three goals in the July 2009 budget, which were: Get growth back to 9%; make this growth inclusive; strengthen the cash transfer pipeline from India to Bharat. The next Budget should see a continuation of this theme. But the contradictions (that befit a country with Godzilla-size problems) in the choice set are daunting. His challenge this Budget is to convert the “or" into an “and".
India needs to grow at 9% per year to double the current per capita income by 2020. By now we know that growth, which has slipped in the current year, will come back to 9%. But will it sustain? Unless we make the infrastructure pipeline fatter and less leaky, we run the risk of choking off growth and an overheating economy due to the supply-side bottlenecks. India needs long-term sticky money to build factories, power plants, for roads, railways, urban renewal, the laundry list is unending.
The money we need for the roads and arhar dal option could come from taxes. Any government can tax more, but the perils of predatory taxation prevent slicing off more from those already in the tax net. The only other way to increase taxes is to get more people paying and more of those paying at higher marginal rates. Which loops back to growth. So the Rs1,31,317 crore allocated as expenditure on the six flagship inclusiveness programmes could have built thousands of kilometres of roads and fired tens of power plants. But that’s not an option.
So, what’ll it be—roads or arhar dal on 26 February? At Mint, we’re hoping that he manages to replace the “or" with an “and". I think there are two things he can do to achieve this. One, make use of the domestic savings sloshing around in the system and not being used productively in long-term infrastructure financing. India has a household savings ratio of 35%-plus, one of the highest in the world. But most of this lies in savings deposits and unproductive gold. The conversion of savings to investment (S to I) is a crucial step for a country with ambitions like India.
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Two, ensure that the pipeline leaks less. This would utilize the money already in the system more effectively. By making the pipeline between India and Bharat more robust, those excluded will be better able to share the fruits of growing at 9%. The first step toward this less leaky pipeline was taken in the last budget in the formation of the UIDAI (unique identification authority of India). Events since then show that the government is keen to follow through. The next step would be to use the UID number, and the technology that comes with it, as the glue to stick the whole inclusiveness piece together. To effectively move a system that feeds off the giant leaking grid to one based on technology will take more politics than economics. But to get both roads anddal at the same time, the FM will have to take concrete steps to make financial regulation and inclusion a part of the Budget this year.
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