Sen vs Bhagwati: Storm in a tea cup?

Last week a debate, which has since turned acerbic, between two celebrated economists, Amartya Sen and Jagdish Bhagwati, took centre stage. One is a Nobel laureate and the other is a perennial contender; ideologically they are from opposite ends of the spectrum. No doubt, therefore, when the two cross swords, the outcome has to be gripping. Their latest episode didn’t disappoint.

add_main_imageSo far this has played out on the letters page of The Economist. While we need to see if this will spill over yet again, the bigger fear is of people drawing the wrong interpretation from the debate. In any polemic, nuance is often eschewed; those debating, especially the two economic dons in question, know their issues and the context, unlike those viewing the debate from outside. I am afraid something similar seems to be happening here, especially among those who are taking what they believe to be the core of the debate and applying it to India’s current context.

The whole controversy has arisen following the review of Sen’s latest book (co-authored by Jean Dreze) that appeared in The Economist. The point of conflict seems to be on how much emphasis Sen places on growth alongside championing the cause of redistribution in an economy. Bhagwati, in a letter, claims that it is only “lip service” (implying it is not favoured), while Sen is claiming that this interpretation of his work is untrue. Though on the face of it the debate does seem to be a case of he said or she said, it is actually very nuanced.NextMAds

Neither is making a case that it is an either-or situation. Instead, the point of difference is on how much emphasis Sen places on growth. It would be insulting the intelligence of these two stalwarts and their vast compendium of research to even suggest that one stands for growth and the other for redistribution.

Sen implies as much in his last response to Bhagwati’s hate mail, when he said, “Economic growth is very important as a means for bettering people’s lives, but ‘to go much further, faster’ (as your reviewer commented) it has to be combined with devoting resources to remove illiteracy, ill health, undernutrition and other deprivations. This is not to be confused with mere ‘redistribution’ of incomes, on which Messrs Bhagwati and Panagariya choose to concentrate.

The understanding, which is central to our book, that economic growth is greatly helped by early public support for the education and health of the people draws on positive experiences from Japan, China, Korea, Singapore and many other countries. It can scarcely be like putting ‘the cart before the horse’.”

It is a no-brainer. Without redistribution, growth is not sustainable (just like ignoring environmental norms can threaten growth). It is not an either-or situation. They have to occur hand-in-hand as my gym buddy pointed out in his common sense assessment of the situation. Unfortunately, what has captured the imagination of a section of opinion is that this is a case of redistribution versus growth. And they have then used this interpretation to weigh in on the Indian context where the macroeconomic fundamentals are threatening to come apart due to the acute fiscal imbalance, which is being blamed on the runaway rise in the subsidy bill.

This is exactly why such reductionists should be shunned. Their narrative, often simply worded and with binary logic, may be very seductive and appealing (just like George Bush argued his case so successfully to launch his misguided war in Afghanistan and Iraq) but is misleading; following their cue could a la Bush lead to disastrous consequences. (And, for the record, the latest phase off the Sen-Bhagwati face-off was kicked off on 2 December 2010 after Bhagwati addressed the Indian Parliament and articulated the relationship between growth and poverty. In fact, the subsequent exchange was so fierce that CUTS International, a non-profit, has actually compiled an e-book, Growth and Poverty: The Great Debate.)

Actually, the debate on subsidies should not focus only on the distortions it causes to the finance minister’s fiscal arithmetic. Of course it distorts the math and some of it is avoidable, but is it the only cause of fiscal imbalance? Absolutely not.sixthMAds

Instead, the focus, as Vijay Kelkar, former chairman of the finance commission and finance secretary, never tires of pointing it out, is the distortion it causes to market prices. According to him, the solution is to provide a negative income tax—an income credit—to the person receiving the subsidy. Something like what is being attempted through the direct benefits transfer in the case of cooking gas. A sensible solution indeed. Not only do you have an audit trail of the recipient of the subsidy, but you also ensure that market price—the price at which demand equals supply—is not distorted by creating a dual price regime. India is today moving rapidly towards a market economy where the allocation of precious resources should be taken on the basis of market prices to ensure its most efficient use.

At the same time, everyone can’t afford to pay the market price. And this is why subsidies kick in. Removing poverty is one thing (and the good news is that the official numbers are falling), but including more stakeholders in the country’s growth process is another. Subsidies are designed as safety nets precisely for these segments of the population to cushion the attendant blows of inequality of income and opportunity.

In any case, even if we write off all subsidies, India’s fiscal deficit problem will not be fixed. It is like, everything else ailing the Indian economy, structural in nature. The revenue side needs as much streamlining as does expenditure; and this in turn is related to fixing the rest of the economy. Doing so needs political consensus. Till such time, the least that can be done is to avoid reductionist interpretations of India’s problems.

Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com