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Home / Politics / Policy /  India Shining debacle led to sharp rise in social sector spending

The success of the Aam Aadmi Party (AAP) in the recent Delhi assembly elections has led to much angst about the resurgence of populism. Especially so as some other states have lost no time in copying AAP’s promises to slash electricity tariffs and offer free water.

But populism is a politically loaded term. In a desperately poor country, if people want affordable electricity, water, health services, education, transport and food, is it reasonable to call it populism? Should we grudge the people even the rudiments of a social safety net? Or should we call it part of the right to life?

While there has been some hand-wringing in the media about populism, political parties, regardless of ideology, seem to be remarkably blasé about it. All of them seem to have come to a consensus that a higher proportion of spending on social services is essential.

Let’s take a look at the facts. Charts 1a and 1b show the percentage of social sector expenditure to total expenditure of states. The trend shows one curious feature—the percentage of social sector expenditure to total state government expenditure for all the states dipped to its lowest in 2003-04, the last year of the National Democratic Alliance (NDA) government. This proportion has since picked up steadily and, as Chart 1a shows, it’s now higher than where it was in 1990-91.

The same trend is seen in the central government. Clearly, the United Progressive Alliance rule at the centre has seen a number of welfare measures, ranging from the rural jobs guarantee scheme and the entitlement laws such as the right to education and food.

Chart 2 shows the central government’s spending on social services, rural development and rural roads as a percentage of total central government spending.

Note the steadily rising trend. It went up from a low of 10.5% in 2003-04 to 18% by 2008-09. The numbers show that, if this is populism, it’s been going on for a decade now. The flip side to the higher social expenditure, unfortunately, is lower capital spending.

What’s interesting about the states’ numbers (Chart 1b) is that after 2004, the states ruled by the Bharatiya Janata Party (BJP) too have increased the share of funds going to social sectors. Take Gujarat for instance. Gujarat’s social sector expenditure fell to a low of 27.3% of total expenditure in 2003-04, but has gone up substantially since then, reaching 39.9% in 2010-11.

In fact, the BJP-ruled states—Madhya Pradesh, Chhattisgarh and Gujarat—in 2010-11 had a higher proportion of resources going to the social sector than the all-states average of 39%. Madhya Pradesh improved its share of social sector spending from 24.7% in 2004-05 to 39% in 2010-11. Chhattisgarh’s share of social sector spending is the highest among the states.

Could it be possible that the failure of NDA’s ‘India Shining’ campaign in 2004 led to a reappraisal of the development trajectory by all political parties?

Perhaps the lesson political parties learnt from that debacle was that governments needed to set aside more funds for the aam aadmi. That would explain the rise in social expenditure since 2004 by all state governments.

There are, however, a few surprises among the states. Punjab, for instance, is a distinct outlier, with expenditure on social sectors much lower than the national average. Kerala, which is supposed to be a social sector model, is also well below the average. Moreover, the proportion of its budget devoted to social sectors has increased only modestly since 2003-04.

In a democracy, particularly one in which large sections of the masses are starting to find a voice, it is inevitable that spending on social sectors will show a rising trend. It is significant, though, that this increase did not lead to any problems as long as the economy was growing strongly. Trouble is, the 2003-07 period, when the Indian economy rode on the back of strong global growth, was exceptional.

In more normal times, one way of containing social expenditures is to ensure they are better targeted.

The long-term solution is productivity growth through structural reform. But that is no easy task in a democracy.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at
capitalaccount@livemint.com

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