Welfare-Business Priorities for the Indian Economy

The recent fixation of the Indian electorate with the state of the economy is an extremely unprecedented situation for the Indian Democracy because in the past the electorate mostly worried about cult figures, legacies, religion and so much more. Not that the latter constraints have all evaporated from the face of Indian politics, but the sense that the economy is wriggling into the centre-stage of 21^st Century Indian governance is heartening for an aspiring economist to say the least.

I think it is amid this fixation of the various sections of the electorate and the rest of the world as a whole, that we set ourselves very high expectations of the current NDA Government and its economic outlook and policies. Of course, we have seen as to how an Economy makes and breaks an election in the case of the recently concluded UK elections where one of the chief USPs of the Conservatives was the improvement on economic fronts since the time they took over realms from the Labour Party. And the Modi Government has come in to the fray in slightly similar situations with albeit a fundamental difference: The Indian Economy is an “emerging” economy while the British Economy is well past that stage of being tagged an “emerging economy”. And it is this tag of an “Emerging Economy” (others including “Emerging Market”, “Developing Economy”) that make the trajectory of the Indian Economic performance so crucial for the Indian polity and electorate. We voted Narendra Modi into power with a decisive mandate for reform in the Lok Sabha and it is this hunger for reform and performance that made economists of the common people who all began to astutely follow the budget and give ratings to Arun Jaitley, which according to them would be equivalent to a Moody’s or an S&P rating.

The making of happenstance economists out of the Indian population is not the main point of this piece but serves as a crucial contextualization and a background to the certain apprehensions of the current schemes of the government that a student of economics gets to see in the social media emanating from among his peers. That cogent and reasonable debate and not direct confrontational ridiculing is what economists believe that their modus operandi is, I have undertaken a similar effort.

A sense of unease has crept into the different sections of the economy and this aware electorate that I previously spoke of, when it comes to the direction of the policies of the current NDA government. To aptly put it, the debate concerns A Predominantly Leftist/Socialist Past vs A More Free Market future that have been time and again pitted against each other (most famously when Narendra Modi remarked that the NREGA Is a reminder of how the Indian National Congress created a population of land-diggers in the past 60 years of their governance of this country). And this debate has essentially now taken a new turn about the Welfare-Business Dilemma that the Modi Government seems to find itself in.

At a first glance through the Indian Economy’s current status quo (whether that be through opinion articles or newsroom conversations) it becomes certainly clear that the Welfare-Business anti-thesis is not something that the current government is aiming for. It is not a case of welfare and business being substitutes to each other as a lot of people seem to construct them to be. The economy does not face this sort of a production possibility curve as I am constructing below:

 

                

                                                                                             
What a production possibility curve is to put the economy into that perennial guns-butter debate where you have 100 units of resources in the economy and can use it to dole out either welfare schemes for the poor or make the economy friendlier for Business entities i.e make welfare and business compete with each other. It is however common knowledge that the Indian economy faces many challenges as it wriggles out of inertia as I opine on its current status but this Welfare-Business Dilemma is definitely not one of those challenges that I would rank very highly on my priority list (given that I assume that it exists).

The first concern that I would like to address is the myth about the Debt-GDP ratio of our economy. Ritinkar points out that the people who scare the masses with these figures of a high Debt-GDP ratio are selfish and want to subsidise themselves by reducing the welfare spending on the poor. That is not the case. The Debt-GDP ratio is a very important cog in the wheel of an economy, more so of an emerging market economy such as that of India. The counter may come that Japan has a debt-GDP ratio going well in excess of 200% and many other countries have a really large Debt-GDP ratio but continue to dole out welfare schemes for the poor. It is a legitimate counter when we just keep it to those figures and not look at the core of their economy such as demographics, trajectory of economic growth, investor confidence and so on. When we start looking at those cases we see that the Indian Economy begins to give a rather dim picture about itself. So why should we bother about this ratio? The answer is simple. For India, as calculated by the Reserve Bank of India, the threshold level of Debt-GDP is 61% and currently we are dangerously close to that level. What happens when you start crossing that threshold level? Growth and Debt begin to take an inverse relationship with each other.

Ritinkar very rightly in his blog out that a major share of our debt is to the Indian populace and not to the rest of the world which in this case is a major strength for India of used properly – We don’t have to depend on an external country to finance our existence on 4 out of the 6 days that the Stock markets are in operation. But this is also a major constraint for the Indian state. The path of growth which the Indian economy currently is on, a major share of the people in the country do not have the means to education or are currently allowing the subsequent generation to indulge themselves in the education provided by the state. This is where the welfare spending comes into the picture. In a state of unemployment and lack of means for the poor people, Ritinkar advocates expanding the reach of welfare spending measures, ceteris paribus (My takeaway from his blog). But this welfare will have to be financed by someone – either by external sources or internal sources. It is nothing but policy to ask a population which is grappling with its own sources of income to finance your welfare measures for them because they may not have the additional money to do so under status quo. If they end up doing so, you push them greater into the pangs of indebtedness which only compounds the situation you’re put in because this translates into a Debt-Welfare Upward spiral. The second stream would be to go knock on the doors of external organizations or agencies which would not only push up that economic figure of external debt from 20-odd percent but would also alarm the so-called Leftists in the country that India is being sold out to the Capitalists and the West, which would only spill-over to the rest of the populace. The first situation is definitely undesirable and the second one is only desirable if you want an economy to be indebted to the rest of the world to the tune of trillions of dollars. Seeing both as unfeasible, what the current government has done is to move toward a partial roll-back of the enormously expensive welfare schemes to make sure that it doesn’t go into that level of debt where Economic Growth becomes an impediment and the very same people for whom it took on the debt, start criticising it without knowing the actual reasoning.

But two things have happened simultaneously with this contraction in welfare spending. Firstly, we have seen steps toward inclusive microfinance being taken by the Government whereby close to 15 crore poor people have set up bank accounts of their own and the government has been able to mobilise almost 15,800 crores for the same if my recollections are correct. What is important is the digitization of finance in the economy has been propelled under this initiative through a lot of new insurance and other pension schemes that are starting to be rolled out by the government. And why is this important – because digitization of accounts helps you to avoid those middlemen that are existent in the current PDS system.

The Indian economy at this point of time is fraught with a maze of subsidies and expenditure programs which in their current forms have contributed heavily to a drain on the Central Exchequer:

1. LPG – With Rs. 23,746 crores of fiscal expenditure on subsidies we see that the bottom 50 percent of households only consume 25 percent of LPG while the rest is benefitting the rich

2. Kerosene – With expenditures of Rs. 20,415 crores on subsidisation we see that 41 percent of PDS kerosene allocation are lost as leakage, and only 46 percent of the remainder is consumed by poor households.

3. Sugar - 48 percent of PDS sugar is lost as leakage. Households in the bottom 3 deciles consume 44 percent of the remaining 52 percent that reaches households. The total subsidy on sugar as a part of Fiscal Expenditure is Rs. 33,000 crores.

A change is slowly being initiated from this PDS system toward a more inclusive financial infrastructure for the population of the country which seeks to connect the people in the economy directly to the agencies in charge of welfare measures. What could happen then is that the current corpus under each scheme could be more effectively distributed by the Union through these banks rather than the current PDS system which is filled with leakages. To comment on the effectiveness of this idea is moot and I agree to that because this is something which has just started on a mass scale under the current government. However from what we did see during the pilot projects of Cash transfers in the 100 districts of the country, spearheaded by Nandan Nilekani (credit given where due) is that it did lead to increase in the nutritional rates of the people in those districts, giving a somewhat limited yet bright hope for a system of microfinance and welfare based on direct cash transfers in the future.

The thrust of the government has been to prioritize the banking sector performance and that of Fiscal Deficit in the country. The banking sector is crucial to our economy at this juncture because banks have become a major source of savings-mobilisation from the people in the economy who had idle physical currency lying around with them. This sort of storage of physical currency would not benefit the economy because it is not injected into the economy for subsequent productive purposes. If we consider a basic Solow growth equation in the economy:

We will see that the numerator which represents savings in the economy will create a higher GDP and output when the quantum of savings are increased in the economy, other things remaining the same. And this is essentially what the focus of the government has been throughout the previous year – to tap into the previously untapped savings of the Indian populace which was previously excluded and thus create a path of savings-induced growth in the economy for the initial phases of the economic roadmap of the current tenure.

The thought of not giving much weightage to the Fiscal deficit is not one without its demerits because as we all saw in the case of the English elections, one of the game-changing elements of the Conservative Party was their emphasis on getting their extent of Fiscal Deficits in order through measures of targeted austerity from Mid-2010 which did induce an increase in the average wage rates of the employees in England from the 2014 onwards. Keynesians like Paul Krugman were definitely not happy with this talk of Austerity but then this injection of policy did attract greater degrees of investments in to the British Economy and have produced desired results to a degree thus far, with the British economy showing considerable signs of improvement through growth rates which are some of the most impressive among the G-20 economies.

The second interesting development that has taken place along with this contraction is that of the renewed attention of the global entrepreneurial class towards India as a source of investment over the past year. This is crucial because India has been suffering from what a lot of people brand as “Jobless Growth” over the past 3-4 years. The push to brand India as a destination for business and as a manufacturing hub with conditions conducive for the ease of conducting business is something that we did not see a whole lot during the previous UPA regime. To solve the issues of unemployment we need different avenues of generating employment and the attraction of global investments is just one of them. The USP on this front comes from the cheap and abundant labour that we have as a country in our repository which would only help to enhance a company’s profit under the given conditions of prices. The second source of employment generation that we are seeing is the modernization of Indian infrastructure which is being given a filip under the current government. When new roads are laid down and new railway lines are created for high-speed state of the art trains, the source of labour will have to be domestic in most cases. The creation of smart cities from scratch will also require a massive amount of effort in construction where the labour will also be from the Indian labour force. This at first may not seem striking to the eye but on careful reconsideration we see that it begins to solve the problem of unemployment that we spoke about initially while introducing the case of welfare schemes and its constraints on implementation through a modicum of debt.

What must be seen today when we consider the case of welfare schemes such as education is the payoff from a case of education or no education. When you consider a household which has Rs. 25 worth of daily income and whose daily expenditure on food is Rs. 20 on an average, we see that free primary education for the children is not a bad idea. But here comes the case of choice-based payoffs. What would the head of the family decide about the future of the child that we are talking of? The first choice would be to give him education and wait for the long term greater payoffs from education. The second would be to get him into the family business or any other source of income which would increase the average daily income to Rs. 30 and thus give the payoff of greater short term benefits. When we have these choices faced it depends on what a family considers more important (or with higher perceived payoffs) that will determine the decision of enrolment into education.

The last point that I would like to talk about is the case of Cooperative Federalism and Competition among the states that has been revived under the current NDA regime. It saw its initial genesis through the Niti Aayog which has begun to serve as a guiding organization to the states in terms of their expenditure through welfare measures. What is being seen is that with the recommendations of the 14^th Finance Commission and with the guidelines of Niti Aayog, there is greater emphasis on the states to begin developing their mechanisms of welfare expenditure (which the Centre has now begun outsourcing). Of course politics will play a key determinant in this sector but what we are seeing now is that with greater finances beginning to be handed over to the state through the recommendations of the Finance Commission (I would avoid the details at this point due to paucity of space) and with the greater increase in the clarity of the mandate of the Niti Aayog, we may see in the future that states begin to start taking the mantle of Social Expenditure upon themselves, and plug in the Centre’s contractions in the Welfare Expenditure that we might see till the Fiscal Deficit has been controlled to the targeted levels by the government.

What we fail to understand in this mad rush for figures, growth, development, welfare, social security and the likes is that a Government is not a spell-caster or a wizard. It is foolish to think of it as a body which would go in and cast a spell of Wingardium Leviosa to lift the economy immediately out of the doldrums that it had inherited. Repeatedly time and again, the Budget and the Economic Survey have pointed out that Big Bang Reforms is not the need for the Indian Economy but a phased process of incremental reforms is the way forward. In tune with that, it would be foolish for us to expect a lavish social security measure right within the first year of governance when a lot of transitions are taking place within the governance structure at this point of time. 

Transforming the economy and placing mechanisms of social security and welfare in the economy not only demand time but also prudence in terms of the other key aspects of the economy which we have to keep in mind.