For higher growth, end revdi culture

With inflation relatively under control, the finance minister’s next big job is to bring a Budget that can ensure sufficiently high growth of GDP in FY24. If she can curate a Budget that manages to clock a growth rate of anywhere between 6.5-7%, that would be a great success, setting the best example for G-20 countries at a time when India is leading the grouping.

How can she achieve this high growth rate? The short answer is to keep the development expenditures (the investment rate) high, and contain the revdi culture (doles/subsidies). India’s fiscal deficit (the Centre and the states) has been hovering around 10% for the last three years. This is too high, perhaps the highest amongst all G-20 countries. And much of this is because of large doles (subsidies) and high borrowings (public debt). In the pandemic year (FY21), much of the macro-economic management went off gear. But now, the sooner it is brought within the limits of prudency, the better it is for the country and its people. India surely does not want to tread the path of its neighbours, a Pakistan or a Sri Lanka, in messing up its macro-economic management.

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So, what are the policy choices that the finance minister has and how she can ensure good use of monetary resources to propel growth and benefit the masses? The largest share (46.5%) of the working population in India is still engaged in agriculture. This is too high, and people need to move out of agriculture, as has happened in almost all economies. But moving out of agriculture to high productivity jobs in the non-agriculture sectors requires investment in education and skills. Our education system in rural areas has performed way below what is needed, especially in terms of the quality of education imparted as well as skill development. While improving the overall quality of education of masses is a herculean task and may take decades to fix, improving their skills in some expanding sectors such as construction activities (infrastructure, housing, commercial buildings creating jobs for masons, electricians, plumbers and painters, etc) could be a short cut to growth in non-agriculture sector jobs.

During China’s boom, almost 200 million people moved out of rural areas, primarily from agriculture, to build new infrastructure, new cities, and gave a facelift to Beijing and Shanghai, making them mega-cities. Today, China’s agriculture employs roughly 23% of its working force, which is exactly half of what Indian agriculture employs. And yet, China produces more than double of India’s agricultural output, from a cropped area that is less than India’s. How does it do it? Is there any lesson for India? Very briefly, the answer is that China, unlike India, does not follow the revdi (doles) culture.

Let’s look at some glaring facts: Free food (5kg of rice or wheat per person per month) to more than 800 million people under the National Food Security Act, now renamed as the PM-Garib Kalyan Anna Yojana (PMGKAY), will cost about Rs 2 trillion in the upcoming budget. This is despite the discontinuation of the extra 5 kg of rice or wheat that was given during the Covid period as a safety net. Another Rs 2 trillion will go as fertiliser subsidy to the farmers. PM-KISAN will cost another at least Rs 60,000 crore, and then on top of this many other subsidies like interest subvention on agricultural credit, subsidy on crop insurance premium, etc, and you easily cross a subsidy bill of Rs 5 trillion just in the agri-food space. Subsidies to the industrial sector may not be any less, though the nomenclature may change to incentives such as Production Linked Incentives (PLI), various tax concessions to attract investments, and so on.

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It is this revdi culture which the prime minister said that one should watch out for during election times. And FY24 is likely to witness nine state assembly elections that would lay down the ground for 2024 parliamentary election. Given these political events, can the finance minister contain the revdi culture? I doubt, and that may remain the bane of the Indian economy for some time to come. But a repurposing of these subsidies, and rationalising them for better outcomes, is still possible if political masters become serious and ready to communicate properly to the public. Ultimately, the public is the main stakeholder in a democratic system.

Let me cite just one example: the food subsidy. Let me start by saying that it is very timely that government has withdrawn the extra 5 kg of rice/wheat per month per person allocation under the PMGKAY during Covid period. Else, it would have put undue burden on the fisc, and constrained growth. But, even the existing allocation to more than 800 million people needs to be revisited. Under the NFSA 2013, almost 67% of population was to be given highly subsidised foodgrains at Rs 2/3 per kg. One must ask how many people are really so poor that they need highly subsidised grains and free food? Can two-thirds of India not earn its food? If so, we must admit that all governments of the last 75 years have failed India miserably.

The reality, however is very different. The multi-dimensional poverty index gives a poverty ratio of about 16%. The World Bank definition of $1.9/day per capita (PPP) yields an even lower number. Should this not force us to think that we need to contain food subsidy to, say, the poorest 20% of the population, and may be even augment the amount of subsidy to them? The massive savings of about Rs 1.3 trillion/year that will result from this rationalisation may be spent on giving modern skills to rural people. That will enable them to move to high productivity/income jobs. Basically, what the finance minister needs to target is training people how to catch fish rather than giving them fish every day.

The writer is Distinguished professor, ICRIER

Views are personal