Bring back the social sector, but not interventionist planning

Published: Thursday 15 February 2007

-- in may 2004, India had a new government at the Centre. Bangalore and Hyderabad, the two boroughs of shining India, saw their chief ministers eat humble pie at the hustings. An India not very often visible--farmers, workers and landless laborers--made its presence felt. The elections brought the United Progressive Alliance (upa). It spelt doom for India's economy. Or so our economic orthodoxy told us.

upa's initial policy intentions did nothing to allay the Cassandras. The social sector was back in an employment guarantee bill was on the anvil, ambitious schemes for rural infrastructure were planned. The upa, however, failed to keep its date with doomsday. The economic orthodoxy has reasons to be happy with it, though the rural employment scheme--and other social sector projects--has been legislated.

How did the coalition achieve this? For one, it never abandoned the economic policies of its predecessors. The upa asserted its commitment to the Fiscal Responsibility and Budget Management (frbm) Act, 2003, which enjoins the governments to eliminate revenue deficits and reduce fiscal deficit to under 3 per cent by 2008-09. The axe has fallen on social sector investments (see Is social sector revenue or capital expenditure?).

Shorn of all jargon, fiscal deficit is nothing but the excess of government expenditure over revenues. At first glance correcting it makes sense. After all why should spendings be more than earnings? And governments tends to crowd out the industry when they borrow heavily from the market.

But in democracies, especially those in developing countries, a large majority of people also look to governments for certain facilities extension of education, healthcare as well as expansion of physical infrastructure. These investment can improve people's skills, or human capital, as economic jargon would have it. Returns on it never show up on gdp statistics, or other economic registers.

So why should fiscal prudence be such holy grail? Even corporates borrow. Some prosper, others go bust. The question at hand is use of money--both by governments and corporates. Economists, of course, argue that governments don't have too good a report card to show. True. That is because interventionist planning always saw people as subjects of aid. Money was put in--it wasn't much in any case--without little regard for what people actually wanted. India's experience with development planning shows top-down measures are very self-defeatist. But then let's not throw out the baby with the bath water.

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