Chidambaram vs Ahluwalia

Written by Ila Patnaik | Updated: Aug 29 2006, 05:30am hrs
In his letter to Planning Commission deputy chairman Montek Singh Ahluwalia, finance minister P Chidambaram raised several questions about the Eleventh Plan Approach Paper. The most important objection, and perhaps the binding onegiven that Chidambaram holds the purse-strings, is his objection to the proposal to shift FRBM targets. Before deciding whose side are we on, we need to answer two questions. First, what will be the cost to the economy of shifting FRBM targets, and second, do the benefits from higher spending justify these costs.

Higher GDP growth in the last three years has come from higher investment. In the period from 2001-02, there was an increase in the investment rate by 7% of GDP. The investment rate rose from 23% in 2001-02 to 30.1% in 2004-05. This investment was financed by a rise in both the gross savings rate and net capital flows from abroad. The domestic savings rate rose from 23.6% in 2001-02 to 29.1% in 2004-05. Household saving remained between 22 and 23% of GDP. Corporate savings rose marginally from 3.6% of GDP in 2001-02 to 4.8% of GDP in 2004-05.From a net outflow of capital of 0.7% of GDP in 2001-02, when India saw a current account surplus, we had net inflow of capital of 0.9% in 2004-05.

The component of savings that showed the most remarkable swing was public savings. In 2001-02, the public sector as a whole accrued losses of Rs 46,377 crore. In 2004-05 the government and public sector enterprises saved Rs 69,390 crore. This was a shift from(-) 2.0% to a positive 2.2% of GDP.

One important part of the increase in the public saving rate was achieved by fiscal consolidation at both the state and central levels. The combined revenue de-ficit is estimated to fall from 7.0% of GDP to 3.4% in 2005-06 (budget estimate). The combined fiscal deficit of the Centre and states has fallen from 9.9% of GDP to 7.7% over this period. Shifting FRBM targets, as proposed by the approach paper, would mean dec-reasing public savings by up to 2.5%. If the current ac-count deficit rises by 1 to 1.5% from the present 1.3%, it can finance an additional 1 to 1.5% of investment. A CAD of over 3% may not be sustainable. So shifting FRBM targets would mean lower investment and lower growth.

But, before we conclude that higher deficits are a bad idea, we need to look at the benefits of the spending proposed by the Planning Commission. The approach paper says that an additional 1 to 2.5% of GDP would be required to be spent on the NREG, health, education and irrigation.

Unless the Commission promises not to spend a rupee more on systems it has shown dont work, theres no justification for shifting FRBM targets
Do the benefits of the additional spending justify endangering growth

The answers are found in the approach paper itself. The evidence on the eff-ectiveness of centralised schemes for primary education such as the Sarva Shiksha Abiyan is very poor. The paper cites a Pratham study which finds that 38% of children who have completed four years of schooling cant read even short sentences. 55% of such children cannot divide a three digit number by a one digit number. It admits that these are indicators of how bad things might be in the learning of other subjects.

Similarly, the approach paper notes that rural health care in most states in India is marked by absenteeism of health providers, low levels of skills, shortage of medicines, inadequate monitoring and callous attitudes. It says that there are neither rewards for service providers nor punishments to defaulters. The paper reports that random checks showed that 29 to 67% of doctors were absent.

As the Planning Commission's midterm appraisal of the 10th Plan had observed, "when people first seek treatment, an estimated 70-85% visit a private sector provider for their health care needs." Moreover, "the poor avail of the costlier services provided by the private practitioner, even when they have access to subsidised or free public health care, due to reasons of distance, but most importantly, on account of the unpredictable availability and very low quality of health care services provided by the rural public primary health sector."

The paper comes up with some innovative solutions. For example, it proposes education vouchers as "a more powerful method of enforcing accountability is to enable parents to choose between the schools where they will send their children. Enabling people to choose between available public or private schools (by giving them suitable entitlements reimbursable to the school) and thus creating competetion among schools could be considered."

Similarly, the paper suggests a voucher scheme for secondary school students since 58% of secondary schools are private aided or unaided. Vouchers would allow students to go to private schools in areas where they exist.

The paper proposes that in order to energise health systems for improving health outcomes, innovative financing mechanisms are critical. "Publicly supplied health care depends on how health care providers are paid. Providers should be paid only if they actually perform a service." It suggests that one way out may be to empower Panchayati Raj institutions to manage, administer and be accountable for health services in community levels.

It is clear from the approach paper that the problem is not lack of funding, but lack of accountability. That institutional reform, and not higher spending, is the key to better health and education. So, unless the Planning Commission promises that it will not spend a single rupee more on the systems that it has demonstrated do not work, there is no justification for shifting FRBM targets.