Now that the Budget has had the week to settle down, how do we read the tea leaves ?
Let us start with Sensex. On May 18, the market had gone through the roof and trading had to be suspended. This was the market celebrating the demise of the Left. Dalal Street and Wall Street both concluded that now the barriers to liberal reforms were removed, India would fast become like Singapore. This hope was what kept Sensex alive for the last six weeks. Just as the Budget day neared, the Economic Survey fed the delusions further. It looked like a wishlist of the CII and FICCI. Hopes rose that Pranabda would just deliver.
Now the punters know better. There is no quick lunch, let alone a free one. Congress is no pushover about reforms. The veil of delusion thus having been removed, the market is back in a world where the growth recession is still a fact, reflation is needed and the deficit cannot be brought down any time soon. The climb back to 8% or even 9% GDP growth looks less easier than it did on May 18. No wonder Sensex was sliding down all last week.
Could it be worse? Martin Wolf, writing in FT last week, raised doubts about sustainability of the growth rate of 2005-2008 if special care was not taken. The world wants India to grow rapidly, but few think it is a simple exercise. India has to will to grow faster. This is where the Budget raises doubts. Does Congress/UPA have the desire for sustained high growth ?
The problem is that powerful voices in the Congress prize redistribution above growth. Indeed, there are people on the Congress Left who think that rapid growth harms inclusion, and raises inequality. Hence, it is no longer inclusive growth but growing inclusion.
The idea inside Congress is that success in the election came not from four years of 9% growth, but the last year of rampant populism?the Rs 60,000 crore of debt cancellation and NREG. That is the continuing story in this Budget. The front seats are taken by rural distributive measures not by growth-oriented measures.
Of course, rural India deserves a break. After all, 60% of Indians live there. Spending on health and giving them jobs, even for 100 days, cannot be grudged. If people are healthier, it will be helpful for growth. With elections coming in Maharashtra, UP and West Bengal over the next two years, the Congress is taking no chances. Populism in rural areas won the 2009 election and this winning formula will be tried again and again.
There is, however, a serious caveat. Rural workers have low productivity and if we keep them in villages, they will continue to have low productivity. NREG gives makeshift jobs. The point is not the value of final output but income transfer.
This is a pessimistic strategy. It assumes that rural India will stay overpopulated and have low productivity for the foreseeable future and so the task is to smother it with goodies to alleviate the suffering, but not cure its poverty. This is the Congress Left?s idea of the ends of economics. They don?t trust rapid growth as a cure for poverty since they think rapid growth can only help the already dynamic sectors?services and high tech manufacturing.
There is an alternative. It is to reform labour laws so that there can be large manufacturing units employing hundreds of workers on low-tech product manufacturing. These will be rural workers, unskilled or semi-skilled. This is what India has missed out on. Malaysia and Indonesia have used low tech manufacturing to lower their head count of poverty. Only among Indian Left economists do you find an aversion to admitting that labour law reform is the answer. These views are still in command. The wish to protect the organised 10% of privileged labour force has won out and so the rural poor would be kept on the farm and manufacturing will continue to be high -tech.
The danger here is that there is no realisation that India?s good growth record of the last ten years was riding on a global boom. Now with a much colder climate, India should try harder to grow faster and not take growth for granted as the Budget is doing.
The next step, which will cost a lot and be ineffective, is the National Food Security Act. It wants to distribute foodgrain at low price to BPL families. Now despite all the rounds of NSS expenditure studies, we still don?t have an accurate estimate of the number of poor. But the idea of food handouts is based on a fallacy. Amartya Sen has shown that people starve not because there is not enough food but because they don?t have enough purchasing power. The answer is to give BPL families cash transfer and not foodgrain packages. There is still time to rethink this white elephant.
?The author is a prominent economist and Labour peer