The FDI decision was a false signal that the UPA-2 may have found its reforming zeal back. The manner of its withdrawal showed a Congress which is fearful of survival and wants to be risk-averse till May 2014. Or at least until after the UP elections. The world has read the signals and has begun to abandon India as a preferred region for investment and so have the Indians. The Sensex may have bounced back from its lowest but that is not a permanent turn around. The rupee shows what the prospect is.
Of course, neither the Sensex nor the rupee-dollar rate are what the real economy is about. But they are fever signals which indicate much bigger trouble lying beneath the body economic. The deficit is obviously going to be higher than predicted in the budget, and there seems little hard steel in the Cabinet to insist that the next year?s projected deficit be kept to the path predicted in this year?s budget. The upshot in the deficit this year does not have the excuse of a local recession as was the case three years ago. This is purely due to uncontrolled inflation and loose purse strings when it comes near to important state elections.
Is this a temporary blip that the government will ride out and resume its reform path or is this the end of incredible India? The problem now is that there are rival centres of power, a PM and a PM hovering in indecision as to when he wants to take over. The ship has to keep sailing till he takes control; in the meantime, water is flooding in and has to be baled out. There are major differences within the crew whether the direction in which the ship is headed is correct. The Old Congress, which is still where power lies, does not want to own the liberal economic reforms. It argues that growth has left many behind, and health, education and nutrition have not seen the improvement they should see.
The Old Congress has, of course, conveniently forgotten that the 40 years it was in absolute control of economic policy did not deliver growth, nor development. Health, education and nutrition were neglected in favour of temples of irrigation dams and heavy machinery factories. It is the cumulative neglect of all those years of glorious socialism that India is now curing with difficulty. But to admit that will mean disowning the heritage which is electorally precious.
There is little doubt now that the Old Congress is getting impatient with growth and wants to get back to permit-licence raj. It likes the cosy comfort of the days when it told the captains of industry what to do and how much money to make. The Congress also has decided that urban India is the greedy face of capitalism and rural India is its base. Hence, money must be poured into rural areas-higher procurement prices, fertiliser subsidy and MGNREGA.
The Food Security Bill is the climax of this move. There is no other economy to my knowledge, rich or poor, capitalist or socialist, which has given such a commitment to a majority of its population that foodgrains would be sold at half or below of the price paid to producers. Brazil?s Bolsa Fam?lia or the US?s AFDC are selective targeted schemes. The scheme will cost R1 lakh crore in consumer subsidy alone; the expenses for FCI to handle the extra work, the money needed to raise output plus the costs of logistics and bureaucracy will be extra. Entitlements have a tendency to ratchet upwards and I see no reason why if 75% of rural population is helped, the remaining 25% will not agitate to be included too.
A more radical decision would be to have had a universal cash transfer scheme. If you are going to spend the money, why not spend efficiently and in a way that gives people the choice of spending on where they think their priorities are? Basic income schemes have a large following around the world and India can benefit from this. Even R1 lakh crore amounts to R1,000 per person; by the time you add the other costs and get up to R3 lakh crore, the amount is R3,000. Those who pay income tax can be excluded from this scheme. The rest can claim the cash.
The conflict between development and growth is a false one. Growth generates the tax revenue for spending on development. But the missing element is efficiency in obtaining the best outcome from spending. No political party in India advocates efficiency in public spending or restraint in budgetary discipline. Now that we have shifted tracks from growth to development we see how growth is receding in the background. Elections have to be won and, for the next two years at least, good bye growth, hello development and to hell with budgetary discipline.
The darkness will continue till 2014. Beyond that who can tell?
The author is a prominent economist and Labour peer