Chemicals and fertiliser minister MK Alagiri believes that welfare schemes such as the R780-crore drinking water scheme in Madurai launched by his father will help the DMK retain power in the Tamil Nadu elections next month. Fiscal purists, on the other hand, fear a plethora of such schemes in others states going to the polls will result in budgets getting out of whack and, eventually, hitting
economic growth. The truth lies in between, and a lot depends on how welfare schemes are sequenced; it is actually possible to have reasonable levels of populism with high growth, the subject of the latest
Economic Freedom of the States of India, released on Monday. While Tamil Nadu topped the charts, followed by Gujarat, the real surprise was Andhra Pradesh improving its position from 7th in 2005 to 3rd in 2009, roughly the period in which YS Rajasekhara Reddy was the state?s chief minister. Andhra?s growth rates rose from 5.6% in the pre-YSR period to 9.1% in the YSR period, a hike that?s pretty commensurate with that in states with a rise in economic freedom levels?Gujarat, which saw its rank rise from 5th to 2nd between 2005 and 2009, saw a
similarly high GDP growth.
Where YSR scored, the report points out, was in exploiting a window of opportunity by sequencing reforms well. Like his predecessors, YSR believed in very cheap rice, and free power and irrigation facilities; but by abolishing the land ceiling, reducing stamp duties, computerising property records, elaborate use of PPPs, unbundling of the state electricity boards, appointing more judges, YSR created an environment where business found it attractive to invest in the state?Andhra?s rank on ?business/labour regulation? improved from 10th to 2nd. As a result, private investment rose, GDP followed, and this left YSR enough funds to spend more on his subsidies in absolute terms while, at the same time, being able to contain his spending relative to state GDP?social audits of schemes like mid-day meals also helped make them more efficient. YSR never tackled powerful teacher unions but encouraged the hiring of contract teachers to improve the quality of schools; while being populist, he also spent more on irrigation?
None of this is to say governments can be profligate and hope not to pay for the consequences. Eventually, governments have to get their fiscal house in order. But if business is encouraged to flourish, this
creates a lot of headroom for achieving this, and growth allows for more social spending. The Freedom report, and the chapter on Andhra Pradesh especially, are recommended reading for the UPA?s managers.
