If recent numbers about the state of the Indian economy are any indication, then all is not well. Growth of Indian economy slowed down to 5.3% in the third quarter of 2012, a nine-year low. Savings are falling, and so is investment. In September, the index of industrial production (IIP) fell by 0.4% from a year earlier. Exports fell for the sixth months in row, taking the October trade deficit to a 12-month high. In November, foreign exchange reserves dipped to $293.6 billion, down by $20.32 billion compared to a year earlier.
Gauging in terms of these base indicators, there is a clear indication about the economy slowing down and there is a dearth of private investment. In 2011-12, out of the targeted budgeted receipt of R40,000 crore from PSU disinvestments, the government was able to garner only R13,894 crore. This financial year, the target is R30,000 crore and we are yet to cross the R10,000 crore mark, and this includes the receipt from the 2G auction where the government has managed to sell only 22 out of the 122 licenses. Even with FDI in multi-brand retail sailing through the winter session of Parliament, it will be interesting to see how many eventual takers emerge. The euphoria surrounding the big-bang reforms announced in October seems to have been short-lived.
Now that we have a problem, and the government is finding it hard to manage its fiscal deficit, proper policy measures should be taken to fix it. It is to be noted that just before the UPA government took over in 2004, the fiscal deficit was 3.8%. During fiscal 2011-12, the fiscal deficit shot up to 5.8%. For fiscal 2012-13, the government plans to borrow R5.69 trillion to further its development agenda. This borrowing is based on the assumption that the economy will grow at 7.6% with a lower inflation of 6.5%, which is unlikely to happen.
Like personal finance, control of government finance can be done through innovative policy design. To maintain a 6%-plus growth rate, the government should act as a facilitator, assisting growth of manufacturing and services sector, with an eye on absorbing excess labourers from the shrinking agricultural sector. However, some faulty policies are coming in the way of development.
Take, for instance, the new Land Acquisition, Rehabilitation and Resettlement Act, 2011. As per this legislation, when it comes to acquiring land, the state has to pay two times the market price if the land is in urban areas, and four times the market price if the land is in rural areas. In addition, for rehabilitation, a sum of R1.36 lakh has to be given to the displaced household, and for sustaining livelihood, a job for one member in the household has to be provided, or a one-time payment of R5 lakh has to be made.
To put in some numbers, if a piece of land costs R1 crore in Chennai and the government wants to procure this land, then it has to shell out R2 crore plus R1.36 lakh for rehabilitation, plus R5 lakh as a way towards sustaining livelihood for the displaced household. The calculation gets a little more complicated for the displaced people living in rural areas. As average landholding sizes vary from one state to the next, the amount of money that the state government has to shell out for building industry will be far greater when the landholding size is small in comparison to when it is big.
This is because with smaller average size landholding, more people will be entitled to the rehabilitation and sustaining livelihood reimbursement, relative to when the average landholding size is higher. The average landholding size for farmers in Punjab is around five times that of West Bengal, which makes the cost of procuring land higher in West Bengal relative to Punjab.
Now, this can create problems. If the government wants to build some project on the basis of public-private partnerships, then naturally the cost of the project goes up in West Bengala relatively backward state in comparison to Punjab. Quite naturally, private companies might be reluctant to enter into collaborations with the government for nation-building activities in relatively backward states, leading to further regional disparities.
Small landholdings can also create coordination problems. In West Bengal, the National Highway Authority of India so far has been able to procure only 1.93% of the land required for the expansion of National Highway 34 and National Highway 31. Rail construction work between Nasirpur (a place of historical importance) and Azimganj in Murshidabad district of West Bengal is held up just because of 7.5 acres of land.
Scarcity of land not only hampers expansion of industry and tourism, but can also have other secondary effects. Take education, for instance. Despite the success in enrolling students in primary education, there is still a vast pool of the population stuck in the agricultural sector. In fact, 75% of unemployment lies in the agriculture sector. The government can initiate public-private partnerships and make an attempt towards the provision of vocational education. Students, when they pass out with a degree in polytechnic or in hotel management, will have takers in the fast-expanding services sector. In this way, excess labourers from the agriculture sector can be used to facilitate growth of the services sector.
But here also the problem is regarding acquiring the land. For opening any polytechnic institute, the All India Council of Technical Education (AICTE) mandates a minimum of 1.5 acres of land in urban municipal areas, and a minimum of 5 acres in rural areas. Last month, the West Bengal government was scouting for land to set up polytechnic schools but with no luck.
At a time when the future expansion of business activities is getting stymied because of faulty policy and additional revenue realisation is not forthcoming, the government needs to find ways to control the fiscal deficit. The recent move initiated by the Prime Minister to directly pay cash subsidies to the beneficiaries from January 1, 2013, is a good one. The subsidy amount would be transferred to beneficiaries bank accounts linked to Aadhar cards. The government is also thinking about integrating the banking system with the post office network, especially in the rural parts of the country to make Aadhar viable. In this way, much of the administrative cost of running government welfare programmes can be reduced and at the same time all the schemes relating to pensions, education and healthcare can be brought under one umbrella. Direct cash transfers will bypass state, district and panchayat administrative hurdles, and indeed can save the government much-needed moolah to contain its fiscal deficit. Of course, the success of cash transfers will depend upon financial literacy and financial inclusion. It is at least a step in the right direction.
The author is professor at the Institute for Financial Management and Research, Chennai. All comments to firstname.lastname@example.org