Strong social indicators vital for robust growth

Updated: Jan 25 2002, 05:30am hrs
As the countdown to the Union Budget 2002-03 has started, the government is faced with a fait accompli that the overall sluggishness in the economy has been the fallout of a severe demand crunch. Though commentators and unofficial studies have been trying to drive this point home for quite some time, the argument got an official ring with the latest study by the Centre for Monitoring Indian Economy (CMIE), commissioned by the government, which corroborated this point.

So, the crucial task before finance minister Yashwant Sinha and his team is how to budget for growth or, in other words, take necessary steps to rekindle demand and preclude the current slowdown from deepening into full-fledged recession.

Going by the signals that are emanating from North Block as well as from public statements made by the finance minister so far, the forthcoming Budget will go for the kill by putting public investment and farm sector reforms on top of the agenda. However, any reference to investment in social services and infrastructure and its growth is conspicuously absent.

For starters, there is no denying that stepping up public investment to enhance domestic capital formation is a necessary condition for long-term, sustained economic growth. Also, it is a truism that efforts should also be made to spur growth of the agriculture sector, which has the maximum forward and backward linkages in the economy. Therefore, the fortunes of this sector lie close to the heart of overall economic performance.

While any policy initiatives addressing these two issues would be the most welcome developments, it is equally important to address one grey area that, too, deserves equal attention.

The development of social infrastructure, such as education and public health, is also considered a vital factor in ensuring robust economic growth in a sustained manner. However, ever since 1992-93, this sector has become the casualty of expenditure control by the government. While the finance minister now accepts that fiscal deficit is not a worry for him, investment in social infrastructure deserves a relook for more than one reason.

Literature on applied economics has amply demonstrated that GDP growth is a function of three key variables, namely, rate of change in capital formation, technological change and development of social infrastructure. While approximately 60-70 per cent of the growth is being explained by the growth in capital formation, another 15-20 per cent variability is being attributed to the rate of technological change. The remaining 15-20 per cent growth in GDP is estimated to be the function of the development of social infrastructure, like education, public health etc.

However, a little number crunching shows that the government has lost sight of this crucial variable, and has been slowly turning off the tap on resource flow to this sector. Though the Plan outlay per se has not been reduced keeping in view the image of the ruling party, irrespective of their political colour, the actual allocation of resources for this sector has reduced drastically over the years.

For instance, while the Centres total expenditure is estimated to have doubled from the Eighth Plans (1992-93/1996-97) figure of Rs 8,35,205.7 crore during the Ninth Plan period, the outlay on social services did not keep pace with this. Even though the Plan outlay seems to be higher, actual spending on the social sector has taken a severe beating since 1992-93, the beginning of the reform era.

While the total Eighth Plan outlay for the social sector works out at 9.46 per cent of the governments total expenditure, the actual resources received by this sector works out to a paltry 1.36 per cent of the total expenditure. While the total outlay for the sector stood at Rs 79,011.9 crore, the actuals stood at an abysmal Rs 11,322.8 crore.

Though total expenditure figure for the Ninth Plan period is not available, the Plan outlay for social services is pegged at Rs 1,83,273 crore, nearly double Rs 79,011.9 crore earmarked during the Eighth Plan. However, going by the trend since 1992-93, the actual resource allocation to this sector could be a far cry from the original outlay.

According to available figures, actual resource allocation to social services stood at Rs 25,867 crore in 1997-98, but declined to Rs 19,394 crore in 1998-99. In relative terms, this works out to 11.50 per cent of the total expenditure in 1997-98 and 7.35 per cent of total expenditure in 1998-99. The revised estimates for 1999-2000 shows that the Plan outlay for the social sector stood at Rs 41,660 crore or 13.29 per cent of the total expenditure, the budget estimates for 2000-01 pegged it at Rs 23,007.9 crore, which works out to only 6.50 per cent of the total expenditure.

That the reforms have put social services infrastructure on the back-burner is also evident from the fact that resources earmarked to the sector have declined from 1.21 per cent of GDP during the Seventh Plan period (1985/86-1989/90, the pre-reform period) to a paltry 0.27 per cent of GDP during the Eighth Plan.

On an annual basis, social sector outlay stood at 32.56 per cent of GDP in 1997-98, 1.79 per cent in 1998-99 and 3.62 per cent in 1999-2000. However, again, these figures do not mean anything as these are outlays and not actuals. Going by the trend since the beginning of Eighth Plan, it can be surmised that the actual resources received by this sector would be far less than the budgeted figures.

Again, considering an average 5-6 per cent inflation rate during the 1990s, even the nominal increase in Plan outlay does not make any difference.

A peak into the growth experience of the now developed economies of South-east Asia and other countries shows that all these nations hit a higher growth trajectory on the back of a sound social services sector. It is also notable that economists now look at human capital indices rather than conventional indices, like per capita GDP etc., as the true yardstick of development.

Therefore, while budgeting for growth, the finance minister should keep in mind that like fiscal and financial infrastructure, social infrastructure too is a crucial variable, which is not only a necessary condition but also a sufficient condition to ensure long-term, sustainable growth.