How subsidy reforms could help take on China

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August 3, 2020 7:50 AM

A major rationalisation of subsidies can finance development of eastern India as well as reinforcing of defence in the wake of Chinese aggression.

No wonder, Bihar, UP and Jharkhand had the lowest per capita incomes among major states of the country in the triennium ending (TE) 2017-18 (at constant 2011-12 prices).

Given the way the disengagement with Chinese troops at the Ladakh border is going, one thing is clear: India will have to contend with China’s aggression over the long haul. The days of bonhomie between prime minister Narendra Modi and Chinese president Xi Jinping seem to be over. While addressing soldiers in Galwan Valley, Modi said that India knows well how to look the enemy in the eyes and stand up to safeguard its sovereignty. But, how do we do that? Substantial increase in defence expenditure over the next 5-10 years seems inevitable if India is to match the Chinese military might. With limited resources, that is going to be a daunting task.

One thing that India needs to learn in order to stand up to China is how China became the superpower it is today. It is well known that China’s per capita income in 1978 was lower than India’s, but today, it is almost five times higher. It is this transformation of China between 1978 and now that has made it the second superpower in the world. Although every country has to find its own way to a high-growth trajectory, it is always useful to take a leaf or two from others’ books.

China ushered in economic reforms in 1978, starting with major changes in agriculture. It dismantled the commune system in land-holdings, and established a household responsibility system. Then, it largely freed agricultural prices from controls. This led to its agri-GDP growing at 7.1% during 1978 to 1984, and farmers’ real incomes growing at about double this rate.

China doubled farmers’ real incomes in six years, and this created a huge demand for industrial products, laying the demand base for the long-term manufacturing revolution, starting with Town and Village Enterprises (TVEs).
Even over a longer period, from 1978 to 2018, Chinese agriculture grew at 4.5% per annum.

Focus on agriculture during the initial years of China’s economic reforms has to be viewed against the backdrop of what happened during the ‘Great Leap Forward’ (1958-62) under chairman Mao Zedong. It coincided with a famine that claimed about 30 million lives due to starvation, perhaps the largest human tragedy in history. So, while China initiated reforms in 1978, somewhat less known is the fact that China introduced its one-child policy, which continued till 2015, in 1979. As a result, China’s average family size, which was 4.84 in 1971, dropped to 3.96 in 1990, and further to 3.1 in 2010—it was at 3.03 in 2017.

In contrast, look at the average Indian household size. It was 4.8 at an all-India level as per 2011 Census, almost same as what China had in 1971. Uttar Pradesh had the largest family size (6.0); Bihar, at 5.5, came next, followed by Jharkhand (5.3)—all above the India average, and a lot higher than China’s family size of just 3.03 in 2017.

No wonder, Bihar, UP and Jharkhand had the lowest per capita incomes among major states of the country in the triennium ending (TE) 2017-18 (at constant 2011-12 prices). Also, their growth rates during TE 2002-03 to TE 2017-18 remained below the annual India average (see graphic). And, it is these very states from where the largest migration of rural labour takes place to Maharashtra, Gujarat, Delhi, etc, and we saw the piteous state of the workers during the lockdown.

The bottom line is that the economic reforms India launched in 1991, with changes in trade and industrial policies, had only limited success in these states of eastern India as their family sizes are large, while agricultural holding size is extremely small. Unlike China, India being a vibrant democracy, it cannot follow a forced one-child policy to overcome the population problem. Recall Sanjay Gandhi’s forced sterilisation drive during the hey days of Indira Gandhi; but, that regime could not remain in political power. The only way out for India, therefore, is a massive education drive, especially of female children, with liberal scholarships for the girl child. That brings me back to the question of overall resources.

The New Education Policy, approved by the Cabinet recently, talks of raising the overall expenditure on education as a percentage of GDP, but is almost silent on education about population control and from where the resources will come.

The Pradhan Mantri Garib Kalyan Rojgar Yojana, focusing on providing 125 days employment to migrant workers in 116 districts, is commendable as a short-term relief. It provides `50,000 crore, spread over 25 activities drawn from various ongoing schemes. But, there is no medium- to long-term plan for massive infusion of development funds for the laggard states of Bihar, Uttar Pradesh, Jharkhand, Madhya Pradesh, Chhattisgarh, Odisha, West Bengal and Assam as well as the northeastern states. Almost all development indicators of these states lag behind the India average.

India needs a package for the eastern belt, to the tune of at least Rs 15 lakh crore over the next 3-5 years, to improve basic infrastructure of health, education (including population control), housing, roads, power, water, etc. It is this sustained investment plan that will create jobs and development. It has to be steered by public expenditure. Private sector can also be roped in through CSR in well-designed schemes.

One way to finance such a mega-investment plan is to control the culture of doles. There are massive subsidies on food, fertilisers, and power, and in funding recurrent losses of several public enterprises both at the Centre and the states. A major rationalisation and pruning of these subsidies can go a long way to finance a development plan for eastern India as well as address the new demands for reinforcing defence in the wake of Chinese aggression. Can India do it? Only time will tell.

The author is Infosys Chair professor for agriculture at ICRIER. Views are personal

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