Column: The toxic legacy of state capitalism

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Updated: Nov 21, 2014 3:39 PM

A radical way to generate the wherewithal to improve human development would be to privatise the PSUs

A tragedy like the one in Bilaspur, where fifteen women died from a badly-botched sterilisation programme, is not rare. That is itself a tragedy. The usual story reveals badly-equipped hospitals, doctors in a hurry, insanitary conditions, wrong medicines and helpless patients who have been lured to undergo a treatment more for the pittance offered than because of any informed choice. The blame in such matters will no doubt be placed on the local hospitals, the personnel, the ministers and the chief minister of the state and no doubt the central government and the prime minister as well.

The tragedy is, however, very much a legacy of sixty seven years of distorted economic thinking. From the outset, at Independence, the idea was that while India had many poor people, the way to develop it was not through improving health and education, sanitation or the infrastructure. It was through securing national self-sufficiency in matters of industrial production. India had to stop importing machinery from abroad. It had to make machines at home which would make other machines that made goods which could have been imported. But these goods had to be made at home, whatever be the opportunity cost.

This idea of development was to be fair, universally-held by all sections of Indians. The industrialists had their Bombay Plan as the socialists had their People’s Plan. They were similar except for the role of the state assigned by each. The essence of growth was production of goods with machinery made under state ownership. Trade was to be minimised as it made India dependent on the foreigners who had only so recently ruled over her. Forty five years were spent in securing a fragile, over-capitalised and inefficient manufacturing sector with low productivity.

Higher education, especially in technical subjects, was privileged over primary education or vocational education. For forty years, India subjected itself to low per capita growth with low employment generation and neglect of the basic needs of the people. This was the Nehruvian state-capitalist socialism

In the 1990s, two things happened. It became clear that the closed economy/national self-sufficiency model had hit rock bottom and India was nearly bankrupt. The then prime minister, PV Narasimha Rao, changed the direction with his finance minister Manmohan Singh’s help despite great reluctance on the part of the Nehruvian Congress. But at the same time, the idea of human development came to be popular. Now, development was measured in terms of health and education as well as income; India was consigned to a suitably low place in the league table of nations as per the Human Development Index.

The policy has now shifted. Economic growth of the old-style was now speeded up, thanks to an open and liberalised economy. Growth rate increased and India began to be counted as one of the emerging economies. But the socialists, who had engineered the previous disaster and were unhappy with the success of liberalisation, changed their tack. Now, they created many entitlements to health and education and subsidised food and employment to continue their critique of liberalisation policy.

The entitlements created for health and education were no doubt well-meant. But the resources required to cater to them adequately were not provided. You need good hospitals and doctors—and many of these—to provide a health ‘guarantee’. You need an extensive set of school buildings with good classrooms and toilets to allow students to get good education to say nothing about well-trained and conscientious teachers.

Demand for health and education was allowed to balloon without willing the supply. It was a strange logic in which if one fell sick, the cure was not to provide medicines but a health guarantee. It was not clear where the supply would come from nor as to who would bear the cost of such entitlements.

The inevitable followed. The public fisc is overladen by debt-interest payments to service the debt incurred in constructing the pile of junk which counts as the public sector. Built at excessive costs, with borrowed capital, these public sector units sometimes make profits, thanks to a monopoly advantage. But they would not stand a chance against imported goods. Yet, the cost of servicing them deprives the budget of any room to spend money on health and education. If you spend a third of your total tax revenue on interest payments, something has got to give. It is health and education.

A radical strategy for achieving high human development levels would quickly dispose of the capital assets held in the public sector, which can be profitably sold. The loss-making units can be disposed of, even at a loss. The debt can then be quickly retired. There will be room for borrowing again, if necessary, for the health sector and for education and for sanitation. A ten-year programme of training professional personnels to service the infrastructure is the most-urgent need now. The goal should be to take India into middle or even a high level sections of the Human Development Index.

The author is a prominent economist and Labour peer

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