People's Democracy

THIS is a brief and preliminary response to the Draft Approach Paper to the tenth five-year plan prepared by the Planning Commission of India. The government of West Bengal will present a more elaborate and comprehensive note on the Approach Paper at a later stage. The present note dwells on some selected areas of concern with respect to the Approach Paper.

The Draft Approach Paper outlines two alternative growth paths --- a base line path with 6.5 per cent growth and a maximal path with 8 per cent growth. Since the growth during 1999-2000 and 2000-2001 is now estimated below 6 per cent, even the 6.5 per cent base trajectory is a significant step-up. Even allowing the incremental capital output ratio (ICOR), or investment required to yield a unit of output, to fall to 4.1 from the prevailing 4.3, an investment rate of 32.6 per cent is needed to deliver 8 per cent growth of GDP. This is not easy, particularly in the context of steady decline in investment rate in the era of liberalisation. The ratio of gross domestic investment to GDP was 26.3 in 1990-91. It fell to 22.5 and 23.1 per cent in the next two years but rose again to 26.8 per cent by 1995-96. It fell continuously and reached 23 per cent in 1998-99. The decline is not merely because of the fall of public investment from 8.7 per cent of GDP in 1994-95 to 6.4 per cent in 1998-99 but also due to the sharp decline in the peak private investment of 18.9 per cent to 14.8 per cent.

The target of average GDP growth rate of 8 per cent over the tenth plan period is essentially based upon an approach almost similar to the package of economic reforms being imposed on the Indian economy under the IMF loan and WTO conditionalities. It is pertinent to note that it is after following this approach that the average annual rate of growth of industrial production in the country has fallen from 7.65 per cent in the pre-reforms period of ten years (1981-91) to 6.02 per cent in the post-reforms period of ten years (1991-2001) and has slipped further to 5.78 per cent in 2000-2001. In the sphere of agriculture, the average annual rate of growth of foodgrains has similarly fallen from 3.4 per cent from in the pre-reforms decade to 1.4 per cent in the post-reforms decade.

In this background, when the present Draft Approach Paper sets a target of annual GDP growth rate of 8 per cent in the tenth plan period on the basis of the same IMF-WTO tailored economic reforms, there is an inherent difficulty with the approach itself.

It is also clear that public expenditure on capital formation and social sectors has been substantially squeezed during the liberalisation period. The Planning Commission has little capacity or desire to reverse the liberalisation agenda in order to raise resources.

How then are resources to be mobilised to raise the investment rate from 23.3 per cent and 24 per cent respectively during 1999-2000 and 2000-2001 to the projected 32.6 per cent? This requires, even if the required savings rates are achieved, a buoyant demand situation.

The Approach Paper says that this "calls for significant increase in the domestic savings to nearly 29.8 per cent and the foreign savings (current account balance of the balance of payments) to 2.8 per cent from the present level of 1.5 per cent. This is reasonable in the light of the experience of other emerging countries. The more difficult task is to increase the public sector savings from 2.4 per cent to 4.6 per cent and especially the government savings from a negative level to 1.7 per cent of GDP in the target growth scenario."

The problem with this approach, as has been noted by economists, is that it assumes that the problem lies at the savings and not the investment end. It ignores the facts that the Indian economy is today characterised by a high degree of slack, reflected in unutilised capacity, surplus food stocks, comfortable foreign exchange reserves and unutilised resources including human resources. This situation would boost investment, stimulate demand, improve utilisation and, therefore, increase employment, incomes and savings. In the Approach Paper, it has also been assumed that government expenditures cannot be translated into capital expenditures because of the revenue deficit in the government’s budget, which implies that borrowing is being used to finance current expenditures. Here again, given unutilised capacity, even deficit-financed capital expenditures would result in improved utilisation and, therefore, higher incomes, profits and revenues for the government, so that it need not worsen the savings performance of the government.

Two major suggestions for resources mobilisation have been advanced. First, the Planning Commission suggests that proceeds from the disinvestment should yield Rs 16,000 to Rs 17,000 crore per year, on the average, over the first three years of the tenth plan period. Secondly, it discusses how government expenditure could be reduced with main emphasis on downsizing government employment --- 3 per cent annual average reduction over the tenth plan period and reduction in subsidies.

The thrust of the Draft Approach Paper is on improving efficiency to bring the ICOR down from 4.28 per cent. Since the approach is essentially guided by the IMF-WTO tailored economic reforms, it is but quite natural that the whole range of recommendations will be in keeping with the fundamental principles of liberalisation and privatisation where incentives to private sector, change of labour laws to the disadvantage of workers, particularly with respect to retrenchment, are the basic features. And the Draft Approach Paper truly reflects these principles.

We believe that it is important to raise resources for public investment, both for the direct role that public investment can play in raising growth and also because of the positive linkages between public and private investments, a link observed in India as well as in other developing countries. One of the most important sources of revenue is progressive non-inflationary direct taxation. The tax/GDP ratio in India is not only very low (even among developing countries), but has declined after liberalisation. The bitter pill of higher direct tax rates has to be taken if the government is keen at resource mobilisation. Policies of tariff reform in line with the WTO agreement have also to be re-examined as the sharp reduction in tariff rates has major adverse effect on revenues. There is yet another area to mobilise additional resources, which the Draft Approach Paper has not mentioned. It is unearthing of income tax-evaded black money with annual accrual rate exceeding Rs one lakh crore.

With regard to agriculture and the rural development, the government of West Bengal is of the firm opinion that the foundation of a programme for agricultural growth and all-round development in the rural sector principally depends upon the implementation of land reforms. There is, however, no reference to redistributive land reforms anywhere in the Draft Approach Paper. Land reforms, in our view, should form an integral part of the Approach Paper to the tenth plan with the need for statewise targets in terms of vesting and distribution of ceiling surplus agricultural land within a definite timeframe. So far as the agriculture sector is concerned, the target has to be stated not only in terms of rate of growth of sustainable agricultural production to ensure food and national security, but also in terms of employment generation as required by the overall objective. Given these objectives of growth and employment generation in agriculture, there is a critical need in the agriculture policy, to accord special emphasis on land reforms. The role of land reforms, in freeing demand constraints in the rural economy, in creating purchasing power and opening up home market in the countryside and in freeing the productive forces in the rural economy are too well-known to need further elaboration in this brief note. It does not require any further reiteration that land reforms is not a charity, but essentially a productive move. Moreover, the essence of our approach to reforms lies in moving from less to more competition. This competition in agriculture requires, among others, more equal access to land, and that means redistributive land reforms. We do believe that land reforms not only lay down the foundation for growth with equity in the countryside but also presuppose an effective system of decentralisation. In absence of land reforms, the panchayat system cannot genuinely be representative of the poor and the majority of rural producers; and without such representation, in turn, effective and real decentralised rural development cannot be ensured.

It is unfortunate that the Draft Approach Paper has restricted the target of employment generation to only the addition to the labour force over the tenth plan period. This implies that the entire problem of huge backlog of unemployment has been totally ignored by the Planning Commission. But the severity of this backlog of unemployment is widely known and is documented in the ninth plan document of the Planning Commission itself where it has been admitted that the annual rate of growth of employment generation in the past years (2.44 per cent) has been slower than the rate of growth of labour force (2.51 per cent), resulting in an increase in the backlog of unemployment every year. We, therefore, strongly urge that this restricted target of employment generation in the Draft Approach Paper be reviewed, and the target of employment generation be correctly placed at a rate sufficiently higher than the rate of growth of labour force so that the backlog of unemployment is significantly reduced within a definite timeframe.

This emphasis on land reforms needs to be supported simultaneously in terms of non-land inputs and measures, such as irrigation, improved seeds, fertilisers (with priority to biotechnological inputs), credit, marketing and fair prices. We shall give our detailed views later on each of these issues including not only on agriculture but also the allied sectors relating to animal resource development, fishery, forestry as well as industry and business related to these sectors. What needs to be pointed out here is that in the Draft Approach Paper there is an emphasis given on irrigation, but unfortunately at the expense of curtailing rural employment schemes which can indeed help building these productive assets and generate employment, when implemented in a decentralised manner by involving the local people through the panchayats. We are of the view that given the foundation of land reforms and panchayat, a range of measures involving non-land inputs to enhance agricultural productivity and provide for employment, as against the de-emphasis on rural self-employment and wage employment schemes in the Draft Approach Paper, have to be considered. Some indications of the range of policies have been outlined in the speech of the West Bengal finance minister in the chief ministers’ conference in Delhi on May 21, 2001. He has also made the position of our government clear on the impact of recent policy pursued by the government of India vis-à-vis the WTO on food security and rural livelihoods.

By the recent declaration of exim Policy, the government of India has withdrawn the quantitative restrictions (QRs) in respect of some 750-odd items including agricultural commodities and aggravated the situation further. It is extremely difficult to restrict the import of major agricultural commodities merely by way of tariffs. This process of indiscriminate liberalisation is already showing its disastrous consequences in terms of the adverse effect on remunerative prices for the farmers. Unless the entire decision is reviewed and stopped, the "negative" multiplier effect in terms of adverse effects on not only agricultural growth but also on the overall growth of the economy will be enormous, with drastic rise in the rate of unemployment.

As a part of development of rural infrastructure, a special target of reaching 100 per cent of rural mouzas with intensive electrification should be included. Similarly, for the sector on industry, target of domestic industrial growth with linkage between the large and small sectors should be clearly spelt out, with specific quantification of employment generation. This emphasis on small-scale sector, with linkage with large-scale sector, will not only be important for employment generation but also for moving towards more equal competition and achieving overall cost efficiency.

Consistent with the targets of production and employment generation in the industry, agriculture and allied sectors, there is a need to reorient the approach to education with emphasis on more equal access and on technical and vocational education to sustain the thrust of productive employment generation. Given the pattern of morbidity in public health, emphasis should be on cost-effective preventive health care and particularly decentralisation in curative treatment by involving the panchayats and municipalities.

The two objectives of the disinvestment strategy of the central government have been stated to be, first, to improve "efficiency" in the public sector by bringing in private sector participation and management and, secondly, to raise resources and reduce the fiscal burden on the exchequer. The process and pattern of disinvestment in India, however, has failed to meet either objective. As has been pointed out by several scholars, by selling off shares in profitable PSUs and retaining the loss-making PSUs, there is clearly no effort to improve the working of the PSUs. While international experience provides little evidence that private sector participation improves "efficiency," in India, the management of profit-making public enterprises is being handed over to the private sector. Disinvestment policy has involved selling shares in navaratna PSUs at throw-away prices to private interests. The government has thus embarked on a deliberate policy of losing access to dividends and profits from some of the cash-rich PSUs.

It is also important to point out, as economists recently have done, that there is a logical fallacy in assuming that the proceeds from privatisation can help the government reduce its debt burden. Calculations have shown that the revenue loss from selling off profitable PSUs is greater than the gain made by the government in terms of interest payments saved by lowering debt. In a demand constrained economy, public investment and expenditure based on a fiscal deficit need not be inflationary and thus cannot be the excuse for selling off public assets.

Public investment must be raised both for the direct role it plays in raising growth rates and increasing employment and for the positive linkages between public and private investment. Public investment in agriculture has been critical to India’s improved agricultural performance in the seventies and eighties. It is also well recognised that investment in schemes of self-employment and wage employment in the 1980s was instrumental in lowering, albeit to a limited extent, the head-count poverty ratio. Slashing public investment in direct industrial production, in infrastructure, in agricultural and rural development and in social sectors is, of course, central to India’s liberalisation strategy. Contrary to this approach, the government of West Bengal feels that a public investment-led strategy of growth is essential if a government is to fulfil the people’s mandate and meet people’s aspirations for economic growth.

The policies of liberalisation rob the exchequer of ways and means of mobilising the resources that are essential for enhanced public investment. The process of disinvestment, as has been mentioned, leads to a loss in government owned assets and in the potential stream of profits and revenues. Another major source of revenue is through direct taxation. Here again, policies of raising public resources through direct taxation are an anathema to liberalisation policy. The tax/GDP ratio in India is not only very low (even among developing countries), but has declined after liberalisation. The bitter pill of higher direct tax rates has to be taken if the government is serious about resource mobilisation. Policies of tariff reform, in line with the WTO Agreement, have also to be re-examined, as the sharp reduction in tariff rates has a major adverse effect on revenues.

A public distribution system (PDS) in essential commodities, efficiently organised from the national level and in coordination with the states, is known to act as a countervailing force against monopolistic forces in the trading sphere and is therefore impliedly a move towards more competition, helping to contain inflation. The approach document raises two sets of issues with regard to the procurement and distribution of food in general and the public distribution system. The first deals with the role of government (including the FCI) in procurement and storage operations and the second deals with the PDS or distribution system.

On the first set of issues, the main objective of the paper is to promote private trade. This objective is based on the implicit ideological assumption that private trade is better (more "efficient") than the public sector. And in line with this objective, there are suggestions inevitably to weaken the Essential Commodities Act (ECA), remove restrictions on inter-state trade and so on.

We have to make two observations on this count. First, there is no evidence that private trade is more "efficent" than the FCI. (It is worth mentioning here that although there is frequent mention of the amount of rotten grain with the FCI, the actual extent of grain not fit for human consumption is relatively small --- 1.5 lakh tonnes as of January 31, 2001.) Secondly, simplistic assumptions about the efficiency of private trade cannot apply in a situation such as India’s where foodgrain markets are not fully integrated. Modernisation of storage capacity with FCI and investment to improve its infrastructure (such as through computerisation of its activities) should be given priority.

Specifically, since under these situations other than war and similar threats to national security such as situations of high inflation, of volatile price movements, of drought, flood, cyclone and other natural phenomena affecting the supply or distribution of food, where the government may be required to control the production, availability and distribution of certain essential commodities, some kind of ECA is required. It is pertinent to note here that already an Essential Commodities (Amendment) Ordinance had severely diluted the enforcement of provisions of the Essential Commodities (Special Provision) Act 1981 and from July 8, 1998, even that ordinance had also been allowed to lapse, leaving states only with rather weaker provisions of the original Essential Commodities Act 1995. In this context, it is important to review the different provisions of the law in terms of whether they help or hinder the basic objectives of government control in situations where such control is necessary. It is also necessary to strengthen rather than weaken the regulatory law relating to essential commodities in a period of liberalisation and entry of large-scale private trade, including foreign multinationals.

Turning to PDS, a fundamental objective of PDS is to provide nutritional support to the people of India.

Here the Approach Paper appears to recognise the merits of the system of universal PDS (that is, the system that prevailed before the introduction of targeting in 1996-97). It recognises the problems of implementing a system of targeting in a country where there is mass poverty and nutritional deprivation. It also specifically recognises that the TPDS, as it was designed and implemented, has led not only to a reduction in offtake from PDS but has weakened the delivery system by excluding a large part of the population from the PDS.

We suggest the PDS to supply around 60 kg of grain per capita per annum, or roughly half of the daily cereal requirements as per the recommendations of the ICMR. The grain should be available at a reasonable and uniform price to all those who wish to purchase from the fair-price shops. A universal system is not only likely to reduce leakages (such as due to high price differentials for different types of buyers) but strengthen the network by increasing the quantities distributed and ensuring a viable fair-price shop in each village or urban location.

There is a reference in the Draft Paper to the loan burden of the state governments. What has, however, not been mentioned is that most of this burden has been created by the central government. For instance, although it is called central plan assistance, 70 per cent of this "assistance" for most of the states is in terms of loans, and at a very high rate of interest. Similarly, all the central schemes, such as RIDF, AIBP, etc, are either totally loan based or have a significant loan component, again with high interest. To cite another example, in the sphere of small savings, when there is adequate accretion of saving in states to generate a surplus after paying the interest and principal to the depositors, even then this surplus is advanced to states in the form of loan, thus imposing an unfair loan burden on the states. These policies have augmented receipts for the centre, but have caused loan burden and have severely increased the revenue and fiscal deficits for the states. If these central policies are reversed, then the loan burden of the states would fall significantly, with a corresponding fall in the revenue and fiscal deficits of the states.

It is unfortunate that without analysing these fiscal problems of the states adequately, there is a proposal in the Draft Approach Paper to even withhold a part of the central plan assistance unless the states follow the pattern of economic reforms similar to what is being dictated by the IMF-WTO conditionalities. This is not only unjust because of the negative experience of IMF-WTO guided reforms as mentioned earlier, but also because this is an intrusion into the powers of decision-making of the states. We strongly hold that this part of the Draft Approach Paper needs to be significantly changed after discussion with the states.

Foreign capital has come largely on the current account because of its non-convertibility, mostly for stock exchanges. The combination of free market philosophy and foreign dominance in the share markets has led to successive financial scandals. As against the billions of dollars of foreign exchange that have come in on the current account, it is quite conceivable that funds of almost a similar amount have flown out because of the killings made by foreign institutional investors in the share markets. A proper five-year plan for the country should also include a scheme for exercising control over stock exchanges.

It is essentially a question of choice of technique as to how we will achieve the target of annual rate of growth during the tenth plan period. Equally important are the approach and thrust areas. There is a need to reduce the ICOR from 4.28 to 4.08 per cent. It will be helpful to achieve the objectives of the plan if there is appropriate choice of efficient and divisible technology, and also more cost efficiency in implementation of plan schemes. For effecting this cost efficiency, it is essential to move for decentralisation of powers, both financial and administrative. This decentralisation has to be participatory, by involving directly the people at the grass roots level through the elected panchayats and municipalities, and it has to be accountable to the people. This process of accountable decentralisation can go a long way in achieving the plan objectives, and it should find adequate recognition in the final Approach Paper for the tenth plan.