Can India afford welfarism based on handouts
By TK Arun ET Bureau| Updated: Feb 03, 2019, 06.16 AM IST
A spectre is haunting India. A spectre of never-ending handouts, which would bring some relief to the really hard-up, remove the incentive to strive for the rest and starve the economy of the funds it needs for investing in productivity boosting human capability and physical infrastructure.
Time was when politicians promised voters a cycle, computer or TV set, won their favour and made commissions on wholesale purchases of the said gifts, and proceeded to live happily at least for the rest of the term. Then came the recurring expenditure on heavily subsidised food.
Loan waivers gained currency subsequently. Ratcheting up the minimum support price of crops, without regard to trade competitiveness, was mapped out as the route out of rural distress. Income support—for the farmer in Telangana, for the farmer, share cropper, tenant and agricultural worker in Odisha and for the poor farmer with landholding less than 2 hectares across India, courtesy the Union budget—supplements, rather than displaces, existing doles such as the employment guarantee scheme, in which manual work is only a self-selection tool for targeting the poor for the dole. The Congress’ basic income assurance for the poor waits in the wings.
All these handouts are in addition, of course to assorted production subsidies, as on power for pumping water, canal irrigation and fertiliser, and incentives and tax breaks for industry. Subsidy on education, healthcare and food that increases their availability and benefits society at large, over and above the benefit that accrues to their direct recipients, is in another class of merit.
How much subsidy can India afford and what does mounting subsidy imply for the economy and society?
India’s total tax collections are about 17% of GDP for the Centre and the states combined, half the average for members of OECD, the club of mostly rich countries. The odd percentage point of GDP worth of non-tax revenue and borrowings make up the rest of state spending power of 27% of GDP, of which the Centre’s share is less than half.
India spends less than 1% of GDP on R&D, 1% of GDP on public health, less than double that on defence and a little more on education. The result: the world’s largest burden of disease and malnourishment, substandard education, the company of laggards in science and technology, and defence capability that falls far short of India’s ambition and compulsion of strategic autonomy.
Protection from foreign competition and easy pickings through cost padding and milking of state schemes have created a private sector devoid, for the most part, of any fire at any point of the alimentary canal, if you discount the smokers.
Materials, computing, communications, artiartificial intelligence, design, energy and outer space — advances in these areas define strategic power of the hard variety. India has a foothold only in space and flounders elsewhere. China surges ahead in every sector.
Yes, India has youth and talent, oodles of them. They can be trained to think creatively and critically. An elite minority flees the country to acquire these faculties. Most of the rest stunt their potential. Some learn to glorify everything in tradition, hate those who are not part of the herd and create social schism. Others now are being trained into passive indolence, their subsistence assured at the udder of the munificent state.
The greater the spending on handouts, the less that remains for spending on productive investment. The less the emphasis on empowering people with political agency, education, healthcare and physical infrastructure, to take advantage of the opportunities generated by globalised growth, the greater the demand for handouts. The greater the hunger for revenue to fund handouts, the greater the incentive for productive elements to relocate outside the land.
Subsidy is not a dirty word. On the contrary, it is a tool to be used to burst poverty traps and launch enriching lives. India is a poor country with middling fiscal capacity. For it to wear the trappings of a welfare giant is to snap its own back. Subsidy must be used sparingly and with intelligent design.
The way out of poverty and want is not through doles financed by taxing production or burdening the future with debt. Rather, it is through growth. Farmers must get world prices, by removing restrictions on exports and on realising as large a share as is possible of the value added to their produce before it reaches the consumer.
That means removing marketing restrictions and creating new market linkages, while removing distortionary incentives that encourage farmers, for example, to grow sugarcane in arid Maharashtra, instead of in the Gangetic plains, or to continue with ruinous flood irrigation, forgoing drip irrigation. The emerging political economy of handouts must not take hold.