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It's the human face, not scar face

Arvind Panagariya


The view that the reforms since 1991 — whether implemented by the Congress, United Front or NDA — neglected the poor, agriculture and education has gained near universal currency inside the UPA government.
Even the reformists within the government have publicly complained that the policies pursued during the 1990s lacked the human face. This ‘demonisation’ of reforms not only distorts facts, it also endangers growth that is essential for poverty alleviation.

The claims that the reforms short-changed the poor are pure nonsense. During the first three decades of development ending in the early 1980s, the proportion of the population living below the poverty line remained stubbornly unchanged. Because the total population was rising during these decades, the absolute number of the poor actually increased. It was only when liberalisation began — initially haphazardly under Rajiv Gandhi and then more systematically under Narasimha Rao — that incomes began to rise rapidly and the poor saw their fortunes change for the better.

Thus, according to official calculations, the proportion of the rural poor declined from 39% in 1987-88 to 27% in 1999-2000 and that of the urban poor from 39% to 24% over the same period. Andhra Pradesh, the favourite punching bag of the left currently, witnessed its poverty ratio decline from 21 to 11% in the rural areas and from 41 to 27% in the urban areas over the same period.

Not only does the evidence thus belie the claim that the reforms short-changed the poor, the assertion that agriculture did not receive its due in the 1990s can also be questioned.

True, public investment in agriculture as a proportion of the GDP declined from 0.53% in 1993-94 to 0.35% in 2001-02 (the dates of comparison are dictated by data availability). But this change occurred in the face of declining total public investment mandated by increased current expenditures and inadequate growth in tax revenues.

Because the decline in the total public investment was less sharp, however, the share of agriculture in the total public investment still declined from 6.6% to 5.9%. Thus, the “neglect of agriculture” hypothesis would seem to have some qualitative, though quantitatively tiny, support.

But even this conclusion is qualified in two ways. First, trade liberalisation turned the terms of trade in favour of agriculture and allowed private investment to approximately keep pace with the GDP.

This means the total investment in agriculture as a proportion of GDP fell less sharply (from 1.6 to 1.3%). If we then recognise that the share of agriculture in the GDP fell from 31 to 24%, investment as a proportion of agricultural output actually rose slightly.

The second qualification is that the subsidies to agriculture rose during the 1990s. While the precise data on them are not readily available, increases in the subsidies are almost sure to have more than offset the decline in the public investment as a proportion of the GDP. If the government had chosen to spend the subsidies productively and invested them, even public investment as a proportion of the GDP by itself would have risen.

The story on education is not altogether different. Successive governments have recognised the importance of investing more in this sector. For example, the chapter on education in the Economic Survey 2002-03 published before the UPA came to power, states in the opening paragraph, “Education is a critical input for investment in human capital. As against a goal of 6% of GDP, the total expenditure on education in India is currently 3.99% of GDP (2001-02).” Thus, the Survey anticipates the central objective of raising the investment in education to 6% of the GDP highlighted in the UPA Common Minimum Programme. The Tenth Five Year Plan proposed to increase education expenditure over that in the Ninth Plan by 76%. This hardly demonstrates a neglect of the sector.

The real danger lurking behind the rhetoric that the reforms ignored the poor or agriculture is that the government may simply end up substituting higher expenditures for the reforms.

This is doubly dangerous. For one thing, the government lacks resources to significantly raise the total expenditures. Even the Planning Commission has raised serious doubts about the tax receipt estimates offered by the finance minister in the current budget.

If the Planning Commission proves right, the realised deficit will be much larger, which will crowd out private investment. If the Planning Commission proves wrong, higher taxes will crowd out private savings so that private investment will still suffer.

Much more importantly, if the government embraces the view that increases in the expenditures on education, health and agriculture can deliver 7 to 8% growth, the reforms will end up on the back burner. We can then be sure to settle down to the neo-Hindu growth rate of 5%. This is not idle speculation: the UPA government has failed to offer a blueprint of reforms in agriculture and education even as it promises to give high priority to these sectors.

Thus, it is now common knowledge that India needs to ‘decontrol’ agriculture by amending the Essential Commodities Act, which allows states to control the storage, transport and processing of agricultural produce in a variety of ways. There is also a dire need to reform the policies relating to the governing procurement of food grains and their storage and distribution.

The controls on the development of competitive markets in fruits and vegetables that can challenge the monopoly power of the wholesale traders in the mandis must also be eliminated. In the area of higher education, there is the need to break the monopoly of the University Grants Commission, allow entry of private universities and give autonomy to public universities in raising tuition fees.

Sensitive reforms are easier when the service is being improved through the provision of increased resources. Yet, none of these reforms have been put on the table along with proposals for increased expenditures.