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Thursday, 09 August 2012 00:50
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Only if the economy does well can they spend more in the states they run -- that goes for Sonia Gandhi too

Though the plethora of developmentwallahs, and not just in Sonia Gandhi’s National Advisory Council (NAC), won’t admit it, the last few years have been the best of their lives. Thanks to an unprecedented surge in the economy—growth rates rose from an average of 2.4% in the 1980-81 to 1993-94 period to a whopping 6.91% in the 2003-04 to 2009-10 period—there has been an equally sharp boom in development expenditures. According to data presented by NIPFP Director M Govinda Rao at an NIPFP-Columbia University seminar on Tuesday, total expenditure on all development services rose by around 8.9% per annum in the 1994-2003 period, and then nearly doubled to 17% in the 2004-10 period. And, given the lower initial expenditure of the poorer states, naturally, the surge in their development expenditure has been huge. In the case of Bihar, such expenditure grew 1.8% per year in the first period and then by 25.8% in the second period—so you know why Nitish Kumar got re-elected! If the growth in education-spend for states is not that high, it’s because the Centre has been spending a lot here.

A combination of the greater employment opportunities created by economic growth and the fiscal space (at both the states and the Centre) created by the higher GDP growth then led to a sharp compression in the proportion of people below the poverty line in most states. For the country as a whole, poverty fell from 45.3% in 1993-94 to 37.2% in 2004-05 to 29.8% in 2009-10 and to an estimated 26.2% in 2011-12. The results of most states are equally good, except for Bihar where, due to the exceptionally low initial incomes (distance from the poverty line, to use Surjit Bhalla’s phrase), it will take a lot of growth to lift people out of poverty.

As we get into yet another tricky monsoon session of Parliament, where MPs from the Opposition will try their best to disrupt its working, where Bills getting passed will be the oddity and them getting shelved the norm, there’s a big lesson here. None of this is at all possible unless the economy grows. Even more bailouts from the Centre, of the type Mamata Banerjee has been canvassing for, depend upon the Centre’s fiscal strength. Just wait to see what happens to central government taxes now that growth is collapsing, and then see what happens to the finances of the state governments. A total of 45% of what the Centre collects by way of taxes and other receipts goes back to states, either in the form of sharing of central taxes or by way of various grants or schemes—it’s true the states want more autonomy over how the schemes are to be designed, but let’s get it clear, there will be nothing to share when the economy tanks.

FDI in retail, or a more industry-friendly land acquisition Bill is not something Manmohan Singh or P Chidambaram want because they’re sold out to US Inc or India Inc, it’s because this is needed for the economy to pick up its lost steam. If Chidambaram has ordered a review of the Vodafone retrospective ruling, it’s because Vodafone has invested $15 billion in India, not counting the $11.1 billion it gave Hutch—at 58 million, this big bad profit-sucking MNC has three-fourths more rural customers than the government-owned BSNL does, and that’s when BSNL has got tens of thousands of crore of subsidies! Or just look at how Haryana chief minister Bhupinder Singh Hooda is running around Maruti Suzuki now that there are serious chances of the auto major scaling back production and compare this to how he arm-twisted Maruti to reinstate militant union leaders after they’d been sacked in the past. Has Hooda struck a deal with Maruti? No, he’s just being pragmatic and knows the state needs Maruti as much as Maruti needs the state to produce its cars. More than the Opposition, that’s an important lesson for Sonia Gandhi and her NAC, since much of what the government wants to do gets stopped by them.

Of course, as Govinda Rao’s data shows, even after the surge in expenditure by the poorer states, their per capita spend is a fraction that of the richer states. In 2009-10, Bihar’s per capita spend on economic and social services was a pathetic R2,886 versus R9,511 for Gujarat. And given that investment won’t come into Bihar till there’s a certain basic amount of social and physical infrastructure, in effect that condemns Bihar to a lifetime of poverty—which is why, data from Columbia Professor Arvind Panagariya at the same conference showed, the share of manufacturing in Bihar is down from 6% in 2000-01 to 5.8% in 2009-10.

So, is the solution to throw more money at the problem, more so when we know just how ineffective government spending is? One point that Govinda Rao makes is that while the states’ revenue buoyancy is now flagging (VAT reforms have done their magic, but that was six years ago), the states still haven’t done enough. The way he calculates it, West Bengal’s tax effort is under 70% that of what it needs to be just to reach the all-India average. For Bihar, given its level of taxable output, the tax effort is actually 94%, though there has been some slippage. So, before clamouring for more, states just have to get their act together.

There’s some interesting information here for Chidambaram. The bulk of the central subsidies, in per capita terms, go to the rich states and not the poor. So, Bihar got R465 of subsidies per capita while Gujarat got R1,053 and Punjab R1,714 in 2007-08. There’s the issue of the state’s capacity-to-spend and stuff like that, but the overall lesson is clear: cutting subsidies will help fix the central fisc and it will hurt only the relatively better off!

Last Updated ( Saturday, 11 August 2012 00:17 )
 

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