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The balancing act
February, 18th 2008

The Finance Minister can still make a push towards saner politics and at the same time improve the prospects of realising his three goals of populism, low inflation and rapid growth by combining the ideals of Inclusive Development and Public Private Partnership, says P.V. INDIRESAN.

The Finance Minister, Mr P. Chidambaram, must curb inflation and simultaneously increase freebies.

Ten years ago, Mr Chidambaram produced what came to be known as the dream Budget. This year, given the kind of pressures he faces, he cannot even dream of repeating that performance. All his three current objectives earning votes, curbing inflation and promoting rapid growth are under extreme pressure. With current policies, he can meet any one of them only by sacrificing the other two.

His supporters are demanding more and more freebies. That will increase inflation and reduce growth. If he tightens the Budget to check inflation, he will displease political supporters and hurt growth rate. If he liberalises the economy to promote rapid growth, he will anger his coalition partners; resultant urbanisation will increase inflationary pressures. Whichever way he turns, he is in for trouble.

Inflation concerns

The Finance Ministers immediate concern will be political: Somehow or other, he must curb inflation and simultaneously increase freebies. What he will probably do (what we are witnessing already) is to maximise subsidies and postpone inflation for another year by artificially keeping prices below market value till the time elections are over.

Purists will snigger at this policy. However, that would not be fair. World over, in their first year of office, democratic governments try to fulfil as far as possible the extravagant commitments they would have made to the voters. In the second and third year, they will try to repair the damage done by their populism. In the final year, the cycle comes round once again with maximum populism. Periodic bouts of unwise populism before and after general elections are the price extracted by democracy.

In the forthcoming Budget, we can expect fulsome tributes to the idea of Inclusive Development. Theoretically, the concept of Inclusive Development is unexceptionable. In practice, it is no more than a buzz word. As with most ideas grabbed by politicians, it suffers from Orwellian Double-Speak: Inclusive Development does not mean including everyone but including those who are political favourites and as a further step, excluding the others. In the minds of politicians, this distortion of the idea of Inclusive Development will appear to make it heavenly, but it is certainly not logical.

As past experience has amply demonstrated, selective favours are not manageable. Even then, there are ever increasing demands for more and more reservation (not merely in college admissions and in jobs but virtually every sphere). Thus, so-called Inclusive Development will imply exclusion more and more.

Handicapped by poor performance

In tuning the Budget to meet electoral pressures, the Finance Minister is further handicapped by the poor performance of ministries in charge of social welfare. As the Human Development Report reveals, even though we are having unprecedented rates of economic growth, our Human Development Index has not improved we have been held back by relative retardation in social development, particularly in education and healthcare. Housing too is coming up only for the rich and not for the poor. Somehow, the present government has failed to learn a proper lesson from the debacle of the previous government that rapid economic growth does not win votes as well as social welfare will. It feels that more money for social welfare will do the trick. Unfortunately, what these services need most is not more money but honest and efficient management.

In all fairness, it must be said that the government is aware of inefficient delivery of services by the government apparatus. Apparently, it sincerely wants to invoke Public-Private Partnership to remedy the situation. Unfortunately, on the ground, we see no PPP where it is needed most in fields such as education, healthcare, housing and rural transport. What we are witnessing is an ever widening divide between the rich and the poor, with the rich opting for privately managed services and the poor condemned to (largely mismanaged) state-run services.

Even where the government had established institutions of international quality, (the IITs and the All India Institute of Medical Sciences, for instance) the present government has brought in much chaos. Sadly, but truly, it must be stated that its ministers have no pride of performance. They prefer to kill the golden goose to earn immediate and cheap popularity, however unwise that would be in the long run.

Lessons from failure

It is a fundamental principle that the poor will retain what is given to them if, and only if, that is not coveted by richer people. For instance, some slum dwellers were given subsidised tenements in Mumbai. The poor did not keep them for long. Richer families bought those flats, combined two-three of them into large flats to suit their own needs. The scheme failed because richer people, who too needed shelter, were neglected, and because the poor found cash more attractive than living in better accommodation. After all, they were well inured to living in slums.

If Mumbais slum rehabilitation programme had been truly inclusive, and had been combined with housing for all classes of people, this unintended distortion would not have occurred. Likewise, if in failed social services such as education, healthcare and rural transport, private participation had been encouraged, development would have been more efficient and fruitful. Unfortunately, instead of Inclusive Development and PPP, the Finance Minister will be pressurised to throw good money after bad into populist, inefficient, ineffective and corruption-filled programmes.

A way out

Under the circumstances, the Finance Minister deserves our full sympathy. His task appears impossible. However, he can still make a push towards saner politics and at the same time improve the prospects of realising his three goals of populism, low inflation and rapid growth by combining the ideals of Inclusive Development and Public Private Partnership. Here are a few examples:

Vouchers for education in private schools but only for evening classes (also for hospitalisation in the general wards of private hospitals): Vouchers promote competition. Confining the amenity to evening classes (and to general wards) will leave private space for the rich; they need not dispossess the poor with allurements to meet their own needs.

Tax concessions in housing developments where at least 10 ranges of houses are built to cater to all classes from the very rich to the very poor. The concessions (alternately, penalties) should be substantial enough to induce private developers to cater to the needs of the poor too.

Subsidy (equal to, say, interest and depreciation costs) for buses operating on intra-rural routes. Resultant increase in connectivity among the villages will generate a unified market of tens of thousands of customers and convert the connected villages into virtual towns capable of supporting urban amenities.

Integrating special economic zones (SEZs) with the newly proposed Social Development Zones and with housing to maximise mutual advantage: For example, tax concessions may be restricted to projects that limit industrial and commercial space to 15-20 per cent, housing to 40-50 per cent, leaving the rest for social, municipal infrastructure. This is only an indicative list; it can be extended or modified. Each one of the above proposals will be popular with people; will improve efficiency and thereby curb inflation and simultaneously promote growth. Unfortunately, casteism is so deeply ingrained in our psyche that we dislike Inclusive Development in any form even Social Development Zones are being kept separate from SEZs. Nor does our socialist bias allow us to pay anything more than lip service to Public-Private Partnership. The forthcoming Budget can still become a dream Budget if it breaks these two jinxes.

(The author is a former Director, IIT-Madras)
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