At the expense of equity

UNION FINANCE MINISTER P. Chidambaram - B. MATHUR/REUTERS

The Planning Commission's blueprint for the Eleventh Plan reflects the reformer's mindset.

THE growth versus equity debate is among the oldest in popular economics, though often it borders on the silly when passionate advocates on either side argue as if it is not possible to have them both at the same time.

However, judging whether the economy is doing well or not depends on one's perspective. If growth is the sole criterion for judging performance, India has done very well in the past few years. Thus far, during the Tenth Plan (2003-04 to 2006-07), economic growth has averaged about 7 per cent, up from 5.5 per cent during the Ninth Plan (1997-98 to 2001-02). These growth rates, by international yardsticks, are exceptionally good. However, if one asks whether this growth was meaningful for the vast majority of the people, the assessment would be negative for several reasons. In terms of the two most important parameters - employment growth and poverty reduction - the results are far from satisfactory. The growth versus equity debate, in the current context, thus boils down to what one wants from planned development, the very raison d'tre of the Planning Commission.

Fundamentally, the promise that the benefits of faster growth will eventually "trickle down" has never appeared credible. In fact, the evidence does not suggest that faster growth has resulted in lowering unemployment. In the decade between 1993-94 and 2004, unemployment rates among rural men increased from 5.6 per cent to 9 per cent and among urban men it increased from 6.7 per cent to 8.1 per cent. The unemployment rates among women, which are usually higher when compared to those for men, also increased substantially during the decade.

Although the more controversial data relating to poverty levels, released by the Planning Commission, indicates that rural and urban poverty have declined, it is difficult to reconcile the unemployment data with the poverty estimates. In other words, how could people have escaped poverty if there were fewer job opportunities? Critics of the Planning Commission have pointed out that the poverty estimates are based on "contaminated data" and are "methodologically faulty". The Commission's draft Approach Paper to the Eleventh Plan, titled "Towards faster and more inclusive growth", promises more of the same. The paper, which basically sets the tone for the next Five-Year Plan, has fixed four alternative growth targets - 7 per cent, 8 per cent, 8.5 per cent and 9 per cent. Each of these is further sub-divided into sub-alternatives, depending on a set of assumptions or conditions necessary to get the desired results. The overall growth rate is broken down into sectoral targets and in terms of mobilising resources to finance the targeted rates. Thus, for example, if the overall economy has to grow at 7 per cent, the Planning Commission estimates that public investment must reach 8.4 per cent of gross domestic product (GDP). But if the overall growth rate is to reach 9 per cent a year during the Tenth Plan, pubic investment must be at 11.2 per cent of GDP.

Similarly, it sets targets for sectoral growth rates in order to reach targeted rates of GDP growth. For instance, the agricultural sector must grow at 3.2 per cent if the GDP is to increase annually by 7 per cent; the sector must grow at 4.1 per cent if GDP growth is targeted to increase annually by 9 per cent during the next Plan. The Planning Commission suggests that the Fiscal Responsibility and Budget Management Act (FRBMA), which sets legal limits to the government's ability to finance the Plan by running a deficit, be amended.

The Planning Commission has proposed a target of 8.5 per cent for the next Plan. The draft will be discussed by the full Planning Commission, which comprises the Prime Minister, the Finance Minister, other members of the Union Cabinet and all full-time members of the Commission. After approval by the Cabinet, the Approach Paper will be placed before the National Development Council, which has representatives from all States, for final approval.

Not surprisingly, the Planning Commission's draft approach came in for criticism as soon as it was released. It was also not surprising that the most stringent criticism came from the Left. The most substantive reaction from among political parties came from the Communist Party of India (Marxist), which issued a critique of the Approach Paper.

Eminent economist Prabhat Patnaik, who was recently appointed Vice-Chairman of the Kerala State Planning Board, has prepared a background note on behalf of the Board, contesting the Commission's approach. Fundamentally, both critiques argue that its approach is likely to undermine its stated objective of "more inclusive growth". More important, both argue that growth with equity would be impossible without reorienting the planning process. This would require targets to be set in terms of social objectives rather than percentage of growth in national income.

Patnaik is critical of the Planning Commission's approach to the next Plan. He argues that in order to yield tangible results the "sectoral" approach must be replaced by a social approach. This requires targets to be set in terms of social objectives. In other words, the question must be phrased not in terms of the pace of growth but in terms of the level of employment required to yield a certain level of income. For instance, instead of deciding on the target rate for the growth of the agricultural sector, the emphasis must be on social categories if the Plan's objective is to rescue the peasant from the agrarian crisis he/she is in.

The difference in emphasis leads to posing the question in two different ways. First since the agricultural sector is stagnating, what must be done to increase agricultural growth to 4 per cent in the Eleventh Plan period? Secondly, in view of the crisis in peasant agriculture, what must be done to lift the peasants out of the crisis? The difference is not one of semantics. Patnaik observed that the Planning Commission's approach arises from a "serious conceptual lacuna", which makes "a world of difference to our understanding of the remedies". For instance, the move to encourage corporate farming in agriculture would make sense if one were merely interested in increasing agricultural growth.

But this would be disastrous if policy is more concerned about protecting and promoting peasant agriculture.

Liberalisation has undermined not only the viability of small farms but also the livelihoods of people engaged in small-scale activities, which Patnaik calls "petty production". A range of activities in the informal or unorganised sector has been adversly affected by the policies associated with liberalisation. Sections of people dependent on such activities no longer have preferential access to institutional credit, nor do they enjoy government support, which was earlier provided by way of reserving certain fields of activities for the small-scale sector. Indeed, the Approach Paper prescribes that the policy of progressive de-reservation should proceed "at an accelerated pace" during the next Plan.

The Approach Paper recommends that the entry of multinational companies into agricultural retailing would protect the interests of small producers. This, it claims, will protect producers from "vested interests" (read local traders). The reasoning that these companies are free of any vested interest is not just naive, but also appears to be an excuse for allowing foreign companies into retailing in the pretext of serving a greater common good.

The liberal mindset, which casts its shadow on the economic policy-crafting establishment, is evident in the way the Approach Paper has been drawn up. "Targeting" is the preferred mode of delivery of important social services. Although the Approach Paper emphasises the need to extend educational and social services and advocates state intervention to achieve tangible results, its insistence on increasing "user charges" and cuts in subsidies give the game away. In effect, even while seeking greater state intervention in crucial fields, it seeks targeting or increased tariffs/fees for users, which will actually undermine the expansion of these very services.

Of course, public-private partnership is touted as the panacea for solving all infrastructural problems. Interestingly, the governments (at the Centre and in the States) and private industry have warmed up to the idea that joint partnerships are the way to go. Invariably, this has meant that the government would make available resources (land and water, particularly) to joint ventures at highly subsidised rates. Private industry finds this proposition attractive because not only does it enable the industry to access public resources, but also blunt the possibility of political protest because the government is a partner in the venture. This has been the experience with the various water projects.

In any case, infrastructure is of very many kinds. A poor person's notion of essential infrastructure would be schools, hospitals, anganwadis, and other facilities that can be accessed by entire communities. This is in contrast to the notion that infrastructure means new airports, tolled expressways, flyovers, and so on. The Approach Paper, by upholding the latter, prescribes a course that is iniquitous.

The Planning Commission sees great opportunities in labour-intensive, which it says will generate employment. But it points out that the "key issue... is the need for greater labour flexibility in some of the labour laws". The Commission echoes the calls given earlier by lobbies such as the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce (FICCI) to amend the Industrial Disputes Act and the Contract labour (Abolition and Regulation) Act. This, it argues, will give industry the flexibility to compete in international markets. Prabhat Patnaik argues that lower wages will result in lower purchasing power. This, he points out, will actually result in lower levels of investment and is "completely unacceptable".

The scenarios presented in the Approach Paper indicate that the savings of the public sector undertakings (PSUs) and the government are projected to be stagnant even as the GDP increases. This indicates that the profitability of the PSUs is not expected to increase during the Eleventh Plan.

The CPI(M) has criticised the Approach Paper for failing to use the Plan as a means to build a mechanism that would help the United Progressive Alliance government deliver on its promises contained in the National Common Minimum Programme (NCMP). Specifically, the NCMP promised to increase public expenditure on education to 6 per cent of GDP and expenditures on health services to 2-3 per cent of GDP. Moreover, the National Commission on Farmers had also made recommendations which ought to result in greater public expenditures in order to mitigate rural distress. The CPI(M) has pointed out that the Planning Commission has not made any effort either to plan towards fulfilling these promises or to suggest measures that will yield additional resources to fulfil them.

In recent times the Planning Commission has made controversial proposals that undermine the NCMP, which is regarded to be the very embodiment of the coalition dharma of the UPA government. For instance, its eagerness to woo U.S. business with policy manoeuvres that run counter to the key objectives of the NCMP has undermined the consensus within the UPA (Frontline, April 7).

An internal note circulated recently within the Planning Commission has sought to push forward the liberal agenda in virtually every segment of economic activity. It calls for "unrestricted private entry into coal mining", "completion of the process of selling 5-10 per cent" of equity in "previously identified profit-making Navaratnas", extension of industrial decontrol to sugar, fertiliser, drugs and petroleum refining industries, introduction of tolls on all national highways and State highways, free entry of the private sector in rail freight and privatisation of tracks and signals and foreign direct investment (FDI) in retail up to 49 per cent "if political resistance is too strong". The note also calls for an amendment to legislation to allow 49 per cent FDI in the insurance industry, reduction of government stake in public sector banks, an amendment to the provisions of the Essential Commodities Act, which will allow greater play for private trade, amendment to labour legislation, which will enable private companies enter the business of providing contract labour to industries, establishment of water regulators in the States, which will set user charges and allow "free entry of A grade global universities into India".

After decades of planning it is obvious that the process is not merely a set of targets for growth, resource mobilisation and expenditures. The context for any Plan is set by the nature of the economic regime. The Planning Commission, by setting higher growth targets, while simultaneously calling for accelerated implementation of liberal policies, skews policy towards growth - at the expense of equity.