Edited Excerpts From An Interview

Do you think there’s real cause for worry or is it just a contagion of fear spreading?
No, there’s genuinely huge cause for worry for a number of reasons. The most important is that the government seems to have thrown all sense of fiscal responsibility to the winds. We had a Fiscal Responsibility and Budget Management (FRBM) Act, which was adhered to until the global crash of 2008. At the time, very justifiably, we had a fiscal expansion in order to prevent growth from collapsing. However, I was a member of the 13th Finance Commission and we prescribed a move back to the path of fiscal correction starting from 2011-12, with 2010-11 as a gap year. But far from reversing the fiscal profligacy of the post-Lehman years, our fiscal flabbiness has just got flabbier and there seems to be no prospect of a return to fiscal discipline in the short term.

Why should this matter to the layman? It matters because when government borrows hugely on capital markets, it exerts upward pressure on interest rates. To that extent, capital becomes costlier for private projects. Investment plans are put on hold. That directly affects growth. The second thing is that when there is a lax fiscal stance, the RBI feels constrained to counter that with a tight monetary stance to contain inflationary pressures because you have a lot of ballooning demand in the system coming from the government. But when the RBI adds a tight monetary stance to the government’s loose fiscal stance, you have further upward pressure on interest rates. That’s where we are now. We have high interest rates, private investments are on hold and, very unfortunately, the government’s reckless fiscal expenditure is not even going towards public infrastructure that would augment growth in the future or add to our supply side possibilities.

What’s changed between UPA-1 and UPA-2 for there to be such a difference in response to an economic climate?
I don’t know what’s precipitated us into this terrible situation in the past two years. The only thing I can imagine is that after its victory, the UPA possibly saw the MGNREGA as the sort of populist expenditure that got them re-elected and imagined more of the same would consolidate them politically. That’s the only reading I have, but it’s an appalling situation and there seem to be no correctives. I hate to sound ala – rmist but I’ve rarely been so discouraged.

When you say “fiscal profligacy”, is it only the social spending that is worrying you?
Largely the social spends. But I don’t want to be misunderstood. If any country needs social spending, it is this. The National Family Health Survey of 2005 found 45 percent of our children are malnourished. Of course, we have to do something about it. But, we have a terrible track record of reaching our target beneficiaries. Sometimes we get explosive information from the field about schemes like, say, the Integrated Child Development Scheme (ICDS). In north Karnataka, for instance, the food being served to children is being produced by criminal elements in the system and is not merely useless but actually toxic, having high zinc content. In other places, where the scheme is delivered well, we’ve found demonstrable improvement in anthropomorphic measurements but only 6 percent of children actually access these centres. The whole system is rotten from inside, but nothing is ever corrected. The only solution the government can think of is to throw more money at these schemes. The corrective needed is not to have more social spending but to have better social spending. Yet there’s absolutely nothing in the system that triggers selfcorrection. CAG, the Public Accounts Committee, what are they all doing?

What are the other symptoms that speak of a brewing crisis?
Food inflation, which has gone on at this level for about three years now, is a story of the most incredible mismanagement. Look at milk price inflation. Now, if we have 45 percent malnutrition among children, surely the price of milk, more even than the price of grain, is something that should worry us. But milk price inflation has run ahead even of food price inflation. The reason is that with the benefits of growth going to the upper sections of our society, there’s been a huge increase in the demand for milk derivatives like cheese by way of pizzas and so on. Given this rise in demand, a lot of liquid milk production is being diverted into the production of cheese. One has to take a very productspecific, nuanced approach in this situation. My response would be to immediately reduce all tariffs on imported cheese to zero. Let’s import cheese: the EU would be terribly happy (and maybe even favour us with some foreign direct investment) and we’d be preserving our liquid milk for the consumption of those who want it as liquid milk. But there is no evidence of any inter-ministerial communication between the commerce, agriculture and finance ministry on any of this. Mission-oriented governance, alertness to the needs of the Intehour — these things seem to have collapsed totally. Take the spectacle of the Goods and Service Tax (GST) Bill in Parliament as another example. Enacting that would at least streamline the tax mechanism in the country and you could have a freer flow of goods and services. 1 April 2012 was the target for its introduction. But even April 2013 now looks a remote possibility. So where is the room for optimism? Wherever you look, there is paralysis. Bureaucrats are also helpless because governance needs political leadership.

There is a feeling that high interest rates are choking the economy. What’s the rationale for not bringing them down?
It’s not happening because the fiscal deficit is ballooning. The government has another huge borrowing programme in the works. I’ve already explained how fiscal profligacy triggers an upward pressure on interest rates. Now if the RBI were to let the borrowing happen and accommodate it by having more liquidity in the economy, what you’d get back is inflation and that harms ordinary people. The high interest rate affects investments and through that, of course, employment, and that again affects the people. So you’re between the devil and the deep blue sea. What you really need is for the government to rein in its expenditures and achieve the same social outcomes with reduced expenditures.

Our social spends have to change. But the real despairing factor is the disarray in our governance

But is inefficient social spends really the only problem? Everyone talks of growth as the grail, but even in the good years, many states slid further down the poverty index, the trickle down didn’t happen, very little employment was generated. Isn’t it better to be multi-pronged?
There’s no question that growth benefits were unequally distributed. In many ways, therefore, the MGNREGA was a good programme and much needed when it came. But compare that with another programme which is far superior — the Prime Minister’s Gram Sadak Yojana, started in 2000. What is the PMGSY? It’s an infrastructure building programme, intended to create last-mile connectivity for all villages. It opens up the village to the world and vice versa. It brings down costs for villagers transporting their produce to the nearest market and of buying things from the town; it benefits industry from whom they buy. It enables children to go to school. It’s good for food inflation because it brings down the cost of transporting food from the interior. Contrast this with the MGNREGA, which is also supposed to be an infrastructure generating project, but the infrastructure it’s creating is useless. So it’s essentially an income transfer scheme. But the PMGSY is also income generating; labourers who work on that get paid. So, which is preferable? I’d say the PMGSY. Yet it’s received one-third the budgetary allocation. Why? These are the things we need to debate.

Apart from this, the core issue that needs sorting is the funding of our political parties. Until we address that squarely, nothing is going to stop the political economy leaning towards programmes where siphoning off is possible. The siphoning is necessary for political funding. But our public discourse shies away from talking about the most important things.

I can tell you as someone on the board of the RBI that the burden of being seen as a growth stopper is a very heavy one. No one wants to stop the growth machine but we desperately need fiscal correction. Periodically the government tries to restrain inflation by hiking petrol prices, for instance, which makes people wonder how that can reduce inflation. The basic idea is it reduces the fuel subsidy from the Budget so the government has to borrow less. But overall, since the last election, there’s absolutely no policy coherence.

You’re saying social schemes should enable people to earn not give them dole?
Yes, the poor, which is the bottom 75 percent of our population, are proud that if they survive it’s because of their hard work. That is something we must never lose sight of. If money is thrown at people this element of the social fabric is torn. People see someone getting money for having done nothing, merely being in a state of entitlement. We have to make people feel they are getting things because they deserve it not because we were being charitable.

It’s not as if the Food Security Bill or any new expensive social spend scheme has got off the ground. So why this dip in optimism since early 2011?
Partly, of course, it’s because of global circumstances. But the fiscal profligacy I spoke of earlier hasn’t just been something in and of itself. It has many ramifications. Look at Greece. The market has punished Greece for fiscal laxity, very similar to India’s post-2008, which was to loosen its fiscal strings and then not tighten up again. Of course, their revenues also fell because they were practically living off tourism and tourists weren’t coming. We fortunately have a large internal market, and are hugely blessed by a large continental mass. We’ve had a number of advantages but at the end of the day the whole world, not just India, perceives India now as a country without a government. That’s a very precarious situation for us to be in.

What are the most urgent correctives needed this year?
First, I’d say, what needs to be done is in accordance with what the government itself had asked us to do in the commission — which is to develop a piece of legislation called the Fiscal Responsibility and Budget Management Act, Part 2. There’s still time to do it. They can do it before the Budget in which they declare a believable plan of expenditure containment and revenue enhancement so we can at least keep our deficit level at 4.6 percent that it was budgeted for, instead of 5.8 percent, which is what it’s expected to increase to.

What’s the measure that can boost investor confidence?
It’s definitely fiscal discipline, as I’ve repeatedly been saying, but to stem the flight of capital you need other reassurances. The gravest block for manufacturing industries in India is the country’s labour laws. Because labourers cannot be fired, industry is reluctant to take them directly on their rolls and companies like Maruti or Honda hire them through contractors. By focussing excessively on job security, we have actually ended up worsening labour conditions. People have no protection and live at the mercy of contractors. So we really need a radical alteration of our labour laws, which has been on the anvil for 20 years but somehow never been pushed through.

Do you see any resilient sign ahead at all?
There is news that the oil-rich Middle East countries that have been the main beneficiaries of the oil price hike are now looking at possible infrastructure investments in India because they are wary of investing in Europe or America. That might see us out of some of this mess. It’s not as though recovery is not possible, but at the end of the day, if you are going to be dependent on positive external developments, the rains being good or the Middle East favouring us, you don’t have that same confidence as when you have corrected things yourself. For me, therefore, the real despairing factor is the absolute and chronic disarray in our governance.

You’ve written before that what really ails our economy is its dismal delivery systems. Why haven’t we managed to fix the PDS in 60 years? Do we lack the governing gene as a society?
The biggest impediment is decades of inattention to the daily and very boring business of governance. If you look at any other country, things can go wrong but look at the speed with which they get corrected. That’s because they have internal mechanisms that kick in without street demonstrations. We don’t. Here everything has to be highlighted by the press because correction within our system is nonexistent.

Take simple things. If you are an educated taxpaying citizen of the country, you should be able to pick up the Budget document and find out where your rupee is going. But it’s so opaque even I find it difficult to track expenditure. There are government departments hopelessly short-staffed, but vacant posts are not getting filled. Others have outlived their utility but continue to exist.

Take the warehousing question. We need to create a network of facilities all over the country. But there’s no strategic thought to this at all. When the panchayats came, they were thought of as a local governance hub that would address issues of local storage. But none of that happened. Who is thinking spatially? Who has put government expenditures on a geographical information system (GIS) platform? In Canada, you can ask for anything and they’ll pull up a GIS map that will tell you, for instance, where the police stations are. We don’t have anything of the sort.

When I was in the Finance Commission, we prescribed a grant from the Centre to local governments and structured them in two parts. The first went to them regardless, the second was performance based. For instance, there was a grant for creating a fire plan for all urban bodies with a population of above one million. They had to have a certain number of trucks, a fire station, etc. This idea is based on what we call in economics as yardstick competitions. So Delhi’s local government is supposed to feel the pressure of how Noida or Gurgaon’s local government is performing. But for this to happen, the minimal requirement would be for the urban development ministry to monitor on its website what was happening to this Finance Commission grant. But if you go to the site, there’s no mention of the Finance Commission or the grant. It’s as if it never existed.

This should be publicly available information. Everyone should be able to ask why their city failed to get its performance grant. To rely on the RTI is to put excessive burden on an individual. This information must be a collective right. There’s something rotten within this system that has nothing to do with which party is in power. We do have our oases of excellence. As a country, we’d be unbeatable because of the talent we have. But what China has is their ability to make music together. They can band together and do things collectively. We don’t have that.

Shoma Chaudhury is Managing Editor, Tehelka.
shoma@tehelka.com