Finance Minister P Chidambaram has started to bring the focus back to where we need to contain subsidies, but over a period of time curtailing subsidies won’t be enough because we have to raise more revenue, says Ajay Chhibber, Assistant Secretary General, United Nations Development Programme (UNDP). In an interview to Vrishti Beniwal, he says the government can cut expenditure without reducing benefits by delivering subsidies to people at a much lower cost. Edited excerpts:
What is your outlook for the Indian economy? How much of our problem is because of the global slowdown?
We are off the highway of growth and to get back on the highway, it will take some effort. Some of the slowdown is due to the global economy, but a bigger part is due to our internal lack of policy reforms. Prospects for the global economy for the coming decade are not that positive. So to hope that the world economy would get much better and (we can) use that for our recovery wouldn’t be a good idea. We will have to do a lot more internally, and it is possible.
We need to have a very clear roadmap of the second generation reforms we have to do. We have made a bit of a mess of our macro economic situation. So we have to fix that, besides (fixing) structural reforms of labour and land issues. We also have to make sure that we don’t continue to do so much damage to the economy. Large fiscal deficit is crowding out private investment, which is creating more inflation, and that is then leading to weakening sentiment for India. Our corporates are taking money outside. Rupee is getting weaker and that is adding further to inflation and then fiscal deficit. In a nutshell, maintaining a 6 per cent growth would be an effort.
Would you describe the recent measures taken by the government as reforms?
You don’t get yet a picture of what is the roadmap of the government for getting us back to 8-9 per cent growth. What you have is attempts to contain fiscal deficit, improve the business confidence by allowing FDI (foreign direct investment) in retail. I would define these steps as an effort to stem the decline because we were headed for junk rating status. Whether they will be able to move from here to a broader roadmap of reforms given the political cycle is very hard for me to say. But I must say the threat of a decline in ratings has focused the minds enough to be able to say that we do need to give the impression that we are behind reforms.
The finance minister recently revised the fiscal deficit target for this year from 5.1 per cent to 5.3 per cent. Do you think he has given a credible fiscal roadmap?
He is trying hard, but it is very difficult given the government is one to two years away from elections to really be able to have a very aggressive fiscal programme. This finance minister has a credible record as someone who brought the deficit down in the past, but what he has inherited now is a huge fiscal mess.
Do you see further pressure on fiscal deficit as the finance minister would be under pressure to bring out a populist Budget in 2013?
It is going to be a huge challenge. We have to come to a mindset that the road to better benefits to the people is reduction in fiscal deficit, which will reduce inflation and open space for more private investment. A tough Budget strategy will help large number of people in the country. One way to do that is to deliver subsidies to people at a much lower cost than we are able to do now. So if you do experimentation with cash subsidy, you can target these better to poor people. Then you are not really hurting the poor by increasing prices of fuel.
What do you think would be the fate of Food Security Bill?
Legislating food security is fine, but the Bill itself won’t solve the hunger problem. We have legislated many things in the past like we must drive in a lane, but have you ever seen doing that in India? Food Security Bill raises the consciousness that we have so many malnourished people, but in the end it is the ability to deliver them food at a reasonable price that needs to be focused on.
As both tax and non-tax revenue targets may be difficult to meet, the government may look at further cuts in the Plan expenditure. How would that impact social sector programmes?
Of course it will have an impact, but the point to ask is whether all the money in those schemes is actually leading to the outcomes that were intended. The leakage is huge and there are so many overlapping schemes. The question is, do you want to reach a certain level of human development or social outcome through these schemes and whether the money you are putting in is actually doing that or not. It is possible to reduce and rationalise these schemes without reducing benefits of outcome.
The finance ministry is expecting a lot of savings from social sector schemes this year. Are the huge unspent funds due to loopholes in the schemes or because people have been empowered, as Economic Affairs Secretary Arvind Mayaram put it?
Maybe it’s a mixture of both. There are parts of the country where wages have gone up and MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) wages are considered too low. But in a lot of places the capacity to implement is not there. I think he (Mayaram) is partly right, but that’s not the full story.
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The Planning Commission’s poverty estimates evoked strong protests due to its definition of poverty line, forcing the government to constitute a committee under C Rangarajan. In this context, how can multi-dimensional poverty index proposed by UNDP help? Should the committee take note of it?
First of all, we need both income poverty number and multi-dimensional poverty. Setting up of this committee gives a very good opportunity to revisit the whole issue. You need an income poverty measure, which has international acceptability because you want to be compared with what is happening in other countries. Our multi-dimensional poverty indicator is not a substitute for income poverty.
What it truly is that you get a much better picture of deprivation if you go beyond income measure and that access to water, housing and basic services gives you another dimension to poverty that an income measure alone cannot. My advice would be taking a broader look at all these indicators. It is not possible to capture all the deprivations people face in just one number. At the same time, I must say that by the income measure they used, poverty has declined in India though more slowly than in China or Indonesia. Should it have declined more given the growth we had? The answer is yes.