The e-mail ID of Kaushik Basu has 40 in it. Ask him why and he says: “Many people think it is my age.” He was the fortieth KB to join America’s Cornell University in 1994. Basu, who added a fresh perspective of inclusive growth into the otherwise bland Economic Survey this year, oozes enthusiasm of a student as he admits his latest job is a learning for him too. In a conversation with Jyoti Mukul and Vrishti Beniwal, the C Marks Professor of International Studies in Cornell University’s department of economics, currently on leave to officiate as India’s Chief Economic Advisor, makes a strong case for overhauling the subsidy mechanism, even as he cautions against over-interpreting growth numbers. Excerpts:
How can India handle its fiscal deficit and tighten government expenditure?
Fiscally, India is in a very good situation. Its fiscal policy management has been very good over the last year. If you compare India’s fiscal indicators with European countries, it has done very well and the buoyancy in the auction for 3G spectrum has helped. In general, the fiscal deficit is on a downward trend. There are, however, leakages that take place through our subsidy system and this is the big-ticket item we have to go after. I believe it is the state’s responsibility to help the poor and the vulnerable. It has to subsidise food, education and health services for the poor, but currently there are huge leakages. A study shows that for wheat that we try to reach to the BPL (below poverty line) households, 67 per cent misses the target. To reach subsidized fertilizer to small farmers, we lower the price of fertiliser for all farmers and subsidise the fertiliser producers. A minuscule segment of this huge subsidy reaches the small farmers. Likewise, by holding the entire priceline down for petrol and diesel, you are giving subsidy effectively to the entire population. We need to change this.
The system of food coupons and direct subsidy as a way of plugging leakages has not been tried out effectively so far. Do you think it will work?
I am sure it will work. It can do wonders for our social welfare system. There will be huge budgetary savings, with which we can cut down the fiscal deficit further and also send some of this money back to the poor for health and education. The food security Bill, which is being talked about, is eminently sensible. But, it is imperative that, along with it, we reform the delivery mechanism. Throwing money on the programme and enshrining rights on paper are not enough. Coupons or, equivalently, the smart card system is the way to go.
You have also said that if people sell coupons, it should not be a concern. But, this defeats the purpose of subsidy...
There is indeed some risk that people will sell off their coupons and buy something other than food. The typical bureaucratic reaction to this is to try to post a policeman outside each home and prevent this. There are two reasons I disagree with this. First, if we try to monitor the behaviour of each household, we will end up setting up another layer of bureaucracy, with all the attendant problems of corruption. Second, the worst outcome, namely, that the poor household ends up getting a benefit but not in the form of food, is not such a disaster. And, we can put in small disincentives against this. For instance, wherever possible, the coupons should be handed over to the woman head of the household. There are studies from Kerala and Karnataka which show that the spending pattern of the household depends on who gets the money in hand and is superior if the money goes to the woman.
There might be instances that such coupons or school vouchers are sold and money used for, say, buying liquor. How do you address these social issues?
When you give a higher salary to poor people, some may end up spending it on liquor. But, you do not give them a lower salary for that reason. Teach them better habits, but do not try to monitor.
All the government schemes seem to be looking forward to the ambitious unique identification (UID) scheme. Do you think we are putting all eggs in one basket, by relying too much on UID?
Even if the UID does not come on board, we should still switch to the coupon system. After all, right now we do give BPL cards without a UID system. We make mistakes and we may make the same mistakes with the coupons. The main strength of the coupon system is that the poor will not be turned away from public distribution stores or receive adulterated food because, with the coupon or smart card, the poor man will pay the full price to the store and will also be able to choose which store he goes to. In the current system, the subsidy is with the storekeeper. In the coupon system, it will be directly with the poor. The added benefit of UID is that one person cannot pretend to be another. Let me add that I am quite confident UID will be a functioning system before long.
The shopkeeper has the option of charging any price. He can keep raising price and the government subsidy will keep increasing.
No shopkeeper will raise prices arbitrarily because other shopkeepers will out-compete him. Moreover, we should periodically review the quantum of subsidy that households get and make adjustments.
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What needs to be done to boost agricultural growth, especially since food inflation is a concern and the country needs to provide for a large population?
Agriculture as a percentage of the gross national income has gone down to 14.6 per cent and will probably continue to go down further. That is the global story. As countries become richer, the agriculture sector becomes smaller in relative terms. Nevertheless, 4 per cent annual growth in agriculture is something we can realistically aspire to. Our aim has to be productivity. Indian agriculture is way less productive than that in many other countries. For that, we need infrastructure and investment — regular power supply, irrigation and decent fertilisers. Guarantee these things and the government does not have to do very much. There is enough creativity and entrepreneurship among our farmers that they can take it up from there. There is no need for the government to be meddlesome at each stage. My belief is that for a few vital foods such as wheat, rice and pulses, we should try to be self-sufficient so that we cannot be held hostage. But, we do not need to be self-sufficient in every product. There will be food items you buy from and sell to the world.
The recent GDP (gross domestic product) numbers show that agriculture and services sectors did not perform well last year, though agricultural growth at 0.2 per cent was better than expected. Can we sustain the double-digit growth in manufacturing and how achievable is 8.5 per cent growth for 2010-11?
Agricultural growth was indeed very low last year but that does not alter my GDP growth forecast of 8.5 per cent for this year. This is because in the last quarter of 2009-10, we have seen outstanding growth in the manufacturing sector — 16.3 per cent; and even the GDP growth was remarkable, at 8.6 per cent. Thanks to some new research on seasonality done at the National Institute of Public Finance and Policy, we know that the last quarter growth generally tends to be a bit on the higher side and so, we must not over-interpret these numbers. Nevertheless, India seems to be settling on to a very robust growth path.
This is not to deny that agriculture is a matter of concern. Last year’s poor performance was understandable because it was a year of severe rainfall shortage. In more than a decade, we have not seen a year like that.
The services sector has not done well but only in comparison to India’s own superb record in this. It is no reason for concern. About 60 per cent of India’s services in some critical sectors, such as information technology, are exported. In times of global crisis, this sector is, therefore, the most vulnerable. The only lesson is that we have to increase the demand for IT products in India, so that our global dependence goes down.
The remarkable performance has been of industry and, within that, manufacturing. Whether this is a sign of India’s new prowess or a cyclical upswing, it is too early to tell.
Inflation is one of the major challenges facing the country. Industry is worried about interest rates going up. Do you think this could harm investment in the long run?
Inflation is a matter of concern but let me assure you that this is a hand being over-played by some segments. The food price data released last week received a huge amount of attention, some claiming that food inflation was up at 16.55 per cent. Take a careful look at the numbers and you will see the food price index, which indicates the average price of food, is now virtually the same as on November 27, 2009. Now it is 295. It was 296 at the end of November. This means the average food price inflation since November has been zero. The high inflation figure of 16.55 per cent that is being talked about is that of today’s price compared to that of one year ago. What these facts tell us is that food inflation occurred for six months, from May to November last year, and the high food inflation number that we see today is capturing purely the base effect. Over the last several months, average food price inflation has tapered off.
What is true is that non-food inflation has picked up since the end of last year. Core inflation, which is the inflation without food and fuel, was very low till October-November. It was just above zero then and is just below 6 per cent now. The government must not overreact to this, however, and take draconian measures which will lower investment and raise unemployment.
The government and the Reserve Bank of India (RBI) have been withdrawing stimulus and it appears growth has not been affected. There is a fear that RBI may hike interest rates. Do you think there should be some restraint as far as withdrawing stimulus is concerned?
RBI has been an excellent manager of monetary policy and will have to take the ultimate decision on this. My view is that the policy rates should go up, though not for reasons of inflation, which is anyway tapering, but because we want to go back to normal times. RBI had loosened monetary policy as part of the stimulus package a year and a half or so ago. It is only to be expected that these rates should gradually go back to what may be called “neutral rates”, that is, rates that ought to prevail in normal times. The timing has to be decided by RBI and I am sure it is keeping a close watch on inflation and growth. I personally believe that, given the credit demand situation in the country, it is best not to tighten the cash reserve ratio (CRR) at this time.
After the Greek crisis, it is being felt globally that governments need to watch out on fiscal deficit and there should be a rollback of stimulus. How do you think the exit should be timed?
The direction is clear. The fiscal stimulus has to be withdrawn — this is not a medicine meant for prolonged use. But, I do not think it is time for complete withdrawal, the process has to be gradual — the way some steroids need to be tapered off rather than stopped abruptly. Also, in today’s world, one cannot be unmindful of what is happening in other countries. India has started withdrawing sooner than other countries because we have begun recovery earlier than other nations, but we must watch our steps.
The European crisis is worrying but if you take the fiscal indicators of most of the European countries in trouble and even some not in trouble, India’s indicators are much better. Our fiscal deficit this year is going to be 5.5 per cent or less. Greece is way above this. If you look at public debt as a percentage of GDP, India is around 75 per cent, whereas many European countries are close to 100 per cent. Japan is close to 200 per cent. Another indicator for banking health is non-performing loans as a percentage of all loans. India has a score of 2.4 per cent, while Greece has over 6 per cent, and many East European nations are even higher than that. These are matters of comfort but, in today’s turbulent times, no one can afford to get too comfortable.
What kind of impact would the European crisis have on India?
If the crisis is contained at the level of Greece and maybe one or two other nations, India will be affected quite marginally because our direct exposure to Greece is negligible. Exports to Greece constitute 0.5 per cent of its total exports. India’s banking exposure to Greece is negligible. But, there is a small possibility that Doctor Europe that came out with a massive bail-out package for the patient will get infected and sucked into the crisis. If that happens, then it will be a euro zone crisis. This will have big negative fallout on India, though we will have lots for company.
Does India need to further reform its financial sector, especially in terms of opening the banking and insurance sectors to foreign investment?
We do need to reform more in the financial sector and I am also in favour of gradual openness. But, finance is one sector where reform and regulation have to be continuously evolving. There is no such thing as “all job done”. What even the US has now recognised is that just as you have to continuously watch new medicines coming to the market, new financial products keep emerging. These can be loans with new characteristics or mortgages with different repayment profiles. If we operate with one set of mechanical rules, we will fail to sift between the safe products and unwanted ones. We may end up prohibiting good new products or fail to stop bad ones. Either will be a mistake for a modern market economy. No wonder, the US is trying to set up a financial product safety commission.
There is a view that some kind of reform in budget accounting is needed as far as revenue expenditure and capital expenditure is concerned, especially when it comes to giving grants to state governments. Is the government looking into this issue?
There is actually not too much of a problem, as long as you are aware of this. When the Centre gives money to a state to spend on capital expenditure, it shows as revenue expenditure for the Centre and for the state, it shows as capital expenditure. So, in the Centre’s Budget, this gives the impression of less capital expenditure than is the case. But, when you put the entire nation’s budget together, the states and the Centre, there is no problem.