A V Rajwade: Subsidies, job creation and growth

WORLD MONEY

In Marathi, there is a vibrant and strong tradition of publishing special Diwali issues of magazines. One of the more interesting articles I read this year was by professor Vishwas Patil, an environmentalist and tree-lover who, with his own money, bought 1.5 acres of land to plant trees.

He needed an electricity connection to pump water and was asked to pay a connection charge of Rs 35,000. As owner of just 1.5 acres, he was a small land-holder and as such eligible to subsidised connection and, of course, free power.

He was told that his turn for the subsidised connection will come in 10 years' time.

Clearly, the Maharashtra government's promises of free power do not really mean much to small farmers. Andhra Pradesh Chief Minister Y S R Reddy also acknowledged this, conceding to a Financial Times reporter (December 10) that most of the free power is captured by wealthy farmers (including himself).

If free power in Maharashtra also benefits primarily the richer farmers, the cost being paid by the economy of the state is very high indeed.

There is a daily power cut of at least three hours in district headquarters, including even Pune, and six hours in taluka places. The loss of production to industry and, indeed, white-collar work can well be imagined.

What is truly amazing, of course, is that our political masters continue to indulge in such populist measures which the state's fiscal resources cannot afford "" despite a record of roll backs by various states. Liquor prohibition in Andhra Pradesh and Haryana are cases in point.

Maharashtra has announced that its free power scheme will end on March 31, and Andhra Pradesh, too, is having second thoughts. Meanwhile, the finances of the beleaguered electricity boards have already been crippled further, thanks to the hopefully short-lived promise of free power.

The price is being paid by millions of children who will not get schooling because there are no resources for schools; the inmates of Baba Amte's Maharogi Sewa Samiti projects who may starve because the government has no money to disburse the grants sanctioned; industry, which loses output; and many other sections of society.

I personally feel especially sad for my home state Maharashtra. In the first quarter century after Independence, it displaced West Bengal as the premier and most industrialised state in the country.

In recent decades, however, it has been going down, thanks to populism on the one hand and persistence with instruments like the Urban Land Ceiling Act (ULCA), on the other.

Maharashtra's populism extends from free power to waiver of interest on agricultural loans, monopoly over cotton procurement, bail out of the sugar cooperatives "" each cost thousands of crores, and benefitted mostly the rich.

The richest state in the country is almost bankrupt, despite savagely slashing capital investment in rural infrastructure, canal and road maintenance, schools and so on.

The ULCA has, of course, been useful for patronage distribution, but it also keeps property prices much higher than they need to be. The Act suits only the builders' lobby and its political masters.

I have seen independent economists arguing that Mumbai lost the crown of being the IT capital of the country to Bangalore, primarily because of the absurdly high property prices. To be sure, Navi Mumbai and Pune are trying to belatedly make up the loss.

But enough of Maharashtra. Is the position any different at the Centre? The prime minister has called for rationalisation of subsidies on all types of energy including LPG, kerosene, water and power.

And yet, he was powerless in preventing his own party's manifestos for the Maharashtra and Andhra elections from promising free power to all agriculturists.

His government is proceeding ahead with the Rural Employment Guarantee Scheme. It is a bold and, indeed, adventurous initiative that could have serious consequences: one has seen cost estimates ranging from Rs 40,000 crore a year after full implementation, to Rs 1,50,000 crore, and even Rs 2,00,000 crore.

Apart from the numbers and their affordability, there are serious question marks on the ability of the administration at the Central and state levels to implement the scheme with even a modicum of honesty and efficiency.

The scheme is based on the Employment Guarantee Scheme, which has operated in Maharashtra for several decades. One analysis of this scheme rgues that for every Rs 100 spent on the scheme, the poor got less than Rs 22, and perhaps, most of that only on paper (the balance 4/5th of the expenditure went on material cost and administration).

If this is the transfer efficiency even in a state that is still one of the better governed, imagine the situation on a countrywide basis. It is a telling commentary that Nobel laureate Amartya Sen has voiced several cautions about the scheme "" the possibility of corruption, its opportunity cost in terms of "social public goods" and the strains on states' and Centre's fiscal resources and so on.

Cynics could be pardoned for seeing two merits in the scheme:

Much of the funds will go to assorted bureaucrats, middlemen and local leaders by way of unaccounted money. Since economic activity, by definition, equals money supply multiplied by the speed of circulation, and since unaccounted money circulates much faster, the scheme could lead to a burst in economic activity.

It brings nearer the day of domestic debt crisis "" that may be the only way we will learn, as we did on the external front from the 1991 balance of payment crisis.

E-mail: avrco@vsnl.com