Sudhir Mulji: Mid-term appraisal of the Plan

The suggestion of private sector investment in infrastructure is not a bright one

Except to the partisan, the bizarre dispute between the Planning Commission and the Left must seem a characteristic and irrelevant sideshow.

In reality it should have been obvious to the Left leaders that they and the Planning Commission are natural allies in seeking greater expenditure, and that therefore Jyoti Basu should have been embracing Montek Singh Ahluwalia regardless of the latter's supposed affiliations to international institutions.

Unfortunately, as is quite common, the Left has not read the mid- term appraisal (MTA) before charging into an attack. The MTA, which has been described by some commentators as an innocuous little exercise, is the first attack on government policies. Instead of being bland and wishy washy, it contains a concealed bombshell in its midst.

For, it states: "The Fiscal Responsibility and Budget Management targets indicated to Parliament will limit the Gross Budgetary Support to the Plan as a ratio of GDP to increase by about half of one percentage point over the next two years."

This the appraisal points out in its "candid assessment" is less than originally planned, but it goes on further to argue that "more realistic projections about the likely impact of tax reforms suggest that if the fiscal deficit targets are insisted upon the Gross Budgetary Support to the Plan as a ratio of GDP may actually decline.

The trade off between a larger Plan size and a higher fiscal deficit will have to be explored in depth" (para 15  Mid-term appraisal). This is the first hint by any government authority that the constant pursuit of balancing budgets may not be a solution to India's employment problems.

In simple language the Planning Commission is warning us at the outset that the Common Minimum Programme is not achievable if the anti inflationary policies of the finance ministry are kept into place.

Further, the results of previous official schemes for providing more jobs have simply failed. As the MTA explains, "in the 1990's, the role of agriculture in providing additional employment opportunities was virtually zero. The main solutions proposed by the Plan were bringing waste and degraded lands into production and encouraging diversification to more labour intensive crops. Neither has progressed very much ..." (para 19 of the Mid-term Appraisal).

"It is clear that the Resource position in the remainder of the Tenth Plan will be much more difficult than was originally envisaged at the time the Plan was formulated. The resource constraint will be especially difficult because new priorities which require substantial increase in health and education."

All this could just be dismissed as the usual patter of a government department looking for more money. But it could also be an early warning to the UPA that there is a kind of danger that may put their entire programme out of kilter.

Instead of concentrating on this economic dilemma pointed out by the Mid-term Appraisal, the Left has chosen to berate the Deputy Chairman of the Planning Commission for his injudicious moves on foreign experts.

The truth is that neither the advent of world experts nor their disappearance will make the smallest difference to the problems of employment but their inclusion in the debate could lead to greater sympathy with our fiscal position.

We may be soothed by meaningless phrases "like deficits for investment" or beguiling notions of using accumulated foreign exchange reserves for infrastructure investments. But none of this can be done without a sharp increase in fiscal deficit.

Perhaps there is another red herring that one should not be diverted by. The Mid-Term Appraisal has suggested that some infrastructure investment could be undertaken by attracting private investment. In these pages fortnight after fortnight I have pointed out that such is not the character or the method of the private sector.

The latter has an obligation to aspire for profits out of future outlays. It has no method or system for calculating social profits. Infrastructural expenses will be undertaken by the private sector if it is given monopoly perhaps a limited monopoly for a period of time, not otherwise.

Adam Smith understood this characteristic and those who consider him the champion of free enterprise should read the logic of his arguments for the Navigation Acts.

To return to the topic in hand, it is not my contention that Ahluwalia is now recommending a dramatic increase in fiscal deficit. Leopards, particularly those who have lived within the bureaucracy, do not change their spots quite so swiftly; at this stage we are simply looking at the intellectual positions that different parties are taking.

The Planning Commission is indicating that expenditure has to be increased even at the cost of breaching the Fiscal Responsibility Bill.

In order to convince the polity to accept this line, the Planning Commission will need to assuage a great many powerful forces. First, it will need to sell the idea to the finance ministry and the Prime Minister.

Second, it has to persuade foreign investors that such a move is not the road to ruin of fiscal irresponsibility but a necessary step in ensuring that the future investments are at least planned along the line of removing the bottlenecks to poverty and social services in health and education.

Perhaps Ahluwalia felt that involving foreign institutions like the World Bank in the process of planning would ease their expected criticism of fiscal irresponsibility. In a glabalised economy it matters that the world should also support our schemes.

The Bank and the Fund do not represent international capital but international capital takes its lead from these institutions and it is foolish to seek their dissent if their consensus is available.

Unfortunately, the open opposition of the Left to achieving a target that they should have championed has obscured real issues. It is possible that Ahluwalia did not act circumspectly in the mechanics of internal consensus.

Yet to discard the baby with the bath water is not generally thought to be a sensible solution. The truth is that the Planning Commission in its revised glory is the single most important department in the government to achieve the objectives of the Common Minimum Programme.

It is a sham to argue that the private sector can be cajoled or bullied to pursue public targets in employment, education, and health by involving them in these activities. The private sector operates best with incentives and the development of infrastructure is not open to incentives, nor in a broad and general sense can it be made to work if it is only undertaken with incentives.

We, in India, have become fearful of public expenditure because of corruption, inefficiency, and waste. We are right to be apprehensive but in an equally corrupt age of 18th century England, Adam Smith had no hesitation in arguing that it is the duty of government to expend on common public services.

Infrastuctural investment is now an essential step forward and fiscal balance is not. If the UPA government fails to grasp this somewhat basic argument, it will choose a course that will lead to its own defeat.

It is not the autocracy of Ahluwalia that is at issue but the consensus he can evolve not just internally but also with those investors from abroad, both public and private, that India is at least making the right choices.

sjmulji@aol.com