Why the government must sell urban land

So there we have it. The Modi government, despite its huffing and puffing for the last five year is as broke as any previous government because it has been consistently falling short of revenue while its expenditure has steadily increased and generously. This gap is called the fiscal deficit.

There used to be a time when – in the world’s economic thinking -- the fiscal deficit hadn’t begun to dominate the policy horizon. Those were also the days when the bond markets hadn’t begun to shape monetary policy. Openness to trade, freely floating exchange rates, inflation targeting, foreign portfolio investment, capital account convertibility, the Taylor rule etc were also still to become topics of breakfast conversation.

Economics then was mostly about the optimal allocation of scarce resources. If you were an American economist you talked about the markets. If you were not, you talked about the state’s access to national financial resources.

India, therefore, talked about how the government could invest more. This was to be done by indulging in ‘additional resource mobilisation’ (ARM), that is higher taxation. Every budget from the early 1970s onwards was judged on this single criterion of ARM.

By the end of the decade this tax and spend had become such an obsession that in 1979 Charan Singh presented a huge expenditure budget. The result was that the budget deficit – the fiscal deficit was exactly a decade away – crossed Rs 1,000 crore for the first time since independence. It went to about Rs 1,300 crore in the budget estimate and a great deal more in the final figures.

What has changed

There are two reasons why I am harking back to this. One, we have lived with an excess of expenditure over revenue for 70 years which means the Modi government has not been able to do anything of significance.

Two, successive governments always overestimated revenues and underestimated expenditure and in this respect also the Modi government is no different from the previous ones. But, simultaneously, there have been two changes as well.

One, earlier the government spent more on investment and less on consumption, which was the classical Soviet model. Now it spends more on consumption and less on investment, which is the classical American model.

Two, whereas earlier the deficit was financed by, to put it colloquially,  printing more notes, now it is financed by borrowing from the ‘market’.

The earlier method would result in periodic high inflation when the monsoon failed. The current method results in the government becoming highly indebted.

Earlier, inflation-deflation devalued the government’s debt, but the citizen was left impoverished. Now it is the government which is left impoverished while the citizen, wearing his consumer hat, does ok. 

But what the citizen doesn’t realise is that now he is left with less of public services in order that he can buy more of nice things for his family.

This is the political economy quagmire in which not just India but every country, including China, now finds itself. The big question for the next two decades, therefore, is how does the world come out of it? How can governments finance both consumption and investment expenditure?

Sell land Mr Modi

So the time has come for the finance ministry and the RBI governor to sit down and work out a new way of ‘additional resource mobilisation’. One is printing notes, as we used to do. But this has a fairly low threshold and should be used to finance expenditure in an emergency like disaster relief.

What remains is funds transfer and asset sales. But, in the last five years everything has been tried: from grabbing the RBI’s reserves to selling government equity in PSUs to quasi-government entities to GST to better direct tax administration to reduced investment expenditure.

Nothing is working well enough and nothing will because competitive politics will not allow it. In fact, it will only make things worse.

If you look around, you will find that the only valuable thing left with the government is urban land. It owns thousands of acres. Even if it sells no more than one per cent of it every year, it will meet most of the incremental shortfall in revenue.

The redevelopment of R K Puram in Delhi alone will fetch it at least 2 lakh crore. Instead, as we can see in the neighbourhood of R K Puram, the government is building more flats for babus.

The next government should start the process of land sales without delay. True, there will be corruption in valuation and therefore court cases. But even if these matters take a couple of years to be sorted out, the fiscal problem would have been largely mitigated.

Has anyone else done it? Well. Yes. It is called China.