India’s Decade Of High-Cost Government, Low-Growth EconomyBloombergQuintOpinion
The abiding image of the second decade of the millennium will be that of the Indian economy yo-yoing between hope and despair.
Milton Friedman said “governments never learn. Only people learn”. The first part of the maxim is well established. It is debatable if the second part holds true and more critically if learning has resulted in lessons for ruling regimes.
The State Of The Fisc
The ‘India Story’ is stranded between competing crises and conflicting compulsions, between promised potential and populist profligacy. Numbers frequently bear the burden of eloquence better than words.
In 2010, India’s governments—centre and states—spent Rs 18.52 lakh crore. That is an average of Rs 211 crore per hour or roughly Rs 3.5 crore every minute of the day.
In India’s public finance literature successive governments have added chapters on massaging the message of fiscal prudence. So there is the known expenditure and then there is the known unknown expenditure. Off-the-books expenditure, offshored on to the books of public sector undertakings is estimated to be around Rs 3 lakh crore.
Be that as it may, did the governments earn enough? Prima facie, revenues of the centre and states grew from Rs 9.84 lakh crore to Rs 34.94 lakh crore. The incidence of taxation went up from around Rs 8,200 per person for 119 crore persons to over Rs 25,800 per person across a population of 135 crore people. Even adjusting for inflation and growth, the incidence is higher.
That though was not enough to keep pace with expenditure. In 2010, the governments earned Rs 105 crore per hour which was just enough to pay for half the expenditure. In 2019, the situation persists despite governments raising Rs 398 crore an hour.
How did they fund the spending? The gap was bridged with rising borrowings.
In ten years, centre and states’ gross borrowings doubled from Rs 6.23 lakh crore to Rs 12.58 lakh crore.
In 2010, states and centre borrowed over Rs 1,708 crore per day – that is, Rs 71 crore per hour to fund the spending. In just ten years, gross borrowings of governments shot up to Rs 3,447 crore per day – that is over Rs 143 crore per hour or Rs 2.3 crore every minute of the day.
Nation Building: Costs And Outcomes
A developing economy, it can be argued, must necessarily borrow to fund development and growth. How have governments fared on the basic obligations of the state? In this decade, governments built more roads than before and improved railways and electrified villages and households. Critically, a large chunk of the spending was funded by market borrowings by public bodies such as NHAI and REC. They also added over 40,000 schools, 12,000 sub-centres, over 2300 primary health centres, and 1100 community health centres.
Indeed, spending on education, centre and states, shot up nearly four times from Rs 1.9 lakh crore to over Rs 5.66 lakh crore and spending on health from Rs 88,000 crore to Rs 2.76 lakh crore. All the spending though hasn’t quite delivered on indices.
Parents prefer enrolling children in private schools. Over a million children have exited government schools in ten years. Life expectancy has gone up from 67 to 68.7 years but is worse than in Nicaragua. Under-5 mortality has come down yet over 100 children die every day before reaching the age of five. India must make do with barely 11.54 lakh registered allopathic doctors for a population of 135 crore.
Eight of ten persons in rural India do not have access to piped water – depending on who is telling the number ranges between 14 crore and 15 crore households. Multiply the number of households by five and you get the picture of mass denial. India’s public delivery systems—education and health—are broken. It spends less than its neighbours on critical public services and unsurprisingly trails Samoa Gabon, even strife torn Iraq, Morocco, south Asian neighbours on United Nations’ human development indices.
Agricultural distress is central to resolving two serious issues confronting India – poverty and climate change. Three decades after the chant of ‘farm to factory’ thesis over half of Indians depend on 14 percent of national income.
Agriculture continues to account for over 80 percent of water consumption even as ground water and cities are drying up.
Starting with a new crop map, agriculture requires urgent legislative focus and allocation of resources – to shift to drip irrigation, to create market access. Typically political attention is focused on consequence rather than the cause and thus the episodic repetition of loan waivers.
Where’s The Money Going?
Clearly, there are issues with the quantity and quality of spending. So what are governments spending the money on? The biggest expense of governments is interest payments. In 2010, between them, governments spent Rs 3.25 lakh crore – that is Rs 892 crore per day or Rs 37 crore per hour – as interest payment on borrowings. In 2019, the interest bill was over Rs 2,673 crore per day or around Rs 112 crore per hour.
The second big-tag item on the expenditure budget is subsidies. For sure, fuel subsidies have been trimmed in the past five years thanks to direct benefit transfer and market pricing of fuels. That though hasn’t quite helped. Two of the world’s largest welfare programmes, for food security and health care, launched between 2010 and 2019 cost the government nearly Rs 2.5 lakh crore.
There is spending and then there is the cost of sloth and wastage. Over the past decade state electricity boards have not been able to or have not collected revenue for over 20 percent of the power distributed. Euphemistically called transmission and distribution loss, it is essentially theft and leakage. The government last year estimated that the loss of one percent of power costs around Rs 4,000 crore. Do the math for annual losses.
Government In Business
The debate on what must be done with public sector units is over 25 years old. The inefficiency of political management of public wealth is best illustrated by public sector banks. The value of one private bank is more than the valuation of all listed PSBs put together. The state of Navratnas and the rot of resources in Air India and BSNL symbolise systemic sloth.
Both the UPA and the NDA milked PSUs to fill deficits and have waffled over the persistence of losses. Earlier this month the government informed Parliament that 52 CPSEs have been losing money for three years. Fact is, on an average, 72 PSUs are reporting losses every year.
Cumulatively PSUs have lost over Rs 1.98 lakh crore in the last eight years for which data is available.
The saga of PSEs in the states has been analysed and chronicled by this column. Across states, the state of PSEs is a scandalous mystery. In state after state, a large number of PSEs simply do not file financial accounts. Audits by CAG show across 19 states there isn’t a single state where profits earned by PSUs are more than losses registered. While profits earned were barely Rs 17,500 crore the quantum of losses was over Rs 97,000 crore.
Show Me The Growth
Whether it is good money after good ideas or good money after bad money GDP growth has averaged below 7 percent for the decade. In the decade-period China’s GDP shot up from just over $6 trillion to $14 trillion, India moved from $1.6 trillion to $2.8 trillion. The inability to grow exports, be part of RCEP tells its own story of competitiveness, rather the lack of it.
In rupee terms, GDP went up from Rs 76.50 lakh crore to Rs 140.77 lakh crore. Translated, per capita GDP grew from Rs 65,394 to Rs 1,12,835. Nobel laureate Angus Deaton said famously the average holds little consolation for those left behind. Those in Bihar have an annual per capita income of Rs 38,860, or roughly what a government employee earns in 60 days. Between 2010 and 2019, the centre’s wage bill rose from Rs 87,581 crore for 33.63 lakh employees to Rs 2,41,410 crore over a staff of 36.19 lakh persons. Rural per capita income is less than half of what urban populace earns – at Rs 55,339 the average per capita income in Uttar Pradesh is half of the national average.
Every decade governments offer palliatives – the promise of expenditure management, with the Geethakrishnan Committee in 2000 and the Expenditure Management Commission led by Bimal Jalan in 2014. The report was submitted in 2015. Nobody quite knows what came of the recommendations. What is known is that the government appointed Bimal Jalan to chair another committee in 2018 for ways and means to transfer RBI reserves to the government. The amount finally transferred: Rs 1,76,051 crore. Imagine the hole in the budget without this transfer!
The optics of the transfer defined it as funds meant for investment in infrastructure and for growth. Fact is, the crowding in of government investment through borrowings crowded out private investment, credit growth and private consumption – gross capital formation has dipped to 28.6 percent, gross savings to below 30 percent, credit growth to single digits.
Big government is about the size of government. More critically it is about what governments must do and must get out of. Over a quarter of a century after liberalisation, a permission raj reigns supreme affecting both ease of doing business and investments. Steel was decontrolled in 1992 yet there is a ministry for steel. The much-promised decentralisation is still off the table.
The largest ministries in the centre deal with subjects that are squarely under the states.
The abiding principle of growth in a resource-scarce economy rests as much on what the money is spent on as what it is not spent on. The harsh reality is that the electorally profitable thesis of helicopter economics has met with the statute of limitations.
The spectre of lower and slower growth, the neither-low-nor-middle income trap, confronting the Indian economy is in the script of populism. It is the price the economy is paying for the rising cost of big government.
Shankkar Aiyar, political-economy analyst, is the author of Aadhaar: A Biometric History of India’s 12-Digit Revolution; and Accidental India.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.