June 18, 2021
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The Hole In The Bucket

The issue is not the leak of the finance minister's letter to the planning commission deputy chairman. It is about the leak in the delivery system. Do we fix a leaking bucket? Or get a new one?

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The Hole In The Bucket

If it weren’t so embarrassing, it would be actually a welcome development. When Finance Minister P Chidambaram’s office leaked to the press his letter of August 14 to Planning Commission deputy chairman Montek Singh Ahluwalia (MSA), questioning the fundamental assumptions of the approach to the 11th Five-Year Plan, the media immediately picked it up as an ego battle. Some even went so far as to interpret it as a clash between the PM’s right and left hands. When even the Reserve Bank of India (RBI) came out in support of P. Chidambaram (PC), poor MSA was left alone to defend himself. Ultimately, it seems to have been left to the PM to intervene and find a middle path.

Meanwhile, to everyone’s deep regret, a totally welcome economic debate where both PC and MSA were entitled to have their own views, went awry. In the letter, PC argued that his ministry does not accept the Commission's view in its approach paper that the burgeoning current account deficit will hinder economic growth and questioned the logic that poor demand will inhibit farm growth. At its essence, the debate is about finding enough resources to reach higher average growth during the coming eleventh plan. The target is 8 to 9 per cent growth, to reach which we need an ICOR (incremental capital-output ratio, or how much extra capital is needed to get a particular level of output) of four per cent, which PC calls too tight. Traditionally, India is an expert in running up huge deficits but not in generating resources at will. Which means, other things remaining same, in the short to medium term, we have to borrow more at home to allow for higher growth (which would mean, in effect that the fiscal deficit would go up to 6 per cent, and the current account deficit would go up too, to 2.8 per cent).

However, the Fiscal Responsibility and Budget Management (FRBM) Act passed by Parliament has specific targets for different deficits and they are much lower than suggested by the Plan paper. We can scupper the FRBM Act of course, at the cost of international rating agencies’ severe frowns and perhaps actual downgrading of our investment rating. In which case, our lukewarm success in attracting foreign investment may vanish altogether.

It isn’t too difficult to guess the opposite camps in this debate. The Planning Commission has been a traditional champion of resource mobilization, for it is they who have to talk to the states and hear their problems and grievances. Also, ideologically, since it was set up in the socialist heydays, it favours the expansionary/ investment approach. It follows then that planners are stifled by the FRBM Act. Finance ministry, on the other hand, has to do the unpopular job of doling out the actual money instead of simply marking it out, and the pressures on it due to this government’s many social sector schemes has been enormous in the past two years. PC credits himself as a tight money manager—he launched the outcome budget to point out where and how money could be going down the drain—and he is unlikely to have forgotten his experience with the Fifth Pay Commission in his last job. Also, presumably as someone who piloted the FRBM Act as also voted for it, he is most reluctant to rip it to shreds. To nobody’s surprise, RBI’s Reddygaru agrees with him.

MSA was perhaps unwise to target the FRBM Act. Unless he thought support for this would be forthcoming from the Left, who anyway favour dollops of central investment, and his new brother-in-arms Arjun Singh. There are many other issues in PC’s letter that are quietly at odds with the Plan panel approach. On agriculture, for instance, many would agree with the pertinent questions raised by PC on supply-side bottlenecks, pointing out that these are not demand-side problems as suggested by the planning commission that plagued farmers; the question obviously is on how to strike a balance between "adequate credit" and "cheap credit". PC's stress on more structural reforms to attract FDI to solve the resource problem is definitely not wrong.

The real issue behind the battle, as always, lies somewhere in the middle. Money is indeed scarce with government, now that it’s no longer allowed to print notes at will. Yet, it is also true that many good plans are starved of money. How to solve this impasse? Unfortunately, in this respect, the approach paper ties itself up in knots. "The above programmes (social sector and employment programmes) will require substantial allocation of funds, mainly by the government. The question arises whether these outlays compromise public investment in other needed areas and reduce growth? In fact, if targeted effectively and implemented efficiently, these programmes and the outlays envisaged will stimulate the economy and raise its growth rate," says the commission.

That must have sounded hollow to its own ears. Some 56 years of planning have showed us that government programmes are rarely targeted effectively and implemented efficiently. According to senior Commission officials, the success rate of wage schemes is 60-65 per cent. Which means 30-35 per cent of the money does go down the drain. The Commission itself has been debating more effective and radical ways to redistribute wealth since ninth plan now—food stamps, education vouchers etc--but the states are reluctant to disturb a sprinkler system that’s been working so inefficiently well, and to everybody’s benefit, for so long.

The goal should be seek how best to prevent this abysmal leakage. Yet, the Commission is also justified in asking the very pertinent question in an India looking for inclusive development: just because some programmes leak, can we do away with all? What is the point then of bringing out an eleventh plan? It’s a debate that needs to play itself out widely in public space, not only as a political wrangle between two government departments.

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