INDIA: Social Security Millstone Slows Booming Economy

By IPS Correspondents Reprint | | Print |

Paranjoy Guha Thakurta

NEW DELHI , Feb 27 2006 (IPS) - The Indian economy is growing at an impressive eight percent clip and stock markets are booming like never before. But there are fears that the country could get bogged down in an ambitious employment guarantee programme.

With the country’s social and physical infrastructure creaking, finance minister Palaniappan Chidambaram must somehow find the resources for what has been described as the world’s biggest social security initiative, announced last year.

On Tuesday, the Harvard-educated Chidambaram will present the third budget of the Congress party-led, centre-left United Progressive Alliance (UPA), at a time when gross domestic product (GDP) is slated to grow by eight percent.

This would be the second time in the nearly six-decade-long history of independent India that the economy has shown a growth of over seven percent, three years in a row. Although the Indian economy was similarly buoyant during the mid-1990s, growth rates subsequently slowed down. The difference this time is that business expectations are wildly optimistic and share indices have hit record highs fuelled largely by inflows of foreign funds.

”The main challenge before the finance minister is to reduce the budget to an annual statement of income and expenditure of the government that is shorn of hype and without efforts to push through economic reforms,” says Bibek Debroy, secretary general of the industry association, the PHD Chamber of Commerce.

Budgets in India tend to be more than bland statements of a nation’s balance-sheet and are usually replete with political messages and policy statements. Debroy adds that he would like Chidambaram to simplify the country’s complex tax structure and bring down unproductive government expenditure.

Economist Saumitra Chaudhuri, member of the prime minister’s economic advisory council, told IPS in an interview that ”the primary challenge before the finance minister is to carve out a budget that supports the climate of economic growth while sticking to the path of fiscal consolidation”.

Even if GDP is growing rapidly, the economy continues to encounter major structural weaknesses: electricity generation is not keeping pace with the overall growth of the economy, ballooning oil imports are fuelling inflation, roads are potholed and non-existent in many rural areas, ports and airports are clogged, while banks and financial institutions lend mainly to the affluent elite.

While the services sector (accounting for around half the country’s national income) and manufacturing industry have expanded rapidly, the growth rate of the agricultural sector has been a tardy at 3-4 percent a year in the recent past. There have been reports of thousands of farmers committing suicide because of inability to repay loans from usurious moneylenders.

Whereas Chidambaram and a section within the government headed by Manmohan Singh – who enjoys an awesome reputation as the liberaliser who freed Indian industry from bureaucratic clutches in the early 1990s when he was finance minister – want to initiate market-friendly policy measures, they are constrained by the fact that the ruling coalition is dependent for survival on the outside support of communist parties.

The communists have staunchly resisted efforts at privatising profit-making public sector enterprises and the UPA government has had to accede to their wishes. At the same time, divisions within the communist ranks have enabled the government to proceed with moves like part-privatisation of India’s largest airports at Delhi and Mumbai.

Communist supporters are urging the government to abide by a common minimum programme drawn up in June 2004 that seeks to increase official spending on the social sector (notably, primary education and healthcare) and address long-standing problems of poverty and unemployment.

One out of four Indians, or around 250 million people, lives below the government-defined ‘poverty line’. If the international yardstick of one US dollar a day is used to define poverty, close to a third of the world’s second-most populous nation would be considered poor.

One out of three Indians cannot read or write their own names and close to half of the children who join primary school drop out before completing ten years of education – the highest drop-out rate among Asian countries.

However, the privileged sections of India’s population have a different set of concerns often reflected in the pages of financial newspapers.Thundering editorials are written in these ‘pink dailies’ about the need to resist the influence of the communists, drastically modify (if not do away with) a tax on fat fringe benefits granted to company executives and withdraw taxes on large withdrawals of cash from banks and transactions in securities.

A major challenge Chidambaram faces is to raise resources for an ambitious employment guarantee scheme that aims at providing jobs at a minimum daily wage of Rs 60 (or less than one and a half US dollar) for 100 days in a year to an able-bodied member of each family in rural areas – an estimated two-thirds of the Indian population of over one billion live in villages outside urban agglomerations.

Even in India’s glittering cities, a third of citizens live in abject poverty, are denied secure jobs, social security and basic sanitation facilities and clean drinking water. Much of the money spent by the government on development schemes gets diverted by corrupt officials and subsidies meant for the poor do not reach those who need them.

Says economist Kamal Nayan Kabra: ”Because of structural distortions, the high GDP growth has not been able to reduce poverty and inequality.” He describes the growth of India’s services sector as ”unnatural, unwarranted and undesirable” since it has been at the cost of agriculture and higher production of ‘wage goods’ or items of mass consumption.

A retired professor at the high-brow Indian Institute of Public Administration, Kabra apprehends that the employment guarantee programme may merely lead to higher nominal incomes in the hands of farmers: ”Without commensurate increase in the production of wage goods, inflation may neutralize the higher incomes or even make the rural poor worse off,” he told IPS.

When Chidambaram presented the last annual budget, he emphasised that he was interested in ”outcomes” rather than financial ”outlays”. That challenge remains.