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Cover Story

Bombay plan: Farewell, state

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BEASTS OF BURDEN: About 70% of India's population lives on farms, yet public investment in agriculture has been steadily declining - from 1. 4% in 1980-81 to 0. 6% in 2008-09. The results are there for everyone to see: rural poverty, farmer suicides, rising food prices

Once upon a time in Mumbai, or Bombay as it was then called, a group of seven farsighted industrialists and an economist met to draft a blueprint for India's economic development. The year was 1944, three years before the British actually quit. The document would later become famous as the 'Bombay Plan'. Under Jawaharlal Nehru's stewardship, India's economic policy was largely derived from this document.

The Bombay Plan called for an actively interventionist state policy in order to achieve two primary objectives: doubling agricultural production and increasing industrial output five-fold. This was to be achieved by the government of newly independent India by investing Rs 100 billion over the next 15 years. Prime Minister Manmohan Singh, who was a student of economics at the time, described other important features of the Bombay Plan at an event to mark its 60th anniversary: "The Bombay Plan laid great emphasis on public investment in the social and economic infrastructure, in both rural and urban areas;it emphasised the importance of agrarian reform and agricultural research, in setting up educational institutions and a modern financial system.

Above all, it defined the framework for India's transition from agrarian feudalism to industrial capitalism, but capitalism that is humane, that invests in the welfare and skills of the working people. " As this peek at India's economic history shows, public investment in social infrastructure has always remained a primary objective - at least on paper. Even when Manmohan Singh, as finance minister, was dismantling Nehru's legacy and opening India's doors to the world and embracing liberalisation, he stressed on the continuing need for government to spend on sectors like education and health. "A vast number of people in our country live on the edges of a subsistence economy, " he said in his Budget speech in July 1991. "We need credible programmes of direct government intervention focusing on the needs of these people. We have the responsibility to provide them with quality social
services such as education, health, safe drinking water and roads."

The reality, though, is different. Successive governments at the Centre have surreptitiously been pruning public investment in a clutch of crucial sectors while maintaining the usual rhetoric about "wiping every tear from every eye".

Recent high-visibility programmes launched by the UPA government seem to have hiked spending on social sectors such as education, health and sanitation. There also appears to be an increase in spending on economic services like agriculture, rural development (which includes the Mahatma Gandhi National Rural Employment Guarantee Scheme), energy and transport. However, as a proportion of the GDP, central government expenditure on social and economic services has suffered a certain decline since 1992, the beginning of the 8th Plan, when expenditure on these was 7. 3 per cent of GDP. It soon declined to 7. 1 per cent in the 9th Plan (1997-2002 ) and further to 7. 009 per cent during the 10th Plan (2002-07 ).

This is spending by just the central government. Total public investment derives from both the central and the state governments. If one looks at combined expenditures, public investment in health and education has virtually stagnated - if taken as a share of total expenditure or of GDP - even though the absolute amount being spent is increasing. As a share of GDP, the combined expenditure on education and health was 4. 3 per cent in 1990-91 and 4. 28 per cent in 2007-08. Why is this significant?

Till the slowdown in the Indian economy last year as a result of recession in the advanced countries, India had exhibited dramatically high growth rates of GDP. The peculiar nature of this growth was that it was highly concentrated among high income groups and corporates, says Surajit Mazumdar, professor at the Institute for Studies in Industrial Development, a New Delhi-based think tank. This led to increasing revenues for government - tax receipts increased from about 15 per cent of GDP in 2002-03 to 18 per cent in 2007-08. In short, government had much more money at its disposal for spending.

"Since 2004, the government faced a special situation in which it was possible for it to somewhat increase its expenditures in areas that had been neglected for a long time without coming into conflict with the objectives of keeping taxes low as well as controlling the fiscal deficit. Expenditure growth could, in such circumstances, be allowed to keep pace with high GDP growth without increasing the public expenditure to GDP ratio. This is precisely what happened till the global crisis disrupted the situation - with the deficit having now increased, the familiar old story of the need to rein in government expenditure is back, " explains
Mazumdar.

In other words, so long as the country saw high GDP growth and the government was flush with funds, expenditure rose - albeit marginally, by only that tiny bit more to keep pace with the increase in GDP. In actual terms, there has been no real swing away from the policy of keeping public expenditure low. The proportions are virtually the same as earlier, showing minor increases.
The result of this tight-fisted policy shows up all around, but it's most sharply visible in the standards of living of the bulk of India's population. In a majority of sectors that affect the common man directly - like education, health, agriculture, nutrition, housing, roads and transport - there is increasing disarray and shortage caused by insufficient investment. Simultaneously, there is a rise in private expenditure on heads such as education and health. As per the National Account Statistics, private final consumption expenditure on education and health increased from 2. 79 per cent to 4. 55 per cent of GDP between 1990-91 and 2007-08.

While the government has tried to introduce the so-called 'public-private-partnership' (PPP) model in many of these sectors in an attempt to woo private investment, the results are a uniform deterioration of services and facilities. PPP has also been tried in building roads and highways with disastrous results. Over half of the country's vast road network lies unmetalled because of lack of investment. Private investors are not interested as there are no returns here.

In many areas, like in housing, a piecemeal or creeping privatisation has taken place de facto, with government agencies becoming mere brokers. Take the Delhi Development Authority (DDA). Even as the capital faces a housing shortage of over 1. 2 million units, Delhi's largest landowner has transformed itself into the biggest land broker. In 2006-07, it spent just 1 per cent of its total expenditure on building flats and shops. On the other hand, it derived 18 per cent of its huge income from land deals and 32 per cent from investment of its reserve fund.

According to estimates by the Planning Commission, there is a housing shortage of nearly 25 million units in urban India, requiring about Rs 3. 61 lakh crore in investment. Since 99 per cent of this shortage is in the economically weaker sections (EWS) category, there is virtually no possibility of self-financing. Only an active government policy of providing affordable housing can mitigate this situation.

Neglect of sectors like education and health, in the fond hope that the private sector will step into the breach, is a very short sighted policy. In all advanced countries, the basis of prosperity was laid by first ensuring that citizens got their basic rights - health, social security, education, care of the elderly. Even today, most advanced democracies spend a huge amount, and a considerable portion of their GDP, on these sectors.

According to the latest (2009) data from 26 countries of the Organisation for Economic Cooperation and Development (OECD), the average net social expenditure by governments (on health, education, social security, etc) is 25 per cent of the net national income. The range was from 9 per cent in Korea to 33 per cent in Germany and 35 per cent in France. Comparing India with the OECD may seem unfair, but what do we make of the fact that even Sri Lanka and Bangladesh spend a larger proportion of their budgets on health, for instance, than we do? Clearly, there is an urgent need to increase public spending on the social sector to ensure basic human dignity.

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