TCS Daily

New Delhi's New Deal

By Christopher Lingle - February 10, 2006 12:00 AM

BALI, INDONESIA - India's Prime Minister Manmohan Singh recently pointed out that the urban-rural gap has widened over the past 50 years. By itself, Singh's statement is neither remarkable nor surprising. However, at the same time, twenty-six percent of the Indian population remains in poverty. In light of this, Singh's statement is a veiled admission that the Indian political class has failed hundreds of millions of Indian citizens.

Tens of billions of dollars of aid received over many decades -- coupled with 50 years of policymaking, regulations and laws aimed at helping the poor -- have mostly missed their target. Such failures arose from a noxious cocktail of misguided economic policy, venal acts of greed, and bureaucratic incompetence -- all wrapped in a cocoon of economic nationalism and socialism. Former Prime Minister Rajiv Gandhi famously remarked that only about 15 percent of funds earmarked for the poor actually reached them. Even this estimate may be optimistic.

A "New Deal" for rural Indians

Now, Prime Minister Singh promises that his ruling coalition will deliver a "New Deal" for rural Indians. Eventually, every village with more than 1,000 inhabitants would have all-weather roads, telephones, water supply and electricity. And the government promises to build six million houses while adding 10 million hectares of irrigation capacity. All of this is part of the so-called Bharat Nirman plan that will commit 1.74 trillion rupees ($38.34 billion) to improve rural infrastructure. And jobs are promised from the National Rural Employment Guarantee Act and improved healthcare through the National Rural Health Mission.

It seems hard to fault such plans. After all, the intention is to expand the access to economic opportunity for the poor; not one of India's other post-Independence governments has achieved this.

But the plan will involve political control over massive amounts of money and resources. Naturally, this largesse will also generate substantial electoral benefits to the political class. The dismal record of squandering so much of taxpayers' money implies that the politically well-connected are likely to receive more than the poor.

Why will the plan fail?

The problem is that taking more away from the private sector cannot lead to sustained economic growth. Indeed, in instances where corruption and inefficiency are rampant, government control of resources leads to a "negative-sum" game in that the social losses exceed the social gains.

Prime Minister Singh and other public officials need a change of mindset before their policy decisions can truly impact positively on the weaker elements of the community. This requires that they abandon counter-productive schemes for imposed redistribution of income and wealth, ideas so entrenched among India's leadership class.

Many government policies have been supported by an increasing tendency to run fiscal deficits by the Indian central government. With annual budget deficits running between 9 percent and 10 percent of GDP recently, the public debt-to-revenue ratio of 435 percent has created an unsustainable public debt.

Unsustainable deficits are likely to increase the government's fiscal debt and defer the burden onto future generations. Expanding debts in order to foster a short-term recovery would repeat the obvious economic mistakes that created enormous public-sector debt burdens in Japan.

With this dubious avenue closed, the focus often turns to trying to engineer economic recovery by boosting household consumption spending. But this notion is flawed in presuming that consumption drives economic growth. The truth is that the direction of cause-and-effect works in the opposite direction. Although acts of consumption and production are interdependent, logic implies that production must precede consumption. Without production, neither the end of consumption nor the means to consume can exist.

More growth, not government spending

It would be far better for most Indians if the focus was on promoting economic growth. Less government intervention and ownership, reduced protectionism and the removal of subsidies and price supports would all have beneficial effects on growth.

More growth would be desirable, even if it meant that distribution of earnings remained the same or became less equal. It shouldn't matter how well off the people at the top are becoming as long as those on the bottom are being lifted up.

The best way to help the poor is to improve the opportunities of low-income, rural Indians is for them to find a job that pays well. And the best way to accomplish that is to promote savings and the accumulation of capital so that, as worker productivity increases, so do wages and living standards.

A deal for growth

Relying upon "New Deal" programs allows politicians to pursue short-run results that benefit narrow, politically influential groups. Like other policy choices that serve political ends rather than economic ends, these policies will create long-run costs that most others in the population must pay later.

A real change for New Delhi would be to create a business-friendly and growth-oriented environment, with deregulation and a lower overall tax burden. This would include reducing burdens on entrepreneurs, to encourage responsibility and initiative in the creation of prosperity. This is the new deal rural Indians deserve.

Christopher Lingle is Senior Fellow at the Centre for Civil Society in New Delhi and Professor of Economics at Universidad Francisco Marroquin in Guatemala.


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