Fiscal Prudence, Rule Of Law And Quality Education Needed For Growth

Paul Romer, a Stanford economist and Nobel Laureate, said, "A crisis is a terrible thing to waste.” In a complex, competitive political economy, often a crisis provides the breathing room to engineer necessary reforms. Thanks to Trump tariffs, a crisis of sorts is forced upon us. This is not as grave a crisis as we faced in 1991, but it is a crisis, nevertheless.

Hopefully, the present tariff crisis will soon be resolved satisfactorily. Meanwhile, the Union will certainly do whatever is possible and necessary to meet the challenge. Over the past decade, sustained fiscal prudence, improved performance of public sector banks, and a focus on infrastructure and capital expenditure have served the country well. There is now fiscal room to spend money to address the challenges faced by exporters. In particular, labour-intensive sectors like garments and textiles, shrimp farming and gems and jewellery need special attention. The government has the will and the capacity to address these issues.

But it would be wise to go beyond the fiscal measures. Even today, our goods exports are only about 10-12% of the GDP, low by the emerging economy standards. China’s merchandise exports were over 35% of the GDP in 2006, and even after a steady decline over two decades, they stand at 20% of the GDP. In that sense, our economy is less reliant on global trade. We can withstand the current difficulties without serious damage, as domestic demand drives our economy in the most part.

But it would be a mistake to only address the immediate problem and carry on as usual. Our real challenges are the many internal hurdles to productivity, investment and growth. This is a good opportunity to take stock of these barriers to growth and remove them.

About two decades ago I had a long discussion in Atlanta with Rev. Lawrence Carter Jr, a noted civil rights leader and Dean of ML King International Chapel. We shared our perspectives on our work—upliftment of the African American population and the Indian democratic reform, respectively. At the end of the meeting, Rev. Carter made a very insightful observation. He said, "Our challenge in America is much easier. In a democracy, we promote awareness among the African Americans, organise them, contest in elections, vote for change, and things improve. Politics is our solution. In your case, politics seems to be central to your problem!” It was a remarkably shrewd comment. When democracy is reduced to fierce political competition and unbridled lust for office without purpose, there are serious consequences to the economy, society and governance. Nineteenth-century politics and twenty-first-century economy cannot go together. Political dysfunction ultimately becomes a drag on the economy.

A recent episode of predatory corruption in Telangana illustrates the point. The state is currently reeling under a urea shortage. The fertiliser factory at Ramagundam, a joint venture of the union public sector companies with equity from the state government—in effect a government company—produces urea. The factory was temporarily shut down because of some production problem. A contractor was engaged to undertake the necessary repairs. But the local legislator did not allow the repair work to proceed until he extracted his pound of flesh! The ministers in the state had to negotiate and plead with him to allow the work to proceed!

In several states astronomical sums are spent in elections. In Andhra Pradesh, Telangana, Karnataka, and Tamil Nadu, an expenditure of Rs 25 to 30 crores by a serious candidate for the state assembly is the norm. In some cases, it can reach Rs 50 crores or more. Parties are seemingly helpless to reduce the role of unaccounted money for illegitimate purposes in our elections. Most of the spending is on distribution of money, often as high as Rs 2,000 to 5,000 per voter. Such distribution doesn't guarantee election success! It only ensures that the candidate is in serious contention. In other words, such expenditure has become the “entry fee” for electoral politics; high expenditure does not guarantee success, but not distributing money almost certainly guarantees defeat! Many other states are catching up in escalating election expenditure for candidates and parties. Something similar to Gresham’s law operates in politics too; bad practices drive away good practices over time!

Given this complex political reality, many barriers to economic activity and wealth creation have been erected over time. Profligate expenditure on unviable projects is becoming the norm when extortionary corruption and rent-seeking are the incentives. Exaggerated focus on short-term individual welfare measures becomes endemic in order to appease the discontented voter in the absence of economic upliftment or delivery of quality services.

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With neglect of public services, school education is the primary casualty. We are spending vast sums on public education, but outcomes are appallingly bad. The resultant absence of skills makes most of our youth unemployable in a modern economy. More reservation quotas and more government recruitment are mere palliatives; they do not create wealth. Restrictive land and labour laws are making entrepreneurship difficult, expensive and uncompetitive. Excessive focus on big cities is leading to congestion and paralysis. In the absence of small-town development and promotion of labour-intensive industry at the local level, urbanisation is very slow and distorted. With a weak rule of law, rough and ready justice for a price, often involving brute force, is becoming common.

We need to unleash our productive potential by promoting fiscal prudence in states, quality school education ensuring real skills, reform in land and labour laws, growth of small towns and in situ urbanisation, and at least a modicum of rule of law to promote investment and growth.

A crisis can once again be the opportunity to push our economy and society into a higher growth orbit on a sustained basis for the next quarter century.

The author is the founder of the Lok Satta movement and the Foundation for Democratic Reforms. Email: drjploksatta@gmail.com / Twitter@jp_loksatta