The Hindu Business Line : The two pillars of growth

There can be no sustained economic development without strong successes in both human development and economic growth. Development strategy, therefore, requires major public commitments to social sectors, especially health and education, and to improvements in the business environment to promote large-scale private investments needed for economic growth, says NIRUPAM BAJPAI.

The Centre needs to review and reorient its fiscal policies to hasten the pace of development. In doing so, three goals need to be kept in mind. First, fiscal consolidation. Second, the expenditure should be shifted from economic sectors where the private sector can carry the investment burden, to social sectors (health and education) where increased public spending is vital. Third, the social programme should be redesigned to make maximal impact per rupee spent.

Life-line tariffs

India should move away from its current wasteful subsidy system in which items such as electricity and water are provided at highly subsidised rates (or for free!), with most of the subsidy being taken up by the richer farmers. The result is an expensive subsidy system where most of the benefits fail to reach the poor farmers. This can be replaced by "life-line tariffs," in which all of India's below-poverty-line rural citizens would be ensured a fixed, but limited amount of, say, electricity at zero price, to ensure that every family can at least meet its basic needs. Above that fixed amount, families would be charged a proper tariff to cover the costs of supplying those services in amounts in excess of basic needs.

This strategy — free access to meet basic needs, and an unsubsidised price for amounts above the basic needs — would save vast sums of money for the budget, and still ensure that the poor have guaranteed free access to meet their essential needs. The saving on subsidies could then be used to increase investment in priority areas such as health, education, irrigation, electricity, and so on.

Social spending should rise, including major increase for health and education. Most of this should come from cuts in existing expenditure rather than from increases in taxation as a per cent of GDP. Current government spending (of the Centre and the States) is already around one-third of GDP, which is quite high compared to other developing countries in India's income range. If India were to increase expenditure further as a per cent of GDP, it would have a difficult time raising the internal tax revenues to cover the spending programme.

Ways to reduce expenditure

The prime areas of potential central expenditure reduction over a three-year period, beginning with the upcoming Budget, in February 2007, are:

Disinvestment of PSUs;

Closure of loss-making PSUs;

Reduced bureaucracy; and

Reduction in subsidies.

For instance, in terms of pruning the bureaucracy, the Sixth Pay Commission should consider a freeze on new employment matched by normal attrition through retirement and death. On an average, about 1,25,000 Central government employees are taken off the payroll each year due to these reasons. Implementation of such an approach over four years could result in a reduction in the Centre's employment by approximately 12.3 per cent, or a reduction of around half a million employees from the current total of about four million.

It may seem politically impossible to proceed with such bold expenditure cuts, but it should be remembered that these cuts would be combined with substantial increases in public and private spending. Public spending would rise in health and education, including some highly visible and politically popular programmes such as school meals and increased availability of primary health facilities, especially through the National Rural Health Mission. Private spending in infrastructure would also be politically popular, as it will mean much faster diffusion of new technologies (cellular phones, Internet connectivity and so on) to the rural areas.

Pillars of development

There are two basic pillars of economic development — human development and economic growth. The former signifies the ability of every individual to reach his full potential as a healthy and educated citizen. This, in turn, requires major government commitments to health, education, and political participation of all citizens — with equal opportunity for all, and without discrimination by gender, caste, religion or region. No individual should be left behind. Economic growth signifies broad-based and sustained increase in per capita GDP. Sustained economic growth depends on favourable business conditions, high levels of private sector investment, technological upgrading, and successful integration with global markets.

There can be no sustained economic development without strong successes in both human development and economic growth. The development strategy, therefore, requires major public commitments to social sectors (especially health and education) and to improvements in the business environment in order to promote large-scale private investments needed for economic growth.

Human Development Challenge

India ranks 126th on the Human Development Index (HDI) out of a total of 159 countries ranked in the 2006 Human Development Report. Adult illiteracy remains around 40 per cent, and up to 50 per cent for women. By contrast, China ranks 81st on the HDI and its adult illiteracy is a mere 10 per cent. Almost half of all children do not finish primary school in India. Only around 20 per cent are in secondary school. Infant mortality rates are very high by international standards (62 per 1,000 live births in India versus 26 in China) and so too with under-five mortality — 85 per 1,000 live births in India versus 31 in China. Life expectancy at around 64 years is much lower than China's 72 years. The most striking difference is in the maternal mortality ratio — 540 per 100,000 live births in India versus 56 in China. Total fertility rate in India (3.1 births per woman) is still high and the population continues to grow rapidly, pressuring hard India's fragile ecosystems and natural environment. In short, India has a long way to go to meet the human development challenge.

The shortfalls in health, education, and population control are, of course, mutually interactive. Illiterate mothers are much more likely to encounter the deaths of young children due to disease than literate mothers since the latter are more effective at caring and seeking medical help in emergencies. High infant mortality rates promote high fertility rates, since households have many children to compensate for the risks of childhood deaths. High fertility rates, in turn, promote a social bias against educating girls, since parents lack the resources to provide quality education for all of their children and, therefore, invest scarce resources in boys, for whom the market returns to investment are higher.

India dramatically under-invests in both public health and education. The Government spends less than 1 per cent of GDP on health, compared to an average of around 3 per cent for all developing countries, and more than 5 per cent for high-income countries. The public health services are broken down, especially at the primary level. Studies show that the primary health centres (PHCs) fail to provide an adequate set of services for the population. Again, comparisons with China are telling — while only 43 per cent of births in India are attended by skilled health personnel, they are as high as 96 per cent in China. Similarly, while India has merely 60 physicians per 100,000 people, it is 106 in China. The poor in India are left with almost no health services, besides the very meagre services that they can pay for out of pocket. The situation in health will get worse if there are no substantial increases in public investments in health along with a major overhauling of the current public health system in rural India. The AIDS epidemic threatens to rise dramatically in the coming years. Malaria is resurgent, as is tuberculosis linked especially to AIDS.

Focus on quality education

India needs a similarly bold strategy for universal education, at least through age 14. While the Sarva Shiksha Abhiyan seems to have been fairly successful in terms of coverage, the focus now needs to shift to the quality of education. Special attention is needed to ensure the education of girls on the same basis as boys, and to ensure the continuation of children in school through the school system. Public spending in education should rise from the current level of 3.3 per cent of GDP to at least 5 per cent of GDP and probably more. This money should be spent mainly by state budgets, but with local responsibility for overseeing the effective operation of schools.

In addition to formal education in schools, the Government should promote programmes of adult literacy. Students and literate family members can be encouraged to help teach their illiterate parents how to read. Private sector can open up enterprises to promote adult literacy, with income generated by financial incentives provided by the government.

The social agenda should focus most urgently on primary health and education, especially in the rural areas, but it should also include other social initiatives, such as increased political participation at the village level through village councils or panchayats, and greater social and political equality for girls and women.

(The author is a Senior Development Adviser and Director of the South Asia Program at the Earth Institute, Columbia University, New York.)