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Vision 2020 -- Poison as a remedy

P.V.Indiresan

IT IS strange but it is a fact: All remedies are poisons! If they are not poisons, they would not be remedies. In appropriate doses, even the poison of the cobra is a cure for heart disease. A good doctor is one who is informed about which poison to use for what illness, knowledgeable about how much of it to use, wise enough to know when to stop and, above all, one with the courage and self-confidence to apply the poison as and when needed.

For example, Gandhiji used satyagraha as an antidote to cure India of slavery. As we know now, the same satyagraha has turned into a poison in the hands of present day politicians.

That any new remedy will become poisonous in some way or other is usually obvious. So, there is a tendency among social activists to oppose all new remedies: They spread a scare about what can go wrong; insist that we forego whatever benefit may accrue w ith the application of new methods. Policy-makers often lack the courage to resist them and fear to apply correct remedies as and when they are called for.

At the same time, once a remedy is accepted, we often lack the skill of how to use it, and the wisdom to know when to stop, or where to restrict its use: That is how we have had an excess of socialism, and are getting injections of globalisation in wrong places.

According to government statistics, value-added in agriculture per worker was Rs 10,416 in 1993-1994. It rose (in constant prices) to Rs 12,200 in 1999-2000. In the same time interval, value-added in the non-agricultural sector rose from Rs 42,040 to Rs 57,559. Then: (a) agricultural productivity is an unsustainably small fraction of the non-agricultural one; (b) the disparity between agriculture and the non-agriculture sectors is increasing. That much is clear, but how to remedy these ills is not.

Currently, the country is burdened with a huge surplus of foodgrains rotting in the godowns. Yet, many poor are starving. The reason is not far to seek. Food prices during the period 1993-2000 rose 76 per cent, while prices of other goods rose by only 37 per cent. As a result, food prices have become excessive, much more than what the economy can bear. That anomaly is the result of a dilemma. Agricultural prices have to be raised rapidly to help landowners -- who are indeed less well off than those e ngaged in industry and services. However, that way food prices shoot up landless labourers, who are poorer still, are forced to starve.

There is no dispute about the nature of these and other maladies. However, there is no consensus about how to remedy the situation -- how to make landowners earn as much as those in other occupations do, and at the same time, empower landless la bour to enjoy three square meals a day. The correct (and decidedly unpopular) solution is to (a) shrink agricultural prices up to the point the poor will afford to buy food; (b) shrink the number of farmers and raise the size of their la ndholdings four-five times to bring their incomes on a par with those in industry and commerce. The latter is political poison, which requires courage to apply. Unfortunately, that courage is in short supply.

Appreciating this difficulty, the Planning Commission has proposed in its Draft Approach Paper to the Tenth Plan that employment-intensive non-agricultural growth should be made a top priority. Two other priorities identified by the Approach Paper are th e stabilisation of food prices and raising agricultural output rapidly. Both these are easier said than done. It is physically impossible to force agricultural production to grow rapidly enough to bridge the growing income gap of farmers. So long that re mains the case, political pressures will force food prices to rise and the hapless poor to suffer.

In this situation, rural-urban migration is the chosen remedy. In a private talk, a highly respected politician and former Union Cabinet Minister confessed that he advises his constituents to migrate to cities. According to him, life in the city slums ma y be bad but the slum dwellers at least get piped water and electricity -- which it is impossible to have in villages.

That is but poor consolation. In general, slum dwellers have no legal title to the land they occupy; so, they are at the mercy of land sharks and slumlords. As the minister was candid enough to concede, politicians have a self-interest in encouraging the poor to live in slums because that is the only way they can replace the shrinking caste vote banks of the rural areas.

More and more economists are calling on the government to abandon the policy of fiscal prudence and revert to Keynesian pump-priming -- that is, print more money. That is a counsel of despair. As the graph shows, Keynesian pump-priming lifts the de mand curve and thereby increases demand, but at the cost of increased prices. How much the prices increase and how much the demand (and, hence, employment) increase depends on the elasticity of supply. There are two possibilities: As sh own by curve S(A), when production capacity is in surplus (and, hence, supply can be increased rapidly), employment increases more sharply than prices will.

In the other case, represented by curve S(B), supply is saturated; there is little scope for increasing the quantum of supply, at any rate in the short run. In that case, prices will increase sharply but not employment. However, paper money can still be used to increase investment in scarcity areas to relieve those shortages some time in the future.

Basically, it is not logical to merely increase the fiscal deficit and hope that somehow the economy will grow by itself in a balanced manner. The paper money that is pumped into the economy should be directed where it is most needed and in the manner it will produce the best results. Those decisions will have to be made by politicians and by government officials. That will take us back to socialism. We know by bitter experience that unlike the Nordic countries we are not good at implementing socialism. At the same time, our efforts at privatisation have not been very successful either.

Essentially, Keynesian pump-priming creates two kinds of problems. One, there is an unavoidable time lag between the release of money and the materialisation of the supply. For example, money may be printed for the laudable purpose of building more roads . Then, the construction workers will get paid first; the roads they build will become usable only months or even years afterwards. That unavoidable time lag produces a spurt in inflation. Particularly, in the Indian government system, delays are endemic ; sometimes, projects never get completed.

Two, it is a sad truth that much of the money earmarked for laudable projects is wasted on a bloated labour force, or siphoned out by corrupt politicians and contractors. That is how Keynesian pump-priming has done little good in the past to the Indian e conomy, and is unlikely to do so in the future. How this problem may be resolved will be discussed in the next article.

(The author is former Director, IIT Madras.)

This is 48th in the Vision 2020 series. The previous article was published on June 18.