After the Permit-licence Raj ended in 1991, India’s economy did better. However, India has not created enough jobs that pay reasonable wages, the income inequality has increased, and India’s GDP growth rates have been below China’s. Good but not good enough.

The prospects that, once Covid-19 eases, India’s economy will move up to “good enough” are now threatened by the emergence of Subsidy Raj, which afflicts the Union and State governments.

Subsidy Raj is the growing political focus on operational subsidies, which do not promote higher growth, more jobs, or asset creation. This Raj is not a set of rules or policies, nor has there been a sudden increase in subsidies. Instead, Subsidy Raj is the increasing view of many Union- and State-level politicians of various parties that a combination of a medium rate of growth, limited job creation, and expansive operational subsidies is enough to get them elected. This politico-economic combination is more attractive to politicians than focusing on high growth rates, more jobs, and limited subsidies, which is what India needs.

In effect, as economic growth generates additional tax revenues, governments use much of the additional revenues to fund additional operational subsidies. This squeezes out higher government investments necessary for higher long-term growth. In particular, Subsidy Raj holds back government investment in critical areas such as infrastructure, education and health facilities, and technology development.

Governments continue to invest in these areas, possibly even increasing the money over time. But it’s not enough to propel the economy onto a higher long-term growth path. Hence, the shift in focus from government investments to operational subsidies threatens long-term growth.

Effect of underinvestment

Consider some economic sectors where government underinvestment has already crimped economic growth.

Indian agriculture has progressed significantly over time but is a mess now because of long-standing operational subsidies. There are subsidies for fertiliser, electricity, and groundwater (no charge for what you pump out). And high support prices for key agricultural outputs, with no income tax. Yet, agriculture remains a low-productivity activity, which forces many villagers to move to the urban informal sector. Further, the high dependence on chemicals and water means that in agriculture production use of physical resources is not sustainable.

Yet, there’s little government support to develop new agricultural technologies; the emerging technologies called “agtech” are coming from private firms. None of the Institutes of Eminence is focused on agriculture. The reason is that much of government funds for agriculture are eaten up by subsidies. And after the Centre was forced to withdraw the three 2020 farm laws, few political leaders even think about reducing subsidies.

The spread of Covid-19 brought out the Indian healthcare system’s weaknesses. The GDP fell, and many people lost their incomes. Yet, there is no significant new government investment in healthcare.

The Union government shrugs off the responsibility by saying the States are responsible for health. However, many State governments don’t care, leading to considerable inter-Statal differences in health outcomes. For example, Kerala’s infant mortality rate is about 10 (US 6), and life expectancy is about 75 years (US 80). However, UP’s infant mortality rate is about 40 (Tanzania 39), and life expectancy is about 65 years (Afghanistan about 65). These differences are due to differences in healthcare investments by the States.

Our elite higher educational institutes have world-class students, but the institutes fail to be world-class. One reason for this disconnect is that, after operational subsidies, there are not enough funds for high-quality research equipment or world-class research professionals.

The Railways, one of India’s largest employers, subsidises its employees with above-market wages. This is clear from the extraordinarily high number of people applying for each Railways job. Further, the Railways subsidises passenger traffic. These operational subsidies have increased the Railways’ operating ratio to 98.4 per cent (2019-20). This ratio means for each ₹100 of revenues, the Railways has, at most, ₹1.60 for investment. Since this is not enough to finance the Railways’ investments, the funds must come from the Union Budget.

In practice, the Railways doesn’t have enough money to upgrade its tracks for higher speeds. India now has train coaches that can run at 160 km/hour, but most of the track limits running speeds to 110 km/hour. In short, India cannot speed its trains unless it cuts back on operational subsidies.

It is essential that people and politicians recognise that higher government investment is needed for higher growth and more jobs. This means reducing operational subsidies, though some targeted subsidies should be retained, particularly for poorer people. Much of India’s political leadership has now tilted the governments’ investment-subsidy balance in favour of subsidies. This tilt must go for India to have high long-term growth rates and create more jobs.

The writer is an economist who recently wrote ‘India’s Path to Prosperity 2022-2047: A Workable Agenda for the Next 10-15 Years’

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