Dr Bharat Jhunjhunwala
Most State Governments are reeling under fiscal pressures. Committed expenditures are absorbing most revenues and little is left for developmental works. Two paths are available in such circumstance. They can tinker with minor measures. Chief Minister Akhilesh Yadav, for example, has ordered that new vehicles will not be purchased, new buildings will not be constructed, and works will be given on contract instead of getting these done departmentally by contract labour. These measures are welcome. But they grossly fall short of requirements. Task is to find ways of jumpstarting growth without an increase in expenditures. This requires surgery of a different kind.
Good governance is the key to economic growth. The businessman’s energies are not frittered away in running from desk to desk; and his capital not used up in paying bribes. The trick lies in controlling the inherent tendency towards corruption that is endemic to government servants just as a hard-headed buffalo is controlled by putting on him a heavy yoke. Three measures can be implemented towards this end. One, a confidential survey of the efficiency and character of the officers can be got done by a reputed independent agency in the like of CRISIL. Two, a public hearing about the working of the senior government officers can be organized once in five- or ten years. That would give an opportunity to the victims to place their grievance before the authorities. Three, a separate spy network can be established to proactively trap corrupt officials. Presently the anti-corruption agencies become active only after they receive a complaint. This is not adequate because the most corrupt officers also know how to manage such complainants. Officials should be promoted or given forcible early retirement on the basis input from these three sources.
The second bottleneck to growth is lack of infrastructure. Chief Ministers should embrace Public-Private-Partnership model to improve this. Distribution of electricity, collection of waste and treatment of sewage, registration of vehicles and issuance of driving licenses, issuance of ration cards and management of Public Distribution System, provision of health and education facilities and plying of busses can all be outsourced. The Akali Government in Punjab has improved the bus services by privatizing them. However, most licenses have reportedly been captured by politicians leading to huge increase in fares. Such crony capitalism must be avoided.
The burden of salaries and pensions of government employees is the main cause of worsening state finances. It is not possible to reduce this burden instantaneously. However, steps can be taken that will provide relief few years down the line-before the next election. A complete freeze on new recruitments should be put in place. Surplus staff from departments whose work is outsourced should be transferred and employees put to work in place of those retiring in essential services such a police and revenue. Other released government employees should be employed in supervision and inspection of private providers. A teacher whose school is handed over to a private operator can be required to work as a patwari; or he may be given the task of inspecting all private schools or the functioning of private garbage collecting company. This will lead to gradual reduction in number of government employees and also to improvement in quality of essential services provided to the people.
There is a need to revisit the proposed Goods and Services Tax (GST). VAT as well as GST can be used to generate employment and make life easier for the aam admi. Tax rates can be reduced on labour-intensive products like handlooms, paper envelopes and agarbatti and beedi; and increased on capital-intensive goods like TVs, cars and air-conditioners. The biggest challenge before populous states like UP, Bihar and Bengal is to generate employment. Trades such as handlooms have been wiped out because of the big-business oriented policies of the Union Government. State Governments should commission studies to ascertain the labour content of various goods that are sold in the market. Tax rates can be reduced on labour-intensive goods and increased on capital-intensive goods while keeping the average rate unchanged. That will have no financial impact on the revenues of the State Government and also on the consumers. Yet this will generate employment because labour-intensive goods like handlooms will become cheaper and their demand will increase while capital-intensive goods like machine made cloth will become expensive and their demand will reduce. Chief Ministers should oppose the GST because that will limit the ability of the State to change tax rates in this direction.
The State Governments across the country are bending backwards to provide free or heavily subsidized electricity and water to the farmers. This is logical given the low price of agricultural produce being fixed by the Union Government. But this is leading to a huge misuse of these scarce resources.
The same water can be used to irrigate double the land if apportioned evenly between the farmers at the head and tail of a canal. It is necessary to raise the price of electricity and water in order to cajole the farmers to use these resources judiciously.
The challenge is to neutralize the impact of this price rise on the farmers. This can be done by allowing the price of agricultural produce to rise proportionately. The next problem is to manage the burden on the consumers of this increase in price of farm goods. The solution is to reduce taxes on goods consumed by the urban people by the same amount as the revenues collected from the increase in price of electricity and water. This would make the move price neutral for the farmer, consumer and the State Government. The farmer will recoup the payment for electricity and water from higher price of his produce; and the consumer will recoup the higher price of farm produce from lower taxes on other consumables; and the State Government will recoup the reduced collection of taxes from increased collection from electricity and water. Yet this will lead to a huge increase in production because of judicious use of electricity and water.
Chief Ministers will have to decide whether they want to play a long innings or a short one.
The present model of borrow-and-spend will not deliver in the long run. There is a saying in economics: “There is no such thing as a free lunch.”
One can, however, borrow against his future earnings and have a sumptuous lunch. Such borrowing soon returns to haunt the State finances. Methods of securing economic growth without entailing additional expenditures have to be found. This will not be attained by imposing a ban on the purchase of new cars even though such tightening of belt is welcome. Time has come for basic change in the model of governance.
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