The India story: too many deficits to bridge

It is received wisdom that prior to the era of liberalisation, the Indian economy was a story of chronic shortages. This was the fate of most newly free post-colonial nations of the mid-20th century.

The shortages in a macroeconomic sense were of three kinds. First, and most importantly, were food shortages. This was because the nation was unable to produce enough to feed its population. If food prices remained unregulated, then food inflation would be so high that most of the poor would not be able to afford food and would suffer starvation. The way to bridge the food deficit was by importing food, and possibly depend on foreign aid. Also, prices were regulated so that the poor could afford to buy food.

Which leads us to the second deficit, caused by the need to import stuff — the shortage of foreign exchange. The only way to bridge this gap was to earn via exports and keep a strict control on the outgo of foreign exchange. Those were the days when the per diem to government servants on their trips abroad was around two dollars a day.

The third deficit was the fiscal deficit, wherein the government was unable to collect enough through taxes (or non-tax revenue) to pay for its expenditure. A developing country naturally had a low tax base, and a very high development expenditure requirement.

Fast forward to the present, 27 years after the big bang reforms of 1991. Food shortages are a distant memory, after the success of the Green Revolution of the 1960s.

The present stock of foreign exchange is also adequate, and amongst the top four in the world. Indeed, there is a perception that we are no longer a shortage economy, but a surplus economy.

The stock of food grains in the government’s granaries is always far in excess of the norm. India is among the world’s largest producers of a variety of crops and agriculture products like milk, cotton and sugarcane. All of this creates a bearish and downward pressure on crop prices, bringing lower revenue to farmers. Which is why we have a new challenge of how to increase farmers’ incomes in a scenario of low agricultural prices. The Minimum Support Price regime doesn’t help much, because the government cannot guarantee unlimited procurement.

Also, amidst the plenty, we have still not been able to wipe out starvation deaths or widespread child malnutrition. But that is another matter. Aggregate food and foreign exchange shortages are a thing of the past. But some deficits still persist.

First, consider the fiscal deficit. India has never had a fiscal surplus, although the deficit as a percentage of GDP has been kept in check. In a developing nation, deficits are a sign that more is spent to guarantee growth in the future.

But, if the spending is not on infrastructure, health and education, but simply on salaries, pensions, subsidies and loan waivers, then that spending may not be growth-inducing.

The saving grace for India is that since the tax-paying public is growing faster than the fiscal needs, the fiscal deficit will always be financed by the next generation. Besides, legislating fiscal responsibility can also keep the fiscal situation less worrisome. Young nations with a widening tax base need not worry too much about a fiscal deficit of 3 or 3.5% of GDP.

Next, the current account deficit. We import more than we can export. Except for a couple of years, we have never had a current account surplus, unlike our East Asian neighbours.

Which means that we are perennially short of dollars to pay for imports. Thankfully, the needed dollars (and more) are supplied by capital inflows, that is, by foreign investors who bring money into the stock market and as foreign direct investment.

Forex also flows into India in the form of debt. The current level of foreign debt has ballooned to more than $450 billion, the highest ever, and even higher than our forex stock. But that foreign debt is to be paid over a period of time. The persistent filling of the current account gap by foreign investors is both a matter of satisfaction and worry. It shows their confidence, but we also worry about sudden about-turns.

Infrastructure deficit

The third and more serious deficit is the infrastructure deficit. The country needs more than a trillion dollars-worth of roads, railway tracks, airports, seaways, power and telecom infrastructure. This huge gap needs not just funding, but also equipment, material and knowhow.

The fourth deficit is that of skills and education. Even though the enrollment ratio in schools has gone up, the quality of learning has suffered, as illustrated by national surveys. The employability of engineering graduates has been seriously questioned. The World Bank estimates that about 70% of India’s manufacturing jobs are vulnerable to be replaced by automation.

Is the workforce prepared to meet this challenge? Does our education system’s curriculum and training provide the right kind of skills? The skills deficit is made worse when we have the emigration of skilled professionals, such as nurses and para-medical personnel. There is also a perennial shortage of quality teachers.

The fifth deficit is described as a trust deficit, between the governed and the government. India’s tax-to-GDP ratio is among the lowest in the world, especially when it comes to direct taxes.

Less than 5% of people pay income tax. It is as if the citizens don’t trust the government and don’t want to pay income tax.

In recent times, many laws and regulations have moved to become more “trust-based” or “self-attestment” based.

We also legislated the Right to Information, to make the government more accountable to people. Yet, the trust capital in India lags far behind that in the Scandinavian countries or even in East Asia. This trust deficit is the most abstract and difficult to bridge. It is aided by more transparency and accountability in governance. It needs judicial, police and electoral reforms. It needs political parties to be subject to the Right to Information. This is the most important deficit that we need to bridge.

(The author is an economist and Senior Fellow, Takshashila Institution)

(The Billion Press)