Sonianomics will put India on the path to disaster

The exit of Mamata will confirm Sonia Gandhi in her belief that reforms don't sell. But Sonia's welfarist tendencies will ruin the Indian economy

Vivek Kaul September 20, 2012 14:54:40 IST
Sonianomics will put India on the path to disaster

Sonia Gandhi must be having the last laugh, at least when it comes to economic reforms and their salability among Indian politicians. "Maine kaha tha, Mamata nahi manegi (I had told you Mamata will not agree)," she must be telling Prime Minister Manmohan Singh these days. "Par aap zidd par add gaye (But you became rather obstinate about the entire thing)," she must have added.

Whether this government survives or not remains to be seen but economic reforms will now be put on the backburner, and that's for sure. Also, the Congress party-led United Progressive Alliance(UPA) will start preparing for elections (early or not, that doesn't really matter). And given that Sonia Gandhi's form of "give away everything for free" economics will come to the forefront again now.

Sonianomics will put India on the path to disaster

Votes for the Congress will come at the cost of economic prosperity for the country.

The various Congress-led governments since independence have always followed this form of economics. As Sunil Khilnani writes in The Idea of India, "The state was enlarged, its ambitions inflated, and it was transformed from a distant, alien object into one that aspired to infiltrate the everyday lives of Indians, proclaiming itself responsible for everything they could desire: jobs, ration cards, educational places, security, cultural recognition."

When someone is responsible for everything, the way it usually turns out is that he is not responsible for anything. A major reason for the economic and social mess that India is in today is because various Congress governments have been trying to be responsible for everything.

This is going to increase in the days to come with Sonia Gandhi's pet projects of the right-to-food and universal health insurance being initiated. It need not be said that the projects will help spruce up the chances of the Congress party in the next Lok Sabha election.

These are populist giveaways which have existed all through history. As Gurucharan Das writes in his new book India Grows at Night: "Populist giveaways have always been a great temptation. Roman politicians devised a plan in 140 BCE to win votes of the poor by offering cheap food and entertainment - they called it 'bread and circuses.'"

The idea of the right-to-food and health for all are very noble measures and difficult to oppose for anybody who has his heart in the right place. Nevertheless, the larger question is where will the government get the money to finance these schemes from? As PJ O'Rourke, an American political satirist, writes in Don't Vote! It Just Encourages the Bastards: "We're giving until it hurts. That is, we're giving until it hurts other people, since we're giving more than we've got."

As we have said repeatedly, the fiscal deficit target of Rs 5,13,590 crore, or 5.1 percent of the gross domestic product(GDP) for 2012-2013. This will happen primarily because the subsidy bill is going through the roof (see table below).

Sonianomics will put India on the path to disaster

Table

As is clear from the table, the subsidies on oil, fertiliser and food for the first four months of this year have been much higher than in the previous year. Also four months into the year, the subsidies are already more than 50 percent of the amount targeted for the year. Like the food subsidy for the year has been targeted at Rs 75,000 crore. During the first four months subsidies worth Rs 46,400 crore have already been offered. Unless the government controls this, the spending over the remaining eight months of the year will definitely cross the targeted Rs 75,000 crore. This will increase the overall spending of the government and thus the overall fiscal deficit, which is in the process of reaching dangerous proportions.

As I have stated in the past, at the current rate the fiscal deficit of the Indian government could easily surpass Rs 700,000, crore or 7 percent of the GDP. (You can read the complete argument here). Now add the Right-to-Food and universal health insurance to it and just imagine where the fiscal deficit will go. And that means the scenario of high interest rates and high inflation will continue in days to come.

But that's just one part of the argument. Those in favour of subsidies and a welfare state have often given the example of the greatest western democracies (particularly in Europe) which have run huge welfare states with the government taking care of its citizens from cradle to grave. An extreme example of such a welfare state is Greece.

Greece categorises certain jobs as arduous. For such jobs the retirement age is 55 for men and 50 for women."As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, musicians..." write John Mauldin and Jonathan Tepper write inEndgame - The End of the Debt Supercycle and How it Changes Everything.

But the Western democracies became welfare states only after almost 100 years of economic growth. "Western democracies had taken more than a hundred years of economic growth and capacity building to achieve the welfare state," writes Gurcharan Das. And given this, India is indulging in "premature welfarism". "A nation with a per capita income of $1,500 cannot protect its people from life's risks as a nation with a per capita income of $15,000 could. It came at a cost of investment in infrastructure, governance and longer-term prosperity," adds Das.

That's one part of the argument. In order to finance these programmes, the government will have to run huge fiscal deficits. This means that the government will have to borrow. Once it does that it will crowd out borrowing by the private sector and thus bring down the investment in infrastructure and hence longer term prosperity.

There is no example of a premature welfare state in the history of mankind rising its way to economic prosperity. An excellent example of a country that tried and failed is Brazil. India is making the same mistakes now that Brazil did in the late 1970s.

As Ruchir Sharma writes in Breakout Nations: "Inspired by the popularity of employment guarantees, the (Indian) government now plans to spend the same amount extending food subsidies to the poor. If the government continues down this path, India might meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crossed out private investment, ending the country's economic boom...the hyperinflation that started in the early 1980s and peaked in 1994, at the vertiginous annual rate of 2,100 percent. Prices rose so fast that cheques would lose 30 percent of their value by the time businesses could deposit them, and so inconsistently that at one point a small bottle of sunscreen lotion cost as much as a luxury hotel (did earlier)."

Inflation in such a scenario happens on two accounts. First, it happens because people have more money in their hands. And with this they chase the same number of goods, thus driving up prices. The second level of inflation sets in once the government starts printing money to finance all its fancy welfare schemes.

As far as inflation is concerned, things have already started heating up in India. As Das writes: "The Reserve Bank warned that wages, which were indexed against inflation in the employment scheme (the national rural employment guarantee scheme), had already pushed rural wage inflation by 15 percent in 2011. As a result, India might not gain manufacturing jobs when China moves up the income ladder."

Other than inflation, giving away things for free has other kinds of problems as well. With states giving away power for free or at rock-bottom rates, the state electricity boards are virtually bankrupt. As Abheek Barman wrote in a recent column in The Economic Times: "Most of the power is bought by state governments through state electricity boards (SEBs). These boards are bankrupt. In 2007, all SEBs put together made losses of Rs 26,000 crore; by March last year, this jumped to a staggering Rs 93,000 crore. Just two SEBs, Uttar Pradesh and Jammu & Kashmir, account for nearly half this amount. To cover power purchase costs, the SEBs borrow money. Today, the total short-term debt of all the SEBs has soared to a mind-boggling Rs 2,00,000 crore. Many states would buy as little electricity as possible, to avoid going deeper into the red." (You can read the compete piece here). So the farmer has free electricity but then there is no electricity available most of the time.

Das writes something similar in India Grows at Night. "Punjab's politicians gave away free electricity and water to farmers, and destroyed the state's finances as well as the soil (as farmers overpumped water); hence, Haryana supplanted Punjab as the national's leader in per capita income."

Other than this a lot of things given away for free by the government are siphoned off and do not reach those they are intended to. It would be foolish on my part to assume the politicians in this country (including Sonia Gandhi and, of course, Manmohan Singh) do not understand these things. But as Das writes "But neither the 'do-gooders' nor the Congress party was deterred by the massive corruption in the supply of diesel, kerosene, electricity and cooking gas as well as in 'make-work' schemes and food distribution. Politicians felt there were still plenty of votes there."

But these votes will come at the cost of economic progress. No country in history has got its citizens out of poverty by giving away things for free. Countries have progressed when they have created enough jobs for their citizens. And that has only happened when the right investments have been made over the years to build infrastructure, industry and human skill.

So the votes for the Congress will come at the cost of economic prosperity for the country. In the end let me quote a couplet written by Allama Iqbal: "Na samjhoge to mit jaoge ae Hindustan waalo, tumhari daastan bhi na hogi daastano main" ("If you don't wake up, O Indians, you will be ruined and razed, Your very name shall vanish from the chroniclers' page"- Translation by K C Kanda in Masterpieces of Patriotic Urdu Poetry: Text, Translation, and Transliteration).

Prime Minister Manmohan Singh's love for Urdu poetry is well known. It is time he went back to this couplet of Allama Iqbal and tried to understand it in the terms of all the problems that will come along with the premature welfare state that his party has created and is now trying to spread it further.

Vivek Kaul is a writer. He can be reached at vivek.kaul@gmail.com

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