No more China comparisons please

NITI Aayog CEO Amitabh Kant may or may not have meant that India had too much democracy as many have suggested (bit.ly/3aL2hev) but the intensifying Punjab farmers’ agitation and the support it is getting from even those who should know better, like former CEA Kaushik Basu and former RBI Governor Raghuram Rajan, suggests this may actually be true. The ‘reforms’ that the Punjab farmers want rolled back—essentially those that allow competing markets to come up, including allowing direct buying from the farmer—don’t even scratch the surface in terms of what is needed to boost farm income, but there is a huge agitation over even that; an agitation that may just get its way because it is threatening to block off the capital and all supplies to it. Given the kind of reform that India needs, in almost any sphere you can think of, this is bad news; what happens when there is more deep-seated reform?

While Punjab’s farmers are hoping to get the Centre to legislatively guarantee MSP-based procurement, the system needs a drastic overhaul if the country’s farm sector is to be fixed. The current system, concentrated in a few states like Punjab, has distorted cropping patterns and destroyed the soil; it costs upwards of Rs 2.5 lakh crore a year and, thanks to this, FCI is carrying extra food stocks of around Rs 150,000 crore. Another Rs 80,000-100,000 crore each are spent annually on fertiliser and electricity subsidies that, like the MSP-based procurement, are also availed of only by bigger farmers across the country.

Given the growth-inducing impact of investments, this money would be better spent on creating irrigation facilities, cold storages and market yards across the country, in boosting procurement in eastern India where incomes are especially low, in providing direct transfers to poor farmers, and perhaps even price-deficiency payments, including funds to aid crop diversification in states like Punjab where farm growth is plummeting (bit.ly/3o1adMo). India’s low levels of government investment in agriculture are the direct result of the amount being spent on subsidies.

At 1.4 hospital beds per 1,000 persons versus China’s 4.3, India has too few hospitals —it has 0.7 physicians vs China’s 2—and nothing exposed this more than the Covid pandemic. Indeed, India has too few policemen, too few courts, too little drinking water, too little sewerage, a broken education system,poor social security … you name it, and India has too little of it.

Fixing this requires a big reset in terms of how India has operated over the last 70 years. It obviously requires reforms; you can’t, for instance, expect the private sector to invest in running trains if the massive subsidies the government gives right now are not eliminated. Not dismantling the huge diesel and petrol subsidies, keep in mind, ensured that private sector petrol pumps that came up in the early 2000s had to all shut down as motorists simply flocked to PSU pumps that sold fuel at much lower rates.

Building the capacity India needs also requires a lot of public investment since, in areas like healthcare or courts or education or law and order, the private sector cannot supplant the public sector; there are also issues such as the limited private sector capacity to bear risks associated with greenfield infrastructure projects of long gestation. A total of Rs 100 lakh crore is required over the next five years in just infrastructure, and a fourth of this is needed in the power sector. But till massive electricity subsidies—not just to farmers but also to households—are done away with, this investment won’t happen.

If farmers from one state managed to get the Centre to fold on the plan to reduce electricity subsidies in Wednesday’s round of talks, eliminating household subsidies will be even tougher. If farmers get their way on guaranteeing MSP legislatively, the extra bill for this will run into several lakh crore rupees a year.

Nor is the issue just that of subsidies, it is about the power of unions. Punjab’s farm unions may be arm-twisting the Centre right now, but for decades, Coal India’s unions have ensured successive governments had to postpone their plans to allow the private sector into coal mining even though India had a massive coal shortage and the resultant coal imports have played havoc with India’s balance of payments. And though both EPFO and ESIC hurt the interests of workers—ESIC’s Rs 90,000-crore reserves are proof of how much it overcharges for the health cover it offers—the government has not been able to break the monopoly even though, in 2015, then FM Arun Jaitley promised to do so.

Central to India’s progress is this issue of subsidies vs investment, and if subsidies can’t be reduced for even better-off farmers—Punjab’s farmers are amongst India’s richest—how can they be cut for others? If India gives a 90% wheat and rice subsidy to two-thirds of its population under the National Food Security Act, where will government find the money to help the real poor; even a Rs 1,100 per month transfer — that’s India’s poverty line — to just the poorest tenth of the population will cost Rs 185,000 crore a year. And how can even modest price-deficiency payments for farmers be financed if Rs 4-5 lakh crore a year are spent on MSP and various subsidies even today? While input subsidies on agriculture add up to around 8% of agriculture GDP, public investment is just 2%.

At a macro level, it is equally clear (see graphic) that, if India is to grow faster, it needs to dramatically raise investment levels; China’s investment levels of around 42% of GDP even today versus India’s 28-29% explain why its per capita incomes are five times higher. So, in the new year, let’s make a resolution: no more comparisons with China and the progress it continues to make since India clearly doesn’t have the stomach to carry out the necessary reform. If we value democracy to the exclusion of everything else, including good policy, let’s celebrate, and try to protect, just that.