Shun a handouts political economy

Shun a handouts political economy

Subsidy must be used sparsely, intelligently.

Explicit subsidies have grown from 1% of total budget expenditure of the Centre in 2017-18 to more than 12% in 2018-19, and is budgeted to stay at that level for 2019-20. As a proportion of capital expenditure, subsidies have risen from 85% in 2017-18 to 99% in 2018-29 and in the budget estimate for 2019-20. These do not take into account assorted doles such as pensions for the indigent and the employment guarantee scheme, nor state-level subsidies, which are massive and extend to loan waivers, besides cheap cooked food and handouts of consumer goods. Now, new handouts are in vogue, without reconfiguring or subsuming extant subsidies. The central government wants to add ₹75,000 crore of income support to farmers. Given a chance, Congress would add income support to all poor individuals. What does a political economy of handouts mean for the country?

India is fiscally constrained, its tax collection about half the OECD average of 34% of GDP for the Centre and the states combined. The combined fiscal deficit is about 7%, and with some non-tax revenue and liquidation of assets, India struggles to spend 27% of GDP. The spending on R&D, which determines future competitiveness besides strategic capacity, is less than 1% of GDP. Public health spends are among the lowest among nations, about 1% of GDP. We spend about double that on defence, a fraction of what is required to maintain strategic autonomy. Education, the bedrock of the knowledge economy of the future, gets barely 4% of GDP. India lags in science research and new patent filings. Indian companies show, for the most part, little appetite for pushing the frontiers of commercial innovation.

The more funds are diverted to subsidy, the less investment in productivity-enhancing social and physical infrastructure. Of course, we need subsidy, to help the poor break out of poverty. But it must be sparingly used, and intelligently. India must prioritise growth and marshal resources to that end. India must shun a political economy of competitive populism that sees redistribution as the way out of poverty.