April 13, 1998

Understanding BJPnomics: NAG's goal okay--but numbers don't add up.

Jairam Ramesh

The BJP-led coalition's first intellectual missile, nag (National Agenda for Governance) is loaded with philosophical paydirt that is guaranteed to send all intended victims into a state of stupor. But somehow, two very pinpointed warheads have sneaked in. nag calls for a 30 per cent domestic savings rate and 60 per cent plan investment in agriculture and rural development. What to make of this 30/60 vision?

Investment comes from savings. Growth arises out of investment. Equity is sustained through growth. This is the simplest reason why savings rates matter. Yet, India's fundamental problem now is not low savings but inefficient investment. South Korea grew twice as fast as India in the '60s and '70s, even though the savings rate in the two countries was identical.

Our methodology for estimating savings is deeply flawed. For example, official figures for household savings do not include assets like jewellery and gold. Even so, India's overall savings rate of about 25 per cent of GDP is remarkable for a poor country. At around 19 per cent of GDP, our household savings rate is comparable to that prevailing in east Asia. Our private corporate savings rate is rising and is currently around 4 per cent of GDP.

The villain is public and government sector savings. This is what differentiates India from countries that have high investment and high growth rates. Public saving is less than 2 per cent of GDP, with the savings of government administration actually close to -3 per cent of GDP -- hence the use by economists of that awful term, "dissavings". What is needed, therefore, is a strategy for increasing public savings. Without this, we will just not be able to increase investment levels in the economy.

There is absolutely no evidence to suggest that conventional fiscal incentives actually result in increased savings rates. The payoffs are greater if we concentrate on boosting public savings through privatisation, full commercialisation of railways, posts and telecommunications, better recovery of costs in power, irrigation, higher education and transport and a cut in the size of the government at all levels.

Politics will undoubtedly influence the course of public savings. In the short term, there may well be electoral setbacks to chief ministers who pursue fiscal reform seriously. N. Chandrababu Naidu, J.B. Patnaik, Bhairon Singh Shekhawat and Bansi Lal -- all of whom have been pursuing tough fiscal policies -- have been badly bruised in the recent elections. Political management will thus be the key to sustaining such reforms.

But there is another route for boosting savings that does not depend so critically on the vagaries of electoral politics. This is bolder and faster financial liberalisation. The monopoly of LIC and GIC must be broken. The pensions and insurance industry must be opened up to new players. UTI should be reorganised to inject effective competition in the mutual funds industry. The provident fund system must be reformed in a manner that provides alternatives to the existing fully funded, defined-contribution schemes.

Accelerated financial liberalisation and increased public savings will help take domestic savings rates to over 30 per cent of GDP. Also, increased GDP growth itself will increase savings rates. And in the short term, a doubling of the current level of foreign investment inflow will bring investment rates to around 30 per cent of GDP.

The other nag figure -- 60 per cent of public investment in agriculture and rural development -- makes no sense. Is it public investment in agriculture and rural development, narrowly defined? Or is it public investment in a whole range of rural-oriented activities that go beyond agriculture and traditional rural development and also include irrigation, rural power, rural education, rural health, rural water supply, rural roads and rural communications?

If we go by what nag says, then we will see a jump from something like 15 per cent to 60 per cent. This is untenable, even unwise, given the competing demands on public investment. However, if we interpret nag in terms of all public investment in rural areas, then we are already at about 55 per cent, which is perhaps what it should be. Hopefully, this is indeed how Jaswant Singh will redefine what he initially wrote.

Agricultural research and education specially require greater investment. But overall, agriculture has suffered not so much because of insufficient funds but more because industry has been pampered. Ashok Gulati, the noted economist, has shown that industry has enjoyed a 45 per cent tariff protection while agriculture has been taxed at 22 per cent. Unfortunately, nag is sympathetic to more protection to our corporate zamindars. This is simply inconsistent with its concern for farmers.

Key to getting the maximum out of public investment in rural areas is the financial empowerment of panchayat institutions. To begin with, all rural development funds -- currently about Rs 8,000 crore a year -- must be transferred directly from the Centre to zilla parishads and panchayats. Sadly, nag is silent on this. Fortunately, this Government has a great champion of panchayats in Ramakrishna Hegde. Given his experience in Karnataka, Hegde now has a historic opportunity: to help energise panchayat bodies, particularly in north India.

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