Equitable Growth Must Be The Fulcrum Of Government Budgets
Governments have an obligation to use taxpayer money responsibly. Budget making requires a strategic and comprehensive approach. Policymakers must invite consultations, gather input on budget priorities and allocate funds accordingly. Most state budgets do not.
Citizens have a bigger role (than they own up to) in influencing budget priorities. They must participate, advocate, organise and mobilise society to raise issues and build momentum.
They unfortunately don’t, are despondent and look to others.
Civil society and the Press too must shoulder the responsibility and engage with key stakeholders to communicate with and question the government.
State Policies & Budgets Determine Direction and Growth Trajectory
The Central government’s budget hogs the limelight. It attracts disproportionate attention, even obsession. State policies and budgets that trigger and catalyse economic activities and growth drivers are often ignored. Growth and its dynamics are bottom-up.
The policies at the state level attract investment, ‘Ease of Doing Business’ drives consumption, creates infrastructure and impacts most other growth drivers.
In a less developed economic ecosystem the government must prioritise social spending and invest in multipliers such as health, education and rural development. But equally, it must invest for the future, in hard assets and strategic infrastructure that promote growth. Roads, bridges, transit, water, power, rail network, spectrum and a host of other infrastructure assets are the essential building blocks of the economy. They enable trade, power businesses.
Poorer states, particularly in the north and east need holistic and radical reforms. At the same time they need to build capacity to match and march with other more developed states.
Lazy Policymaking
However, the trend is to focus on non-merit subsidies and misdirected welfare spending. Such spending constitutes over three fourths of what some states ‘earn’. Misdirected and non-merit subsidies benefit only the endowed. It shows up as lopsided development.
Some spend over 85 per cent of their income on ‘revenue’ expenditure (‘committed’, salaries, welfare). This comes at the cost of holistic spending in growth drivers like investments in infrastructure, healthcare, and education. Punjab spends only six per cent of its income on capital expenditure (growth and development), West Bengal and Rajasthan spend 10 per cent. A good percentage of this comes from ‘borrowed’ funds. Sample this. Punjab, Andhra Pradesh, Bihar, Kerala, MP, West Bengal, each have huge (twice the acceptable ratio of 20 per cent) unviable debts as a percentage of their gross state domestic product (GSDP).
Three fourths of Bihar’s income come from devolution (GST, other taxes) and grants and yet, it continues to ignore investment in economic growth drivers. Rajasthan (sitting on a burgeoning debt), Chhattisgarh and now Himachal Pradesh, are reverting to the old pension regime ‒ frittering away the present and ‘cashing in’ on what belongs to the future. It will worsen their financials and deepen the financial crisis.
Misallocation Undermines Social Trust, Corrodes Credibility
It causes significant warping and inefficiencies. The social fallout is staggering, acute and entrenched. Misallocation of funds erodes the very legitimacy of state institutions, gnaws away growth variables.
The cost is difficult to fathom, and greater than the sum of lost money. It has serious consequences. Lobbying and interest accentuate bias and prejudices in budget design and delivery. Poorly designed, badly implemented ‘disguised’ welfare schemes (reverting to old pension schemes, non-merit subsidies) are good examples.
Freebies Induced Growth is Low & Shallow
On the other hand, investment led growth is balanced, equitable and a catalyst. Every budget rupee in a well-designed, robust capital sector raises economic activity by three.
The budget priorities are misplaced and low ‘yielding’. As an example, rural economy benefits more from sustainable and robust infrastructure, not loan waivers, which in any case benefits only rich farmers. Fertiliser and power subsidies are another case in point.
Most agricultural sops come at the cost of creating agricultural capital or ‘taking the road to the village’, or farm to markets. Agricultural infrastructure provides access to irrigation and markets, making agriculture sustainable. It empowers farmers.
The misallocation of funds drives away capital and investment, diminishes growth, dries up opportunities.
Judicious Budget, Meaningful Reforms
States must muster up the courage and usher in agricultural reform that could benefit underemployed and deprived farmers.
Similarly investing in education and skills are investment magnets. Healthcare is a decadal multiplier that improves the quality of life and reduces the burden of disease and illness on the economy.
States must budget for research and development that stimulates innovation and triggers new opportunities for growth. Infrastructure promotes economic growth (forward linkages); growth in turn makes demands on infrastructure. The two-way relationship is self-sustaining.
The MSMEs, the growth engines and the largest employers, benefit even more from growth focused budgets. Rural development is key to equity, opportunity, and mobility. It rebalances growth and elevates living conditions. Other human development indicators bloom too.
Empowering Demography, Yet Unexploited
Over a fourth of the young from the northern states are ‘forever seeking’ jobs. Unsuccessfully. Eventually they migrate, driving away the most important assets. This has a larger and more intangible implication than most people understand. Labour migration drives away consumption and capital, triggering a vicious cycle of low consumption, lower investment, lower jobs and diminished growth.
While growth in itself is empowering, the outcome of growth is even more so.
The state governments are responsible for growth. The policies framework, and effective implementation ‘eases’ doing business, empowers the ecosystem. Meaningful fiscal incentives, land and labour reforms are a magnet for FDI and private investments, stimulating demand and spurring investment. Skill development and infrastructure are enablers of productivity. The capacity, capability, and attitude of industry staff plays a role in easing barriers and enhancing growth.
Citizens Must Not Abdicate Their Responsibility
The vision of any budget should be based on the principles of equitable and sustainable growth. People must vote with their wallets. Voters must embrace those who have a development agenda. They must equally shun those who offer ‘sops’.
In a democracy the people are the ultimate leader
