Can mere outlays make a difference?

The Finance Minister has chosen the popular but ineffective means to fund social sector spends. In the battle between marketplace and government there has been no real winner in Budget 2006.

World over, a battle is on between the marketplace and the government for attaining the commanding heights of an economy. This conflict is well captured, chronicled and explained by Daniel Yergin and John Stanislaw, authors of the best-selling The Commanding Heights.

From their observation it is clear that the government is receding and becoming minimal. More important, it has lost the battle to the marketplace, which has, in turn, begun to occupy the central place or, rather, the commanding heights of an economy. Drawing on the global experience, the authors explain the compulsions that drive these countries to abandon government in favour of the market mechanism.

INDIA, THE EXCEPTION
While the battle seems resolutely tilting in favour of the market across continents, it is not so in India. This battle, which commenced in 1991, is neither decisive nor conclusive. Post reforms, while it is indeed true that the country has understood the efficacy of the market, the government continues to remain quite big and important.

Moreover the experiences with the market have taught us a crucial lesson that market works provided one engages it. Put differently a person must be a producer or a consumer, a borrower or a lender to engage the marketin short, one must be symbiotically linked to the market to benefit from it. What is crucial and lost in the debate in our country is that nearly 400 million people (that is, those below the poverty line or just above it) do not have the threshold financial ability or the skill to engage the market.

Bigger allocations
Will higher allocations make an impact at the ground level?

Budget 2006 has increased allocations to the social sector ostensibly aimed at poverty alleviation. But how much does this increased outlay make a difference at the ground level? Take the allocation for the midday meal scheme, up from Rs 3,000 crore to Rs 4,800 crore a significant 60 per cent jump. But as a cliché goes, the demon is in the detail. This allocation is supposedly for 12 crore children. As schools generally work for about 200 days, the allocation works out to approximately Rs 2 per head per day enough to provide one egg per student per day.

Ditto with the allocation for house construction under the Bharat Nirman Programme. The Finance Minister has allocated Rs 2,260 crore in the current year for 8 lakh houses a princely Rs 26,000 per house!

But in his anxiety to increase allocations for such programmes, the Finance Minister has significantly cut the Plan Expenditure on the Capital Account the most crucial aspect of the Budget. This is the sum the Finince Minister proposes to spend on infrastructure needs. It may be noted that the Plan capital expenditure was approximately 10 per cent of the total Budget Expenditure at Rs 29,382 crore in 1999-2000. However, the planned capital account expenditure for 2006-07 stood at a mere Rs 28,966 crore. This constitutes a meagre 5 per cent of the total Budget Expenditure for 2006. In effect, the increased social sector spending entails substantially cutting the Plan capital expenditure, which can have disastrous consequences for the economy and, more specifically, the poor. Has the Finance Minister robbed Paul to pay Paul?

Risky approach
The Budget strategy to eliminate poverty is wedged between the market mechanism which by definition disqualifies the poor and the unskilled and direct intervention of the Government which is highly ineffectual to make any serious impact. No wonder that while policy formulations have swung between the two alternatives, both inept, there has been little or no direct bearing at the ground level for the poor.

It is time a new economic model was designed that made a direct impact at the ground level. In the absence of any credible alternative economic model, the Finance Minister has taken the popular but ineffective decision of increasing allocations. While this approach has proved a failure, no one obviously has the courage to oppose it.

The Finance Minister has taken a risky approach to funding the increased outlays whose outcomes are suspect. Unfortunately, with both the market and the government failing, a confused nation has no realistic alternative. That substantially explains the muted response of the nation to one of the most insipid Budgets in recent times.

Published at: http://www.thehindubusinessline.com/2006/03/29/stories/2006032900391100.htm