Dr Bharat Jhunjhunwala
Finance Minister Arun Jaitley is to present his maiden budget soon. What steps he takes to control price rise is to be seen, however. Inflation will be truly controlled only by a reduction in the size of the Government. Let us say the economy has notes of Rs 100 in circulation and goods of Rs 100 in the market. The Government collects Rs 15 as taxes and spends this money. Both the economy and Government budget are in equilibrium. Prices are stable. Now, let us say the Government decides to print notes of Rs 10 and increase its expenditures from Rs 15 to Rs 25. The Government incurs a Budget Deficit of Rs 10. Result is that notes worth Rs 110 are now in circulation while goods worth only Rs 100 are available in the market as previously. There is more demand and less supply. The shopkeepers smell an opportunity and they increase prices of the goods. This is how prices start to rise. Here I am using the word ‘Government’ to include both the Ministry of Finance and Reserve Bank of India.
It does not matter whether the newly printed notes are used for investment in a highway or for paying increased salaries to Government employees. Both will lead to an immediate increase in prices. The long term impact may be different. Investment in highways will lubricate the economy, lead to an increase in economic growth and an tax collection. In due course the Budget Deficit may be wiped out. Such a fortuitous long term impact will not take place if the printed notes are used for paying increased salaries or for siphoning the money through corruption. However, this difference is relevant only in the middle term. The immediate impact of all Government expenditures is an immediate increase in price rise.
I expect some improvement in the quality of Government expenditures under the leadership of Shri Modi. His record in Gujarat is excellent. However this will prove inadequate. The budget of the family goes haywire if one purchases a TV without having income. It matters little if one buys a good quality TV at a low price. The budget will still get disturbed. Likewise, improving the quality of expenditures will not prevent price rise. The total expenditures will still be in excess of tax collections. There may indeed take place a positive impact on prices in the long run but as Keynes said, “In the long run we are all dead.” Shri Jaitley needs a sure fix for this problem.
There are two areas that I think Jaitley must attend to. First is the burgeoning welfare expenditures of the Government. Back of the envelope calculation indicates that the amounts being spent by the Central Government on fertilizer, food, diesel and LPG subsidies, MNREGA, education, health and other welfare programmes is about Rs 600k crores per year. Jaitley should dismantle all these programs in one go and distribute half of this amount, i.e. Rs 300k crores among the 25 crores families in cash. This will provide Rs 12,000 per year or Rs 1,000 per month to each family in the country. This amount may be paid to APL as well as BPL households to remove this divisive classification. People can buy their basic requirements from the market with this money. They will be better off. Rajiv Gandhi had said that only 15 paise out of a rupee sent by the Central Government reached the beneficiary. This would have come down to 12 paise at present given the all-round increase in corruption. Jaitley may improve delivery and may be able to reach, say, 20 paise. Still, only Rs 120k out of the 600k crores being spent by the Central Government would reach beneficiaries if Jaitley is able to improve administration. This will increase to Rs 300k crores if half the money is distributed in cash. The Government expenditure will also come down by a whopping Rs 300k crores.
The second area that needs immediate attention is the impending burden of the Seventh Pay Commission. I had seen a World Bank report a few years ago comparing emoluments of Government servants with per capita incomes. It turned out that Indian Government Employees earned about 5 times the per capita income which was highest among major countries. The earnings of Government Employees was about 1-2 times per capita incomes in most countries. This would have increased in India to about 6-7 times after the implementation of the Sixth Pay Commission. Now, the Seventh Pay Commission is in the process of recommending yet another increase in their salaries. The economy of the country today is of the Government servants, for the Government servants and by the Government servants. Jaitley must change this. The Terms of Reference of the Seventh Commission must be restricted to improvement of efficiency and reduction in numbers. There should be no recommendation regarding increase in salaries.
Jaitley must keep away from the disastrous policy of Manmohan Singh of trying to cover up the ill-effects of budget deficits by encouraging Foreign Investment inflows. This only led to changing of hats. The inflows of foreign investment led to increased availability of dollars. That led to decline in the price of dollar and an increase in the price of rupee. Our exports were hit. That led to lowering of growth rates. Then the RBI lowered interest rates in order to jump start growth. But that led to increased borrowing and an increase in price rise. Jaitley must realize at the outset that there is no such thing as a free lunch. He must not fritter away his hard-won victory in such futile stratagems.
Manmohan Singh had constituted a Committee of four Chief Ministers on Consumer Affairs under the chair of Modi. Focus of the Committee was on control of agricultural prices. The Committee had made some positive recommendations. These included, ban on futures trading in essential commodities, establishment of a price stabilization fund, liberalization of agricultural markets, increased investment in storage, etc. These suggestions are welcome. However, such steps can, at best, remove some supply-side bottlenecks in specific sectors. The present price rise, on the other hand, is all-encompassing. It is due to increased Government consumption and effects all sectors. Therefore, sector-specific solutions like these will not be able to arrest the price rise. Jaitley must focus on the core issue of reducing Government expenditures to secure a durable solution to the vexed problem of price rise.
(The author was formerly Professor of Economics at IIM Bengaluru)
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