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Sudhir Mulji

Now that the International Monetary Fund’s Deputy Managing Director Anne Krueger, has warned against our mounting fiscal deficit, it is appropriate to ask whether India together with China has been plain lucky in that they have had their best gross domestic product growth rates with high deficits.

It is widely recognised that both India and China--China more than India--have managed faster GDP growth rates than other countries of the world. Yet, it is well known that both countries have failed to balance their books.

In China, the mysteries of budgets are obscured by secrecy; but it is generally believed that state-owned enterprises lose up to 12 or 13 per cent of GDP. This deficit is probably concealed in non-performing bank loans.

In India, deficits are more in the open. They are part of the public accounts of the Centre and the states. Purists would argue that to these published deficits which amount to 10 per cent of GDP, public sector losses and hidden subsidies by way of cheap housing to bureaucrats and ministers should be added.

All this is known, but it is a pity that Krueger who has profound knowledge and affection for India, has, like others who disapprove of deficits, argued only in generalities.

No one denies the proposition that fiscal deficits cannot go on forever, yet it is highly unsatisfactory for economists to dismiss questions about how to reduce deficits by saying “that’s a political choice, how it is addressed whether it is by reduction in expenditure or increase in taxes” was not the issue. (Krueger in Business Pioneer, November 26.)

It is indeed a political choice but as Economist John Maynard Keynes pointed out, “Economists set themselves too easy too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean is flat again.”

The problem is precisely to show how expenditure can be reduced or taxes increased without damaging the process of development.

First then, expenditure. Since 60 to 70 per cent of the government’s annual revenue goes in payment of interest for past debts, there is not much that can be done to reduce expenditure meaningfully except by printing money.

On other heads of expenditure, the finance minister has hardly any room to manoeuvre. Most of the government’s payments are committed to payments and there is very little discretion now available to any government.

To reduce the overall deficit, the government has to increase taxes. But any shift in revenue from individuals or companies to the government must reduce effective demand.

It does not matter if the transfer of money from private hands to public coffers takes place as a result of higher tax rates, or as the Kelkar Committee suggests by superior administration. The consequence of less money in public hands will tend to reduce effective demand in the economy.

Growth depends on investment, but investment depends on demand. In turn, investment depends on income and expected profits.

If income in private hands is reduced by taxation, immediate demand will be reduced and so will profits, unless costs fall correspondingly.

If profits simply stagnate, so will enterprise and investment. The Keynesian multiplier operating in reverse waits to defeat the Krueger-Kelkar theory.

It is usual to assume (and I have quoted Krueger extensively because she reflects the ‘usual’ view with clarity) that the government is borrowing too much and keeping interest rate too high; a fall in interest rates will reduce costs and stimulate investment.

But interest rates have been coming down and the banking system is replete with liquidity, but private sector is not interested in borrowing because the marginal efficiency of investment has come down faster.

New projects are not springing up precisely because entrepreneurs are not willing to take risks nor is there any reason to suppose that reductions in fiscal deficits by collecting more tax revenue will provide a stimulus to investment.

In China, what little I saw of Shanghai, suggests that much of the development has been created by public investment in infrastructure. The advantage of this form of investment is that benefits are not quantifiable.

Any public investment can be justified on the unquantified benefits it gives to society as a whole. But an increase in public expenditure of that kind is not a recipe for reducing fiscal deficits.

A superficial observation of China suggests that their rate of growth has been assisted by rapid investments but with disregard to fiscal balances.

However China is too far in distance and language, and too enigmatic in statistics, for one to draw any very conclusive lessons.

The feature that we share with them is a large population with probably many people unemployed or under employed. China seems to have been more successful in using this pool of unemployed capacity to ensure faster growth rates.

The question then is, “Were fiscal deficits, even high fiscal deficits necessary for fast growth rates?” Krueger tells us that she “knows of no country that has succeeded in running a fiscal deficit that is 10 per cent of GDP for very long”, but then she probably cannot cite any country that has unemployment figures of probably around 30 per cent for very long.

In India we avoid calculating unemployment figures by using complicated definitions. In its report of 1970, Dantwala Committee of experts quoted the First Five-Year Plan: “...the extent of unemployment in rural areas is difficult to estimate. Some authorities put the figure at 30 per cent; but in addition to this, there is chronic under-employment. The quantitative estimates of this are even more difficult to work out.”

Having expressed this view, the Committee set about classifying different forms of employment, but finally no single figure emerged. We now rigorously collect statistics not of the unemployed but of euphemisms like ‘usually unemployed’ or ‘casually employed’ but no authoritative number usable in macroeconomics has emerged of the unemployed after 30 years of painstaking data collection.

In an attempt to stimulate my own thoughts, I looked at the data of an English farm to which I am connected. The farm produces 5,000 tons of wheat and other coarse grain annually with five workers.

India produces annually 525 million tons of foodgrains, oilseeds and sugarcane. If these crops were produced with the same average labour intensity as the English farm cited, the man-power required would be 525,000 as against the 110 million cultivators and 74 million other farm workers in India.

That these figures are not comparable in any relevant economic sense is obvious; it simply draws dramatic attention to potential underutilised manpower. After all, regardless of other technical coefficients, food is food and manpower manpower.

The purpose of economic policy is full employment with price stability. In that context these notions of fiscal deficits, taxation, government expenditure are just tools, we should guard against the excessive bureaucratic concern for price stability at the cost of employment.

Fiscal deficits as a permanent way of life matter, but whether they are 10 per cent or 15 per cent of GDP is irrelevant so long as there is excess capacity.

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