Indira Rajaraman: Food security and fiscal laxity

For a political government eyeing the next elections, fiscal profligacy and entrenched inflation are not winning strategies

For a long time, the economics literature on public policy assumed that (democratically elected) governments were benevolent maximisers of the collective welfare of the people who elected them. Although the seminal work of Kenneth Arrow and others pointed to the difficulty of defining a formal social welfare function which satisfies some basic internal consistency properties, the idea of benevolence was a useful construct, because it suggested that normative policy advice, on the best course of action in any particular situation, would immediately be acted upon by the benevolent government to which it was addressed.

Beginning in the 1970s, the policy literature increasingly questioned the assumption of benevolence, and posited political government: whose sole interest lies in getting re-elected, and whose gaze is fixed on the next election. Political governments in turn come in two colours. Partisan governments adhere to party ideology on economic issues like inflation and unemployment. Opportunistic governments, on the other hand, will do whatever serves the need of the hour regardless of party ideology. Clearly, the art of staying in power forever has not been mastered by any government no matter how opportunistic, since opposition parties do manage to seize the reins of power everywhere (even in West Bengal). Notwithstanding that, the overriding objective of securing electoral victory is a realistic representation of elected governments.

Empirical work in a number of contexts has validated this. Alberto Alesina and others found that governments in the developed world were more partisan than opportunistic, with predictable stances on macroeconomic issues dictated by party ideology. In work that I did on the Indian economy, on governments in power in the 50 years between 1951 and 2001, I found a clear spike in the (primary) fiscal deficit in every year preceding a general election, across all parties in power — and therefore opportunistic rather than partisan — amounting to an increase over the previous year of nearly one per cent of GDP. The spike before the general election in 2004 was reduced by the Fiscal Responsibility Act of 2003, but the need for a fiscal stimulus in 2008-09 threw off that restraint before the general election of 2009.

The next pre-election year for the Centre, by the formal electoral timetable, is 2013-14. The current year 2012-13 is not, unless the term of the present government is cut short, and the previous year 2011-12 was not. Yet, the fiscal deficit last year was 5.9 per cent and this year, we are looking at 6.1 per cent without urgent mid-year correctives. The current account deficit (CAD) on external payments, other things remaining the same, is the twin of the fiscal deficit (more correctly, the revenue deficit, and of the Centre and states taken together). The CAD stood at 4.2 per cent of GDP last year, and could be as bad this year. The CAD is a measure of our dependence on capital inflows if we wish to hold the external value of the rupee on an even keel. Until the flurry of policy announcements in September reactivated capital inflows, the rupee was falling in value.

Faced with a macroeconomic situation out of control, the government appointed the Kelkar panel in mid-August to submit in two weeks a roadmap for fiscal consolidation and credibility. The government, in its initial reactions to the report of the panel, suggested that the needs of food security had not been factored in sufficiently. That was not the case at all. The report of the panel (of which I was a member) explicitly mentions specific demographic segments whose food needs must be protected, and supports continuance of the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). The panel pointed out the error in equating higher expenditure on the food subsidy through the Public Distribution System (PDS) with better food security for those who critically need it.

The food subsidy this year claims nearly one per cent of GDP. In part this is because of the holding cost of large foodgrain stocks, which have outrun warehousing capacity, and have already rotted in the rain. A more Kafkaesque situation can scarcely be imagined, the coexistence of hunger and rotting foodgrain stocks. The panel therefore recommended that the usable remains of these stocks be immediately distributed. And it suggested that the whole issue of food security be examined afresh.

MGNREGS, started initially in selected districts, and slowly extended to cover the whole country, was brilliant in design if not in execution. For the first time, poor households self-identified themselves by their willingness to do manual labour at a floor wage. With this, it became possible to do away with the terrible business of externally identifying which household is poor and which is not. By contrast, external identification of those not able to work on MGNREGS work sites is easily possible, and coverage of these groups will meaningfully supplement the employment scheme. Excluded from manual work are the disabled, the elderly, and pre-school children. A supplementary scheme must also extend to those who currently work on MGNREGS sites but should not, such as pregnant and lactating women.

This government was positioned, as no government before it, to ride on the MGNREGS to a new configuration of food security, which could have comprehensively covered the disadvantaged segments of the population by shaking resources out of the PDS as it presently stands, and directly targeting the disadvantaged groups mentioned above. There are Plan schemes for these groups, some like the Integrated Child Development Scheme (ICDS) of long standing, but seriously underfunded.

Corruption bedevils all these schemes, whether MGNREGS or PDS or ICDS. That is a separate issue. What is immediately needed is evidence that the government is able to distinguish between the requirements of food security, and fiscal profligacy in the name of food security. Fiscal laxity in the year immediately before elections is one matter, but when it goes on for many years, it merely entrenches inflation, in the absence of any coherent strategy to push back supply constraints. And entrenched inflation is not an election-winning strategy.

 

The writer is a retired professor of economics