India Needs A Tony Blair

Second, the budget has given a big push to the development of a consumer society. The finance minister is only speaking the partial truth when he says that lower tax rates have taken India up to the level of the Asian Tigers. Yes, the new rates are close to those in these countries. But the Asian Tigers impound, in some cases, as much as 50 per cent of the increase in provident and pension funds. Thus, the disposable income in the hands of a taxpayer is relatively small. Moreover, these countries do not encourage loans for consumer durables. But our finance minister is encouraging people to consume more and more. There is a simplistic argument that if consumption doesnt rise, how will production increase? But the question is, what type of consumption? In a country like India, consumption should increase in the form of better education, better health, environmental improvement and development of infrastructure. In the matter of the savings rate, India has a long way to go to reach the level of the Asian

 

Tigers. Also, for about a decade now, India has been neglecting infrastructure. It can be neglected further only at the cost of infrastructure. It is a sector which is capital-intensive and where economic returns are low. Investment in this sector would mean that the ICOR (incremental capital-output ratio) would remain high for quite some time despite an increase in overall efficiency due to shift of resources from the public to the private sector.

So the budget, unless its strategy is reversed, is a recipe for slow long-term economic growth. At best, it can produce a short-term, unsustainable uptrend in the economy.

The intellectual inspiration of this budget is close to Thatcherite Britain than the Asian Tigers. And what has 18 years of Thatcherism in Britain achieved? The underlying annual trend of growth rate of Britain in the pre-Thatcherite phase, and in the best years of Thatcherite rule, improved from 2.25 per cent to 2.5 per cent, according to an IMF study.

The budget should, however, be faulted more on moral, social and political grounds. It is a signal to the rich to flaunt their wealth; an encouragement to their self-aggrandisement. It is an inducement to the affluent middle class to become egoistic, socially less sensitive and forget their moral obligation to the deprived sections of society. The budget strikes out the very root of social solidarity. And this is a gift from Thatcherism, which derives intellectual sustenance from selective interpretation of Adam Smith that all economic activities are based on selfish interests. It was manifested in the most repulsive manner in Britain when top executives of corporations started enriching themselves. At the end of 18 years of Conservative rule, the British society was hopelessly divided. Tony Blair primarily touched the moral chord to make Britain once again one nation. He re-pledged the States responsibility with regard to the health scheme and education. The comprehensive defeat of the Conservatives is,

therefore, much more than the urge for change for the sake of change. It is a moral backlash against amoral values pursued during the Thatcherite era.

However, the backlash in Britain was not spontaneous. It had to wait till Tony Blair arrived on the scene. New battles cannot be fought on basis of the old paradigm, with the old agenda. Thatcherism itself was a backlash against overdone socialism in Britain. It had ceased to produce sustained growth. The State was also oversretched. It needed a person with conviction, perseverance and great communication skills to break away from past dogmas and reinvent the Left. Tony Blair did it, and he got unprecedented response. His massive victory might give some moral courage to Bill Clinton to retrieve some of the ground that he has lost. If this happens, it could impart a more human face to liberalisation and economic reform.

The Chidambaram budget is, in fact, a quantum jump over the budgets of Manmohan Singh. Dr Singh may protest now, but it is he who began the era of the State increasing the economic divide between the rich and the poor. Since the Left is weak and unimaginative, the alienation of the poor from the system has channelised itself in the most destructive form along caste lines. The reforms, as pursued, instead of healing have contributed to social fragmentation. Thus, Mr Chidambarams budget will only aggravate social tensions. Of course, these social tensions will not ease with slower growth. Higher growth will certainly help in reducing social tensions, but only if it is inter-twined with social sensitivity on the part of the rich. This can happen only if India finds its own Tony Blair who, while encouraging the middle class to use its productive capabilities, makes them realise their moral obligations to the poor. Unfortunately, at present the Left is fighting false battles and the Centre is increasingly

falling under the spell of the Right.The rich are celebrating the passage of the dream budget, and understandably so. They never had it so good. But whether the budget will lay the basis for sustainable higher growth is doubtful on a number of counts. First, on a long-term basis, the strategy of the budget, if pursued, will erode the fiscal base of the State. India needs a fiscally stronger State than the city-state Asian Tigers. The extent of poverty, educational backwardness, environmental degradation etc. in India require much greater public expenditure than city-states like Singapore. Moreover, India has a vast rural hinterland where the market will never develop the necessary infrastructure. Also, in the medium term, the State will have to partially finance the development of general infrastructure. And a fiscally weak State cannot undertake these jobs.

Second, the budget has given a big push to the development of a consumer society. The finance minister is only speaking the partial truth when he says that lower tax rates have taken India up to the level of the Asian Tigers. Yes, the new rates are close to those in these countries. But the Asian Tigers impound, in some cases, as much as 50 per cent of the increase in provident and pension funds. Thus, the disposable income in the hands of a taxpayer is relatively small. Moreover, these countries do not encourage loans for consumer durables. But our finance minister is encouraging people to consume more and more. There is a simplistic argument that if consumption doesnt rise, how will production increase? But the question is, what type of consumption? In a country like India, consumption should increase in the form of better education, better health, environmental improvement and development of infrastructure. In the matter of the savings rate, India has a long way to go to reach the level of the Asian

Tigers. Also, for about a decade now, India has been neglecting infrastructure. It can be neglected further only at the cost of infrastructure. It is a sector which is capital-intensive and where economic returns are low. Investment in this sector would mean that the ICOR (incremental capital-output ratio) would remain high for quite some time despite an increase in overall efficiency due to shift of resources from the public to the private sector.

So the budget, unless its strategy is reversed, is a recipe for slow long-term economic growth. At best, it can produce a short-term, unsustainable uptrend in the economy.

The intellectual inspiration of this budget is close to Thatcherite Britain than the Asian Tigers. And what has 18 years of Thatcherism in Britain achieved? The underlying annual trend of growth rate of Britain in the pre-Thatcherite phase, and in the best years of Thatcherite rule, improved from 2.25 per cent to 2.5 per cent, according to an IMF study.

The budget should, however, be faulted more on moral, social and political grounds. It is a signal to the rich to flaunt their wealth; an encouragement to their self-aggrandisement. It is an inducement to the affluent middle class to become egoistic, socially less sensitive and forget their moral obligation to the deprived sections of society. The budget strikes out the very root of social solidarity. And this is a gift from Thatcherism, which derives intellectual sustenance from selective interpretation of Adam Smith that all economic activities are based on selfish interests. It was manifested in the most repulsive manner in Britain when top executives of corporations started enriching themselves. At the end of 18 years of Conservative rule, the British society was hopelessly divided. Tony Blair primarily touched the moral chord to make Britain once again one nation. He re-pledged the States responsibility with regard to the health scheme and education. The comprehensive defeat of the Conservatives is,

therefore, much more than the urge for change for the sake of change. It is a moral backlash against amoral values pursued during the Thatcherite era.

However, the backlash in Britain was not spontaneous. It had to wait till Tony Blair arrived on the scene. New battles cannot be fought on basis of the old paradigm, with the old agenda. Thatcherism itself was a backlash against overdone socialism in Britain. It had ceased to produce sustained growth. The State was also oversretched. It needed a person with conviction, perseverance and great communication skills to break away from past dogmas and reinvent the Left. Tony Blair did it, and he got unprecedented response. His massive victory might give some moral courage to Bill Clinton to retrieve some of the ground that he has lost. If this happens, it could impart a more human face to liberalisation and economic reform.

The Chidambaram budget is, in fact, a quantum jump over the budgets of Manmohan Singh. Dr Singh may protest now, but it is he who began the era of the State increasing the economic divide between the rich and the poor. Since the Left is weak and unimaginative, the alienation of the poor from the system has channelised itself in the most destructive form along caste lines. The reforms, as pursued, instead of healing have contributed to social fragmentation. Thus, Mr Chidambarams budget will only aggravate social tensions. Of course, these social tensions will not ease with slower growth. Higher growth will certainly help in reducing social tensions, but only if it is inter-twined with social sensitivity on the part of the rich. This can happen only if India finds its own Tony Blair who, while encouraging the middle class to use its productive capabilities, makes them realise their moral obligations to the poor. Unfortunately, at present the Left is fighting false battles and the Centre is increasingly

falling under the spell of the Right.