Freebies, Sustainable Human Development and the Need for Structural Reforms: edited version of an Interactive Panel organized by Kamal Malhotra at the request of Navin Berry, Editor, Cross-Section Conversation: The Big Picture in New Delhi on February 2, 2025.
In an exclusive conversation held immediately after the announcement of the Indian Union Budget 2025-26 on February 1, 2025, and while Freebies were Raining Heavy on the electorate in the lead up to the Delhi Union Territory elections on February 5, 2025, an expert group comprising three leading economists came together to discuss freebies, social welfare reform and sustainable human development.
Our Panelists included:
Dr. Rathin Roy, eminent public finance economist and former member of the Prime Minister’s Economic Advisory Council. Rathin was also a senior Policy Advisor in UNDP. He is currently, Distinguished Professor, Kautilya School of Public Policy in Hyderabad, and Senior Fellow, Overseas Development Institute, London. He is also a regular columnist at the Economic Times.
Dr. Santosh Mehrotra, a leading labour economist, former Secretary, Planning Commission, and Professor, Jawahar Lal Nehru University. He is also a former advisor to UNDP and UNICEF and is currently Visiting Professor at the University of Bath in the United Kingdom. Santosh is also a noted newspaper columnist and commentator.
Kamal Malhotra, an eminent political and development economist, who is currently Senior Fellow at Boston University Global Development Policy Centre. He is a former Head of the United Nations and the UN Secretary General’s Representative in Malaysia, Turkiye and Vietnam. Prior to these positions, Kamal was UNDPs Senior Adviser on Inclusive Globalisation in New York for many years. He is also a major commentator on national political economy and global geo-political and geo-economic issues in both Indian and international journals and other publications.
Navin Berry, Editor and Moderator, Cross-Section Conversations: The Bigger Picture.
Navin berry: The first question for the non-specialist and relatively uninitiated is how are you going to distinguish freebies from what you may consider social welfare or sustainable development? Santosh, would you like to make the opening remarks?
Dr. Santosh Mehrotra: I would call all freebies bad freebies. The word freebie itself is not a very useful term because it’s not used in the literature that the three of us are familiar with. It is a political term. We would all probably agree that there is a role for the state in providing health and education services and in providing basic minimum housing. If some poor people don’t have access to food or clothing, the government could do something about that. But these are private goods- food, housing, clothes. It is not the job of the government to provide these. Unfortunately, our governments have gotten into the habit of providing freebies in the last six years or so beginning with PM Kisan, when we began making cash transfers. A government which resorts to freebies in the form of cash or food, which are private goods, is essentially admitting that it has failed to provide what it’s supposed to provide. What is it supposed to provide? I am sure it is clear to all of us that it is supposed to provide health and educational services. The rest people can find if they have a job.
The government’s role is to make it possible to have income on a sustained basis through jobs. When it fails in that, it’s going to start giving cash. I’m not suggesting for a minute that some people don’t need such cash. There are millions, hundreds of millions of people in this country who need more and more of this. But it means that not enough jobs are being generated.
I was part of the Government of India between 2004-2014. Jobs were growing at the rate of 7.5million per annum. And the reason for this was that there was a growth process, which was not only fast, but tended to be inclusive. It wasn’t as inclusive as we would have liked it to be. We would’ve liked government to give more health, more education. But while the government of that time failed in doing so, it at least provided jobs with rising real wages. Poverty was falling. People were able to provide for themselves.
Dr. Rathin Roy: I agree with everything Santosh has just said but let me add to it by giving you an interesting example which the lay person should understand. My first exposure to freebies came with the Indian middle class. I will mention some names in this city, assuming that your primary audience is in Delhi.
The Delhi Gymkhana Club, Panchsheel Park, Chittaranjan Park, the IFS colony were all public properties willingly handed over to the elites of this city. Panchsheel Park South was given to ex-officers of Punjab irrigation. Chittaranjan Park was allegedly given to refugees. I lived there for 4 years but never met a refugee. It was given to Bengali civil servants who worked in government. The IFS colonies were given to IFS officers. Nobody called these freebies then.
The upper class in this country has received a lot of freebies. I wouldn’t use this term for when people who are relatively less fortunate get something from the government that people like us are used to buying by going to the market. They got it from the government because they could not go to the market and buy it.
In 1991, everything changed. But who did it change for? It changed for people like me. There was a massive change in the relative prices of goods and services that people like us bought. When I joined my first job in India, I was earning Rs. 3000 a month. The price of a basic model Maruti car was three and a half times my annual salary then. Today the same entry level government job pays around Rs. 65,000 rupees a month. A Maruti car costs four lakhs. That requires only seven months’ salary now. So, from an affordability perspective, its cost has reduced from three and a half years salary then to only seven months’ salary now for an entry level employee in that job.
The same positive change has not happened for the more unfortunate people. And therefore, this imbalance in the relative prosperity of people like us and them is also motivating governments, as a national security measure, to provide some basic goods and services for free to such people because they have failed to provide them prosperity.
Navin Berry: Kamal, how do you react to the last bit? The privileged did have access to jobs, but more and more people today don’t have jobs or don’t have an opportunity?
Kamal Malhotra: I agree with what both Santosh and Rathin have said. I certainly view India’s biggest economic challenges as what I call the three U’s and the two I’s: unemployment, underemployment, unemployability, ill-suited employment- PhDs applying for jobs of peons, which seems to be an increasing trend– and what the ILO doesn’t even regard as employment, but which India regards as employment, which is informal unpaid work. The latter has seen a huge increase, particularly people going back to agriculture, particularly women going back to agriculture. Instead of a structural shift from agriculture to industry and manufacturing, what we’ve seen is the opposite.
Going back to what Santosh said, in those 10 years of the UPA government, while things may have been going slowly, at least they were heading in the right direction overall. People were moving from agriculture to industry. Jobs being created may not have been fast enough. But we didn’t have this conversation about freebies then, you know, freebies may have been given, but they were not dominant.
Navin Berry: How and what were the freebies that were initiated by the Aam Aadmi Party (AAP) when Kejriwal said, I’ll give you 200 units of free electricity?
Kamal Malhotra: Let me make a slight distinction between freebies, which purely as a dictionary definition are something given free of charge or taken free of charge from the kind of social welfare reform which Kejriwal and AAP say they have been providing. I want to distinguish between free health clinics and giving free bus rides to women and pure freebies like giving monthly cash handouts to women which now all political parties are promising in the run up to the Delhi elections.
At least by giving free bus rides to women, you’re probably increasing women’s participation in the labour force. But it’s still a freebie. It is not a long-term sustainable solution. If you are going to have sustainable human development, and all three of us have worked with UNDP in the past, which is where the paradigm of sustainable human development originated and still resides, then you need to have structural transformation. You need to deal with the structural issues that are facing the country. Freebies are the opposite of dealing with structural transformation. Giving them is the opposite of dealing with capacity building. In addition to health and education, you must build the capacity of people. They will then get jobs because they will have capacities and capabilities.
Navin Berry: There is a vast multitude of our people who are in need, let’s say, of medical attention. You have the Mohalla clinics all over Delhi. If you wait to provide sustainable development, as you say, through jobs and the like, it may take time and become too late to allow them access to some of the medical facilities they need. They may remain deprived for very long.
Dr. Santosh Mehrotra: I agree with you. But what we are saying is that it is not an either/or. We must provide jobs and health and education services almost as basic rights. While a job is not a right in the same sense as the other two, the government must create the enabling environment for job creation. When economic activities get generated, jobs will be created.
Health services should have been provided by state governments, supported by the central government. Neither unfortunately took up that responsibility. The Delhi Mohalla health clinic is a very good thing but it’s perfectly possible to upgrade many of the health services that are being made available there. Let’s not forget, this is the capital of the country which we claim is the fastest growing large economy in the world. And this is one of the richest cities of this country. So, if there is any place which should have provided health services of a proper kind, not just based on Ayushman Bharat Insurance, it is Delhi. I’m sure those of us who have lived in the United States know how expensive a health insurance-based model is. You must think of this much more comprehensively and sustainably.
Dr. Rathin Roy: I completely agree. I would add that if you come to the south of India where I live, you will notice that public hospitals are good. I have never used a public hospital in Delhi, but I’m told they are horrible. But that is not the case in Chennai or Hyderabad. The quality of the public hospital service is commensurate to the best private hospitals. Given the higher annual average per capita income in South India of about USD 3500 per capita, I am not expecting UP public hospitals to have the same quality. But the question is, did the Southern Indian governments deliver that level of public healthcare and are they delivering cardiac services, for example? When my mother-in-law had COVID, I was very impressed. There was not much difference between Apollo and Stanley Hospital in Chennai where she went. And my friends in the IAS told me to take her to the government hospital in Chennai since it is better than going to Apollo. He was correct. So, Delhi is behind the curve in this respect. Why don’t they provide a whole of government solution in Delhi?
Dr. Santosh Mehrotra: This is a northern state phenomenon where there is very serious, long historical neglect of both health and education. This is the biggest difference between the North and South of India. The way that society has evolved in both regions is different. We need to remind ourselves that if Kerala, Karnataka, et cetera, are doing much better in economic terms, meaning in average per capita income and economic growth terms, it is because they invested in health, education and other aspects of human development such as nutrition early in their development process. And they’ve sustained that. While the North did not. And believe it or not, the North is growing slower. Forget about Delhi. Delhi is a not a northern state. Delhi and Punjab are not typical northern states. You should think of the Hindi heartland. Why is Delhi full of migrant workers from Bihar and UP? Because they can’t get health and education or jobs in their own cities.
Dr. Rathin Roy: John Maynard Keynes, the father of public finance once said something very profound about public finance and affordability which I have had to repeat to many politicians in my life. If you can do it, you can afford it. I had to say this to the government of India during COVID, when many people were advocating spending a lot of money. The problem of affordability comes when you cannot deliver something. Now what Kejriwal has shown to his credit, apparently, is that he can deliver some services. If you cannot deliver something and you spend money on it, you’re going to waste it. So, the correct question to ask is, can you deliver?
Dr. Santosh Mehrotra: What Kamal and Rathin have said complement each other. Kamal was talking about building the capacity of people to get jobs. It’s not just the capacity of people to get jobs. It is also the capacity of the state to deliver the basic health and education services that are expected from them at an affordable price. There are vacant posts in health and education in all the Northern Hindi belt states. It’s unlikely that you will find that many vacant positions in Delhi or in Tamil Nadu. They spend the money. That salary must come from the state government’s budget. That is why the state subject issue is so important.
Kamal Malhotra: I think that what the Delhi Mohalla health clinics have shown is that it is possible to deliver basic health services to everyone at an affordable price. You then need the fiscal space to sustain it. During the last few years and during COVID, one of the reasons that Delhi was able to do better was because of the Mohalla clinics. But you need to address the current Centre-State government tussle on fiscal space.
Navin Berry: In the current run up to the Delhi elections, all the three major political parties are competing on freebies. The BJP, Congress and AAP have all offered a lot of them. One political party is offering a two and a half thousand-rupee cash handout for women per month. Another is saying something else. Where will this take us?
Kamal Malhotra: I think that neither of them is dealing with the structural issues.
All political parties are indulging in competitive populism because of which, because one political party offers cash, the other parties feel compelled to increase it. This happened in Maharashtra in 2024. It’s not just happening in Delhi. No one, not even our parliament, is discussing the structural issues that must be dealt with or begun to be addressed. If you are serious about moving India ahead, forget about Viksit Bharat 2047. Even achieving middle income country status, which defined purely in annual average per capita income terms means 5,000 US dollars, is a challenge. India is at half of that right now. Forget about attaining USD 14,500 which is the lower end of the “developed” country annual per capita income threshold. India cannot even move to even 5,000 US dollars per capita without necessary structural reforms. Currently, all political parties are only engaging in competitive populism. This is the challenge for all political parties and the challenge for India. It is a challenge for the Parliament to even discuss these things, let alone come up with policies to address them. It is also the challenge for the Union Budget. It is the challenge for the country as a whole and it is not being addressed by anyone.
Dr. Santosh Mehrotra: Kamal is right. If you keep asking us about the Mohalla clinics, the good thing about them is that AAP have attempted to follow the WHO and World Bank model for basic preventive and curative health care which these institutions had come up with long ago. And they’re doing it not so badly at all, which is the reason why they have got traction among the relatively poor and the bottom 50% of Delhi’s population is very much behind them. But there is a secondary level beyond the Mohalla clinic. The system begins to break down there in Delhi. Beyond that, there is the tertiary level of healthcare. It breaks down almost completely there.
We had great hopes 10 years ago when AAP party emerged. Unfortunately, it has become a party whose only ideology is what can be called “soft” Hindutva which was so much in evidence during the Delhi riots in 2020 when they didn’t say a word against all the racial incitement.
You live in this city; you know the role that the AAP has been playing in all non-Delhi constituencies. The point is that everywhere else where they have entered the fray, because they’ve become a national party, they’re unfortunately undermining the INDIA alliance.
Navin Berry: Kamal talked about sustainable development and structural change which are essential to bring about long-term development. This obviously means providing adequate, decent and appropriate jobs. Kamal’s three ‘U’s require a larger understanding of what we need to do to address those. What kind of structural reforms are essential? Secondly, it was mentioned in another context that 1991 was a path breaker. It cut the umbilical cord and said out we go.
If you’re looking at structural changes, do you think they will happen as a cut from the past or can they be phased? My second related question to this is what Kamal again referred to: the need for dialogue between the political parties who should engage in a conversation because the kind of change which is necessary can only happen if there is some kind of consensus or a larger understanding which is not based on a single party mandate but a national mandate.
Dr. Rathin Roy: 10 years ago, if I went to the Planning Commission and asked the economics team there, what will be India’s GDP in 2028— not 2047— and what the share of agriculture, industry and services in it would be– that’s all— I would get an answer. I could disagree with them, but I would be able to debate these issues. Today, Niti Aayog, which replaced the Planning Commission of India cannot accurately tell me what the GDP of India and the share of these three sectors three years from now will be, let alone in 2028.
I will also give you an example of one of the consequences of the structural problems that Kamal has contoured very nicely in those three ‘U’s and two ‘I’s. The per capita income of the state of UP and the state of Bihar are less than Nepal. And so is their human development index. Last I heard, Nepal was a poor country. On the other hand, the per capita income of Tamil Nadu and Kerala are almost the same as Indonesia which is the second poorest country in the G 20.
Tamil Nadu and Kerala are moving towards middle income country status. UP and Bihar are stuck at the level of Nepal. This should bother the politician. Why? Because most of our population lives in places which are like Nepal or poorer than Nepal. The minority live in places which are like Indonesia. I have looked at the history of the world in the 20th century to identify similar countries. America is not like this. Most of the population in America lives on the coast, which is the prosperous part. In Europe, relatively few people live in Ireland, Greece or Portugal. Most people live in G7 countries such as the UK, Italy, France and Germany. It then becomes very easy for the majority prosperous to subsidize the minority, not so prosperous. In India, you’re asking the minority prosperous to subsidize the majority who are not prosperous. We should really be worried about this. Why? The only other two countries or groupings I know which were like us have the word “former” attached to them. One is the former Soviet Union, and the other is the former Yugoslavia.
I tell the politicians, be very careful. It is a sinister path that we are going down. If you don’t take this seriously and you don’t even know what the GDP of India is going to be in three years, then you’re going to have some pretty ugly politics in this country. This is the year when we will have more young people in education than ever before. This is the peak of our demographic dividend. And I would say 85% of our youth cannot avoid Kamal’s three ‘U’s and two ‘I’s.
They are related to some really depressing numbers which I monitor. The number of people between the ages of 15 and 29–all India– who are neither in education, employment or training was 150 million last year. I don’t know how much it is now.
Dr. Santosh Mehrotra: Well, it has come down to 100 million if it makes you feel better. But the point is, six, seven years ago, that number was 50 million. It has doubled in this period. What is the implication? There are at least three additional groups, other than this one, who need to be provided non-farm jobs. Kamal is so right to have pointed the finger at the jobs related challenges. The data tells us that these people are willing to work, but they have stopped looking for work. So, they’re discouraged workers. When we say that there are over 100 million of them and just six, seven years ago they were 50 million, you can imagine what the implication is. All of them must be provided jobs.
Three other groups must also be provided jobs. The first group of course consists of the young who are still willing to work and looking for work. This country wasn’t as populous as it has now become. Please remember that in 1950 after partition we were a much smaller population than China. China was 550 million. We were 350 million. Look where we are now. We have become the most populous country in the world. How did China control their population? The basic thing that you need to remember is that they achieved this largely through health and education. And we didn’t invest in that. And we are continuing to pay the price for this.
Let me come back to the larger issue. How many jobs must be created? China which has a big population has managed to create jobs for their young. We haven’t, we are failing in providing jobs for our young.
We need to appreciate how many people need jobs and who they are? The second group consists of those who are entering the workforce with better education. The third group consists of all those who in 2019 – 42% of our workforce– were contributing 15% of our GDP in agriculture. What does that mean? It means that productivity in agriculture is extremely low, much lower in India than in China. And much lower than in any Southeast Asian nation, forget about America. Therefore, six years ago we had no choice but to pull workers out of agriculture. But as Kamal rightly reminded us, 80 million workers were instead added to agriculture in the last four years alone. What were 200 million has become 280 million. The government tells us that they have created 8 crore (80 million) jobs in the last four years. I asked one of their chief economic advisors, how could you create so many jobs when no one else in the world was generating jobs during Covid? How did you manage to do that?
Navin Berry: But the fact that they went back to agriculture, how does it become a truism that they have a job?
Kamal Malhotra: India categorizes informal unpaid work as jobs, but such work is not classified as employment by the ILO or according to universally accepted international standards.
Navin Berry: If it’s unpaid, then obviously it’s not a job.
Dr. Santosh Mehrotra: Kamal is talking about a separate issue, which is in addition to the people going back to agriculture. He appropriately pointed out that structural change was reversed. There was a process of structural change that was going on all the way till 2015. But thanks to policy induced shocks, we slowed that process down. The growth rate fell, non-farm job growth fell, and then we sent 80 million back to agriculture. It does not end there. Manufacturing jobs fell in absolute terms as well. This had never happened after 1991. Since 1991, manufacturing’s contribution to gross value added (GVA) was 17% and continued to be so for 25 years after the economic reforms. But it came down first to 16%, then 15%, 14%, and then to 13% of GVA. The absolute number of manufacturing jobs has fallen. To address these challenges, we must first recognize that they are problems.
Kamal Malhotra: I want to come back to something that Rathin said. I was recently in Hyderabad, and before that in Tamil Nadu. I’ve been to Kerala many times. We have these three states which have, in different ways, had much more success than any state in the north or the east of the country. There are things that the North of India can learn from Kerala. It has the highest human development index scores in India and zero poverty – like some developed countries. Hundred percent education and health. You have Tamil Nadu which is doing quite well in manufacturing. It has also provided a healthy, educated population and its manufacturing has a focus on small and medium enterprises. You’ve got some parts of Andhra Pradesh that we can also talk about. So, there are clear success stories in India that can be learned from by the north, but they are not learning from them partly because most of these are opposition led states.
Navin Berry: So, my question is it at some level is this a state subject?
Dr. Santosh Mehrotra: It is a whole of government concern.
Kamal Malhotra: There is a lot to be learned from the southern states on the population issue also. It’s ironic now that Chandra Babu Naidu says that everyone in Andhra Pradesh should have three children. This is because they have been successful in reducing their population size. But if you want to learn what should be done on human development indices, Kerala has been an example of a state with a high human development index for decades.
Dr. Rathin Roy: Just to supplement what Kamal is saying, there’s one conversation I’ve been trying to have with entrepreneurs in Tamil Nadu for many years now. The shirt I’m wearing costs 3000 rupees and is made in India. If you want to wear 300-rupee shirts, we import them from Vietnam and Bangladesh. So, I went and asked the Tirupur industrialists why they didn’t make 300-rupee shirts. They said that their wage rates are too high. So, I said, if your wage rates are too high, go to UP and Bihar since wage rates are very low there. Then they said, no, we don’t have the skills there. I said, obviously you have the skills there because all the migrant labour on your shop floor are people from UP and Bihar.
Then the real story came out. They’re not comfortable working in the social and political environment of North India. This is a solvable problem. This is where the central government can come in and do some genuine cooperative federalism.
Either workers from UP and Bihar must come and settle in the South or capital will have to move from the south to the north. The former is unlikely for cultural reasons and because they do not speak the language and there is no interoperability. The latter is a very good example of a structural solution, which is not happening now. And this is the kind of thing that the Government of India should be concerned with.
Dr. Santosh Mehrotra: Has anyone, including Niti Aayog or the Finance Ministry, given us a roadmap to Viksit Bharat 2047? How are we going to get there from our low middle income status? How does India want to get there?
The problem is that there is no institution which can do vision building for this or which is thinking of bringing different political parties, the right domain experts and the states together to discuss a draft plan for the next five-year period which we can then use to convert into an annual plan. These types of issues used to be debated and discussed in the Planning Commission, and we used to put money behind it.
Kamal Malhotra: One criterion to measure whether Viksit Bharat is attained is average annual per capita income. I stress that it is only one criterion, because to be called “developed”, a country must satisfy multiple criteria. But even if you measure such status in purely narrow per capita income terms, the World Bank uses USD 14,500 US average annual per capita income as the minimum. Most economists, and I agree with them, believe that to really qualify as “developed”, a country’s annual average per capita income should be around $25,000 to $30,000. We are now at only around $2,500. That is why I said at the beginning; we should first have a plan to get to $5,000 which is middle income status.
Navin Berry: Should our aspirations go state-wise, is that a better course?
Kamal Malhotra: Some states in South India are already there since they are above India’s average. Kerala also already has a 14th five-year plan. India’s annual average per capita income is brought down heavily by the north.
Dr. Rathin Roy: Before this tax cut, people started paying tax when they earned three and a half times the average per capita income of India. Now, after the new Union Budget, they will start paying tax when they earn six times the annual average per capita income of India. The people who should be taxed are getting the tax cuts. When we were taxed at three and a half times the per capita income I said our per capita income is obviously so low that even somebody earning three times the annual average was so poor that you could not tax them. Now, after 10 years of this government, the government is saying that six times the annual average per capita income is too low to be taxed. In England, taxation begins at one third the per capita income. There is no country in the G 20 where somebody earning the average annual per capita income is not taxed.
Kamal Malhotra: Rathin’s point is very important because it brings us to the tax discussion and to yesterday’s annual Union Budget announcement for 2025-26. My overall view is that the Budget is not seriously dealing with any of the structural issues that we’ve talked about. There is nothing much in the budget to even begin to address these. And on the tax side, in my view, the tax cut announced is a regressive move because the people who need the tax break are not those paying personal income tax but the ones who do not earn enough to pay personal income tax but are forced to pay the GST, which is a regressive tax.
Also, the people who need to be taxed more are those who pay corporate tax. This fell in 2019 and hasn’t been raised since. So, a lot of the rich, the oligarchs who hide behind the corporate tax are not being taxed enough. There was no tax increase for them.
Today, in all the newspapers, much is being made of this wonderful tax break for the middle class. People who earn Rs. one lakh a month should not be the focus. In any case, they are a small number, so to expect that by giving them a tax break, you are suddenly going to significantly stimulate demand and consumption is just incorrect.
Dr. Santosh Mehrotra: But this is the logic of the government. That this is going to raise consumption and therefore investment is going to rise suddenly. Why is it that it is not going to significantly raise consumption? Firstly, only 5% of our total workforce pays income tax. We may say 15% of our workforce is middle class. But who pays income tax? I’m saying only 5% because out of the 80 million who are filing returns now, only 30 million of the 600 million work force pay tax. Now you’ve given them a tax break. How much are such a small proportion of the population going to contribute to an increase in consumption?
Moreover, in real terms, health and education expenditure on which the Union government should spend is lower in this budget.
Dr. Rathin Roy: Let me give an example to supplement that. The revenue foregone because of the middle-class tax cut is Rs. one lakh crore by the Finance Minister’s own admission. This year, the central government will spend 1 lakh 20,000 crores in education – which means you could have almost doubled the education budget if you had not given this tax cut. Our total annual spending on rural development is 1 lakh 90,000 crores. So, if you had not given this tax cut, you could have increased the rural development budget by 50%. That is the kind of anti-poor choice that this budget has made.
Also, a large proportion of our consumption basket is imported. There is a huge leakage happening there. If I’m going to drink scotch whisky, I can’t make it in India. I must import it. My kids are not going to study in India. My kids study abroad. I must import that education. So, in the average taxpayer’s consumption basket, the richer you are, the greater are the total amount of imports that you consume.
Kamal Malhotra: I want to elaborate on that and the implications for the current account deficit. What is going to result from this tax cut for the people who earn up to Rs. 12 lakhs a year is an increase in import content, which will make the current account deficit worse, put pressure on the rupee to depreciate further, lead to higher imported inflation and therefore higher domestic interest rates.
India is already a trade deficit country with most of the world except the United States. In the case of the United States, Trump is already implementing higher tariffs against China and has indicated that he plans to implement them against Canada and Mexico. India will also face higher tariffs for certain products because it has a trade surplus with the US. But India’s a trade deficit country with the rest of the world, especially with China. Its overall trade deficit will, therefore, rise.
Some of those who benefit from the middle-class tax cut will use their resultant savings to buy more Harley Davidson motorcycles, import tariffs on which have been reduced in the budget as a direct pre-emptive concession to Trump who put a lot of pressure on India to reduce tariffs on Harley Davidson imports, a luxury import.
Going back to structural issues, the budget did not address why foreign investment is deserting India. Nor did it deal with why domestic investment has not been crowded in by public investment. These challenges will not be solved by consumption going up because we don’t have a level playing field for investment. People are not going to invest in an industry that has Ambani or Adani or some oligarch because they know it’s not a level playing field for them. We don’t have legal predictability in investment rules, either. Tax and other instruments of the state as well as certain investment and other laws are also perceived as being used by the government selectively against certain foreign and other investors and even retroactively. None of this is a recipe for bringing in foreign investment or even crowding in domestic investment through public investment. People keep asking, why has foreign investment been leaving? Why are domestic investors going overseas? Unless you deal with these issues, you are not going to solve those problems. Nor are you going to solve them by reducing the tax on people earning Rs. one lakh a month.
Dr. Rathin Roy: We haven’t obviously solved our multidimensional structural problems ranging from employment to health and education. Now I’m learning that we have structural problems on the external account as well. We have structural problems everywhere.
Navin Berry: But coming back to Kamal’s observation about the reluctance of investors to come into those industries where there’s a likely lack of a level playing field, would you call it a structural problem or temporary, depending on other factors?
Dr. Santosh Mehrotra: This government has made it into a structural problem. We cannot go back to the trajectory which we were on. We should remind ourselves that we were growing fast and had we continued to grow fast, we might have been the third biggest global economy today already.
Secondly, for 12 years between 2000 and 2012, we were generating seven and a half million new non-farm jobs annually. Unfortunately, between 2000 and 2004/5, we also kept adding workers to agriculture which was not so desirable, but at least non-farm jobs were being generated. That whole process has been set back. The government is pushing “national champions” but unlike in South Korea or Japan in the past they are not in manufacturing, nor are they compelled to export. RPIL and EIL are unfortunately not expecting them to export. That just happens in some cases. Third, we are subsidizing our big corporations who are largely operating in the space of capital-intensive infrastructure or power and not creating many jobs. That’s no good. They are not producing very much, let alone doing R& D. South Korea’s national champions used to invest in R & D.
Kamal Malhotra: Many of our large corporates are in low job creation, capital-intensive infrastructure.
Dr. Santosh Mehrotra: We need to think about R&D also. But first, our approach must be to at least do what was being done correctly between 2004 and 2014. Private investment was growing, and it was growing not just by the corporates. No one was necessarily being favoured on a big scale like now. Some were being favoured. I’m not denying that. But the organized sector was growing rapidly. Corporate investment was growing and micro, small and medium enterprise (MSME) unorganized sector investment was growing, with jobs being generated. Because of that, the labour market tightened, and real wages were increasing. This government’s policies have resulted in real wages in every sector and for all types of workers remaining flat for eight or nine years.
The share of the self-employed, under this government, has gone up from 52% to 58%. Which is the worst form of employment because most of these self-employed are “own account” workers and the others are unpaid family labour, which is what Kamal was talking about. Unpaid family labour means women, children, and even youth who have been educated but are in unpaid family labour because there are no non-farm jobs, and they don’t want to be in agriculture. So, these are the crises. The focus must be on MSMEs as it was then. If that starts happening, jobs will be generated and private investment will also revive.
Navin Berry: Coming back to our question of freebies. Hearing all the discussion that we’ve engaged in over the last one hour, how would you like to sum up the question of freebies? The need for structural change in the way we are running the economy, providing jobs. Seems jobs is the big issue.
Dr. Rathin Roy: You don’t create jobs, activities create jobs. So, you must ask what kind of activities do we need in this country? So let me say to you in this context what the problem with the state is. Once upon a time when I was a young man, we had a state that was interested in developing the country, in transforming the country. And development is nothing else except what the Prime Minister said when he came into power. ‘Sabka Saath, Sabka Vikas’ – everybody becomes more prosperous. Today we are in a situation where for the first time in my adult life manufacturing’s share is so low. There are so many people in agriculture. First time in my adult life that the research shows that the probability, at all levels of income, of the next generation having a better life than their parents is very low. It’s only 20%. In my generation, or before, we knew that we’d be more prosperous than our parents. That has flipped.
So, we have moved into a model where in the absence of prosperity, the state is now engaged in what I can only call Victorian charity. Until we can come up with a blueprint to reclaim the development state, the most important engine that will transform the lives of people in this country will continue to fail. Because the state is our collective instrument to take this country forward. And if the state is in the business of compensation, then until we change that process of the state and get it back in the business of development, we are not going to solve our structural problems.
Kamal Malhotra: I think the key is we need a developmental state, not a compensatory state. But that can only happen with structural changes in at least five big areas. First, of course, are the three ‘U’s and the two ‘I’s – employment in a broad sense, not just jobs, but decent ones, which means organized sector jobs in a very significant proportion, which you can only have with small and medium enterprises having a much greater role.
A second area is the fundamental overhaul of primary, and especially secondary, education. Coupled with at least a doubling of the budget in terms of the percentage of GDP that is allocated to education. It has gone down in this budget to 2.5% of GDP. It really needs to be 6%.
Third is the MSME policy. There is something on MSME’s in this budget, but it’s more about increasing the category of those that can now be classified as MSME and some credit related support. But credit is just one part of the necessary support system for MSME’s. They need support in many areas. Credit of course, effective regulation of big corporates, market deregulation for MSMEs in terms of making procedures simpler for them, tariff protection for a fixed period for certain products, export incentives, technology policy, to name six areas. The MSME policy to be effective, must be much more comprehensive than it currently is.
Then of course, public health. The budget that goes to public health expenditure as a percentage of GDP is less than 2%, far less than the government’s own 2025 benchmark of 2.5% announced in 2017, which itself was very low.
And then the whole area of agriculture and rural industry, with such a large percentage of the population there, with too many of them doing very little or nothing. India has got to transform both its agricultural productivity and employment.
The government also has to more seriously address the issue of where its sustainable revenue is going to come from. It cannot come from the kind of tax policy that this budget reflects. It can only come from progressive taxation of the rich, on corporates, on millionaires and billionaires. The tax policy must also allow for reduced tax receipts from a rollback of GST which is a regressive tax.
Dr. Santosh Mehrotra: I just want to remind everyone about the trajectory of what we call the rich countries today. If we want to become a rich country, we must seriously study the historical trajectory from 1880 to 1980 of the now rich countries. Their per capita income was growing gradually, but as per capita income gradually increased, the size of the state also grew. Total public expenditure as a share of GDP grew from about 10 or 11% of GDP in 1880 to 40 to 45% in 1980.
The growth of the size of the state in terms of public expenditure as a percentage of GDP was driven by three forces: public health expenditure, public education expenditure, not higher education but school education and then a little bit also on higher. And thirdly, social transfers. These include two things, one of which you can think of as freebies i.e. social assistance. The other is social insurance which is essentially social security. 90% of our workforce is still without this e.g. pension, death and disability insurance or maternity benefits. We need to keep this in mind because our demographic dividend is ending. We are about to become an ageing society by 2040 like the rich countries.
That’s something that we should be focusing on. Instead, we are giving cash handouts and these other freebies. It is not the solution because what it is doing at our level of per capita income is diverting resources, not just from health on which we currently spend only 1.3% of GDP, Centre and States taken together, contrary to the 2017 national health policy of this government’s commitment of 2.5%. So, we are at half or less of what we should have been today by the government’s own target.
The 2020 new education policy of this government committed to 6% of GDP. It used to be 4% in 2014 when this government came to power, Centre and States taken together. It is now 2.5%. It was 2.9% till a few years ago. It is only dropping as a proportion of GDP.
The size of the state is very small. You don’t have teachers in public schools or universities. They keep opening and expanding the number of schools and there has been a massification of both schools and universities, but teachers are not appointed because the government does not have the money, and they can’t find qualified people. This is not how we are going to solve the problems of health and education.
90% of our workforce doesn’t receive and will not receive any pension because they’re not contributing anything to it. And the state must begin to provide for this. It’s perfectly feasible fiscally for the state to do it. Along with, of course, employers contributing also. But no one is thinking about this problem. This is extremely tragic. Finally, if you are going to keep distributing cash for this, cash for that free; that is the opposite of a model of social insurance which is partly what the success story of the rich countries has been.
Kamal Malhotra: I just want to say one last thing. Many of these should be treated as rights. The Right to Education was enshrined more than 10 years ago. It has not been fulfilled. The Right to basic health is in India’s Constitution. They cannot be treated as “Modi ki guarantee” or “Kejriwal ki guarantee” which is the language in use now. That is saying they are gifts, not rights.
