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C3S Founders' Memorial Lecture: Challenges before the New Government 2024: Shri M R Sivaraman

Updated: Jul 5

Shri M R Sivaraman IAS (Retd.), Former Revenue Secretary, Govt of India and ED IMF


30/2024

                    

The new govt has to face challenges in three dimensions political, economic and international. There is also a time dimension to reckon with.

                     

The government that the people of India have elected is not a majoritarian one but formed by a coalition of like- minded parties. Decision making would necessarily not be swift but would require agreement amongst the partners. Fortunately the partners are forward looking but with a different set of goals for their respective states like TDP has different goals for AP and Bihar a multiplicity of objectives. The opposition is strong and therefore the government must respect the voice of the opposition unlike in the previous period when most laws were passed without real debates. Opposition also has to be responsible and responsive and not merely create a ruckus and walkouts. The country would stand to benefit by the combined strength of the government and the opposition. It is the government that has to take the lead.

                 

On the economic front the government has to sustain the growth momentum, ensure that the growth reaches all, employment is generated and both  in  a way that  the inequality in incomes is perceptibly reduced. This requires a multi- dimensional approach.


                 

AP  and Bihar both want special category status. This category of states during the Planning Commission period got special treatment on account of the various handicaps they suffered in attracting investment into their states, They were J&K, Himachal Pradesh, Uttarakhand and the North Eastern states. They got excise duty concessions to attract industries. The Planning commission which finalised the annual plan budgets of every state also assigned higher level of plan grants to the states. In addition the grant element in the centrally sponsored schemes were 90%.The planning commission grants to other states were on the basis of the Gadgil formula. Since the Planning Commission was abolished these arrangements also ceased to exist. Taking note of this paradigm change  the allocation of resources to the states required an equally radical change. The 14 FC increased the tax share of the states to 42% to ensure that the quantum of resources transferred to the states through the Planning Commission and the Finance commissions were not diminished.  In their tax devolution formula they took care of the poorer states and through specific grants addressed theirs as well the  special needs of all the states. Even now the special category states get 90% central assistance for centrally sponsored schemes while others get only 60%.There are different thresholds for registration under the GST for these states. To bring AP and Bihar under this category may pose many administrative and legal problems.

                 

If however,  the two partners of the NDA demand special financial dispensation to their respective states it will open a pandora’s box. It cannot be over emphasised that Bihar does need help as it is the poorest state of India, its per  capita income being just 10% of the richest state of India. This calumny cannot be attributed only to the division of the state into Jharkhand and Bihar the former getting all the mineral resource rich tracts. Much of the problems of Bihar are attributable to the misgovernance in the state over the years.  Andhra Pradesh lost Hyderabad one of the main hubs of software and hardware industry of India. But still AP has rich agricultural tracts and a long coastal belt. To the credit of AP despite this handicap  it was able to more than double its GSDP since its division .The state of Telangana however has almost double the GDP OF AP. So AP may have its genuine share of grievances. How these two demands would be faced is a challenge before the FM.

                 

India had a spectacular growth of 8.2% in 2023/24.If India has to reach a developed country status by 2047 then not only this rate has to be sustained but improved. The government has made it possible by infusing over Rs 12 lac crores per annum in addition to the amounts the states have spent on infrastructure. Government of India capital expenditure from 2020 till 2024 was Rs 68.7 lakh crores.  This has generated demand for various industrial consumption and capital goods like cement, steel, machinery and other equipment. Consequently employment also increased leading to increase in demand for other goods and services. Truly this growth of over 7% in the last three years has been entirely sustained by the Government.   

                    

The private sector  was encouraged by  a reduced rate of 25% of corporate tax for all companies and 15% for new manufacturing units  in the expectation that they would pitch in with investments in either capacity expansion or in new ventures. But they failed to reciprocate by way of additional investments and employment generation. On the contrary they accumulated huge cash reserves. One report shows that the cash reserves of companies could be in excess of Rs 45 Lac crores. They have also outstanding debt owed to Indian and foreign sources. Yet they would have substantive resources to invest. They have not met the expectations of the government. The Indian PSUS such as ONGC, IOC, GAIL etc are also having huge cash reserves . They are slow investors. They do not seem to have obeyed even government request of putting up charging stations for EVs in their 63000 petrol pumps in the country. This could have encouraged people to buy more EVs.

                     

The private sector has huge new investment opportunities in the semi-conductor, green energy, electronics for solar power like inverters that are needed in millions but now imported from China, batteries for EVs, Charging stations for EVs, components for the electronic sectors, defence related sectors that are growing and many more. They are not exploiting them as they are getting probably risk -free returns on their cash reserves. The government review of the Indian Economy Jan 2024 shows that the private sector investment in the 5 years from 2020 till date has been hardly 22.7 crores one third of what the govt has spent during the corresponding period.

                   

What can the FM do to nudge the private sector to move into new investment areas apart from the PLI schemes. She can alter the tax incentive of 25% and link it with investment in new technologies and new investments. The PLI scheme benefitted  the large industries and indirectly the MSME sector. Some innovative PLI scheme applicable exclusively to the MSME sector that encourages employment and their modernisation could be conceived.                  

                 

There is a genuine fear of the AI displacing people and its impact will be known sooner than later as India is one of the world’s leading countries in the adoption of AI.A survey by Deloitte on Generative AI in Asia Pacific found India at the number one slot and even ahead of developed countries in its adoption. This while it augurs well for India to be at the lead in the adoption of the newest of the ICT revolution the AI its impact on employment at various levels will be known only after a lag. To forestall a  significant fall in employment with the adoption of AI which would definitely increase profits of the corporate sector, government could impose a  tax on the AI and Robots that replace humans at the same rate as corporate income tax on their value additions to the companies using these tools. The proceeds could be funded and used to encourage either the same companies to generate employment elsewhere or provide capital to newer industries that would generate additional employment. The people who are employed in coal mines, petrol stations, ICE component manufacturers the thousands of people who are employed in repair facilities for the ICE vehicles are all potentially endangered workers.  India has to generate every year millions of new high paying jobs to meet with the aspirations of those who are not only displaced by new technologies but also the increasing number of educated youth. This is a major socio -economic challenge as well. Unemployed educated youth contain the seeds of unrest. Revolutions across the world in the past when analysed would show that dissatisfaction is amongst diverse groups in the society like agriculturists, workers, minorities, the unemployed, wide income disparities while there is ugly display of wealth, lack of access to health facilities, shortage of vital supplies such as water, accommodation and an unhelpful police system. One could add to these lists. These dissatisfactions simmer amongst different groups and then because of the revolutionary changes in communication they tend to agglomerate over time and burst out in the form of riots and protests against the government. The French revolution is a classic example. It is said that when the gentlemen in rags joined the gentlemen in uniform the riot became a revolution. The tulip revolution  in Kyrgyzstan and the Jasmine revolution in Tunisia are modern versions.

                   

India still has over 45% of its work force employed in agriculture that adds only 15% to its GDP. There are more than 144 million agricultural labourers and 80% of those 114 million farmers  are all in subsistence living standards. On a question pertaining to the agriculture sector by a Hon MP the minister gave a list of several programmes in the field of agriculture that include development of agro- based industries, starting 10000 FPOS, development of horticulture, skill development programmes under which millions have been trained and several millions also placed in jobs. The ministry of rural development has issued a report on the programmes and progress in of  all the 9 different initiatives undertaken for the benefit and prosperity of rural India. But in spite of all these initiatives the fact of the matter is the number of people dependent on agriculture has not gone down Agriculture contributes just 14 to 15% of GDP and if 45% of the Indian work force are employed there. The aggregate demand created by them will not increase to any appreciable extent. Unless a strategy is worked out to  increase the aggregate demand of this vast rural force for goods and services the rest of the economy cannot grow fast.

                

I also work in rural areas. It is true that in some regions there is a lack of labour during the agriculture season and the reason could be that people get employed under the MNREGA rather than go to work in farms as she would be getting paid in cash for doing less arduous work. No serious study has been undertaken regarding how to move the surplus agriculture labour into higher wage -earning jobs. There is also a lack of motivation to move out of one’s own village or neighbourhood on account of the freebies that are given by governments. If this state of affairs continues then in the medium term there will be serious discontentment as income disparities will widen with economic growth. Thomas Pickety and his co -authors have  in their  recent paper “Income and Wealth inequality in India 1922-2023 – The rise of the Billionaire Raj has stated as follows  “Between 2014-15 and 2022-23, the rise of top-end inequality has been particularly pronounced in terms of wealth concentration. By 2022-23, top 1% income and wealth shares (22.6% and 40.1%) are at their highest historical levels and India’s top 1% income share is among the very highest in the world. In line with earlier work, we find suggestive evidence that the Indian income tax system might be regressive when viewed from the lens of net wealth. We emphasize that the quality of economic data in India is notably poor and has seen a decline recently. It is therefore likely that our results represent a lower bound to actual inequality levels. We call for improved access to official data and greater transparency to enhance the study of inequality and enable evidence-based public debates.” They go on to say “ In 2022-23, 22.6% of national income went to just the top 1%, the highest level recorded in our series since 1922, higher than even during the inter-war colonial period. The top 1% wealth share stood at 40.1% in 2022- 23, also at its highest level since 1961 when our wealth series begins. In other words, the ‘Billionaire Raj’ headed by India’s modern bourgeoisie is now more unequal than the British Raj headed by the colonialist forces. It is unclear how long such inequality levels can sustain without major social and political upheaval. While there is no reason to believe income and wealth inequality will slow down by itself, historical evidence suggests that it can be kept in check via policy. Implementing a super tax on Indian billionaires and multimillionaires, along with restructuring the tax schedule to include both income and wealth, so as to finance major investments in education, health and other public infrastructure, could be effective measures in this regard.”

               

While there may be several criticisms of this paper on its methodologies and even conclusions one sees evidence of this glaring inequalities in the extravagant spending by billionaire industrialists and film stars who all become rich as some poor have consumed their products of industry or movies. Added to this are the growing incidents of road accidents by automobiles costing lacs of rupees driven carelessly the victims being only the poor. They may not be many but enough to provoke public anger.

                  

The social services sector of education and health have remained neglected since independence. Despite the commitment of the government to spend at least 6% of GDP on education and health respectively as early as 1986 after they received the recommendation of the Kothari Commission the figure has not reached that level and is still hovering around 3.7% for both the state and central governments put together. As regards health the performance is worse at just 2.1% of GDP. The SEA countries spent as much as 6% of GDP when 50 years ago they embarked on their economic growth. There is a surfeit of literature on endogenous growth models that give central place to education and health. The level of education and health in a population are major determinants of its economic growth. Educational diversity meaning a system that is able to produce citizens who are qualified in all the areas of science, engineering, medical and arts would contribute more for economic growth than physical capital particularly when the earth’s natural resources are depleting fast. India has this diversity but regrettably the often-heard complaint is that quality is sacrificed for numbers. If sufficient amounts are provided attention could be paid to quality as well.

                   

India’s expenditure on health is abysmal. The impact of long -term neglect was felt in all its fury during the pandemic when hospital beds doctors and nurses and other technical staff was found woefully inadequate. What I have observed is the political approach to these areas particularly in regard to staffing. At one time there were over a hundred thousand vacancies of teachers in Bihar and they have recently advertised to fill up 87777 vacancies. The situation was no better in UP. According to its minister for education tin March 2024 there were 85,152 vacant position of teachers in all the categories. Rajasthan has recently advertised to fill up 48000 vacancies of teachers. For all India according to the ministry of education of the government of  India, there were over 7 lac teacher vacancies as against 48,10,226 posts in classes 1 to 8. In classes from 9 to 12 the vacancies are over 2 lacs. This situation is not pathetic but criminal against the people of India.  The Hon. PM talks of less government and more governance and by the number of government employees per 10,000 population India is the least governed country with just 7 persons as against a multiple of this number in other countries. Our media has misled the people of India by saying babu raj babu raj India. The position of vacancies in the subordinate judiciary and the police forces are also  appalling .How can there be good governance and how can you prevent bribes as speed money when you have so few government employees in a country with a population of 140 crores. The PM announced with a bang the filling up of all vacant government posts in 2022 but that ended with a whimper by him releasing just a few hundred appointment letters. This is because there are no resources to meet the thousands of crores of pay out as salaries every month if these posts are filled up. The government will have no money for its pet schemes for catching votes. This is a big challenge before the finance minister. If there has to be good governance first the central and the state governments should fill up all the vacant posts on an urgent basis in the health and education sectors and then also the in the police.

                  

The states are demanding more autonomy. Fiscal economics teaches us that devolution of resources to meet the responsibilities of local governments is a basic necessity. The constitution has cast onerous responsibilities on the states as they are at the cutting -edge level of the people and the latter approach only  the states governments or the other local bodies for their needs. A time has now come to have  a hard look at this issue and the new Finance Commission could be tasked with the responsibility by altering its very brief terms of reference which the previous government laid down in a hurry.

                    

Turning now toward international relations Mr. Modi has to be credited with creating an international image for India which reached its acme in the universally acclaimed way in which we conducted the G20 meeting.  We have to examine how much of our domestic constraints impact  our international relations through the prism of Robert Putnam’s Two -level game theory. It is  a research topic by itself and I do not think there has been any serious work on India’s international relations examined through this prism. India has almost 10 million Indian workers in the Middle East countries all wedded to Islam. India is a Hindu majority country but with a Muslim population the second largest in the world with a tension between the two sometimes on the surface and always under -ground. While India has established its credentials with the ME countries, the US by its recent report criticising India on its treatment of the minorities has done grave injustice. Should not the present government treat this as  a challenge to correct India’s image in this regard by giving due place to the largest minority segment in the country in various government positions inside the parliament and in government assignments. In my view the central government has to take overt actions in order to ensure the sustainability of our credentials that In India every religion has an equal place.

              

India’s neighbourhood first policy guides its approach in its relations with all the eight neighbouring countries of which two are clearly treated as hostile. In this big chess board India is playing against 7 players very often the moves being difficult. For example take Sri Lanka. Its people mostly Buddhists do not trust India for  historical reasons from the days of Raja Raja Chozha who conquered it till the day we trained the LTTE. Sri Lanka cleverly manoeuvred India to fight their devil which we initially helped. However much we may monetarily and physically help them, do we have  the trust of Sri Lankans? Sri Lankan people  do not seem to oppose Chinese investments as much they criticise Indian Investments. China is going to set up a large refinery in Sri Lanka that would end India’s presence in their oil economy. Indian grants to Sri Lanka by and large target only the Tamils there .Our policy toward Sri Lanka is basically conditioned by domestic compulsions. Should this not change in a manner that we win over  the Buddhist Sri Lanka also as our recent help to Sri Lanka to tide over its grave financial crisis benefitted everyone. The perennial problem of Tamil Nadu fishermen getting into trouble with Sri Lanka is a thorn in our relations. The recent incident of a Lankan Navy Sailor getting killed requires to be solved amicably without our trying to pressurise Sri Lanka’s judicial process in any way. We must remember the Enrica Lexie case of 2012  when Italian marines shot and killed our fishermen. This is in reverse as in  a fracas with the Tamil Fishermen a naval sailor of Sri Lanka seems to have lost his life. We should not get lost in domestic political compulsions but deal with it as per international law.

           

Our relations with Bangladesh have been strong as we helped create that country. It is an Islamic country where the Hindu minorities have been dwindling drastically from 15%  in 1991 to 8.5% in 2011.This might have happened for many reasons. But it is a fact that cannot be disputed and may have implications for our relations with Bangladesh over the long run. To the credit of our great nation and in spite of all critics of the Hindutva politics  of the BJP here, there has been no out migration of Muslims on religious grounds. On the contrary their proportion has increased in the population. While there is no discrimination in rights and privileges, the venomous speeches delivered by certain leaders must stop to create a better international impression.

               

Our relations with Nepal have always been rocky. The problem I  see in this is our attitude that Nepal cannot go anywhere  except India for their needs. We also tried to poke our nose into their domestic politics including supporting forces against the monarchy which collapsed leading to instability. Rajeev Gandhi imposed almost a blockade against Nepal and the people suffered in the winter due to lack of essential supplies. Foreign diplomats who met me during that period cautioned me that his treatment will eventually unravel against India .It has, even though the government of India had gone  the whole way in helping Nepal during its devastating earthquake.

             

Every country big or small in size is equal in its sovereignty at the international level. In as much as India hates foreign interference in its affairs it should realise others also think the same if anyone pokes its nose in their internal politics. After years of democracy in India we have not learnt to respect this ideal of non- interference. Our neutrality should be our strength. I am not going into our relations with Bhutan as it has always been strong. I hope it remains so.

     

I think I have given enough thoughts for the students who are attending this session to think over the issues I have raised and debate as to what they think the new government should do to meet with the challenges.



(The views expressed are those of the author and does not reflect the views of C3S.)

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