The Sunday Rant

I have never fancied myself to be an economist. I don't have any formal training in it nor have I read a full book on the subject. Whatever I know about economics is whatever I've picked up from the rudderless trawling on the internet and from newspaper editorials. Common-sense makes for the best economics and that is sadly what has eluded our policy makers for the last 60 years.

A couple of weeks back, there was a session on Indian economics where a gold medalist somebody from some top university came and gave us a lecture on the Indian economy - the history and the current state of our nation etc. It was all well and good until we came to this slide which was discussing the strengths of the Indian economy. She kept stressing on the huge skilled labour force available in our country, which is a sign I guess of the cognitive disequilibrium affecting most arm-chair economists nowadays - very little understanding of the ground situation. Please send me all the skilled mechanics, drivers and electricians that you can find and I assure you I’ll get jobs for all of them, but the sad fact of the matter is that there is an acute crunch for skilled manpower and attrition rates in many industries are probably higher than even BPO firms. I let it pass. To be fair to her I don't think she was the one who made that presentation in the first place. And then it came- the final strength of the Indian economy - subsidies. I wanted to cry BS but I held back. The WTF moment came and passed without anybody so much as battling an eyelid. The blasphemy of it all was too much for me to hold back for too long and soon found release in the Q&A session that followed. I stood up and pointed out the obvious. Incentivizing anything to improve production without actually improving the efficiency is not a strength of the system, instead it should be listed among one of the weaknesses.

One point that was listed out as a challenge to the agricultural economy of the country was the fact that 60% of our arable land was monsoon dependent and not irrigated. Let’s use this same example to demonstrate why most subsidies are bad economics, a punishment for the ordinary tax payers and a prime example of disastrous short-sightedness. Take the subsidies on fuel for example. The government euphemistically calls it under-recoveries and it usually runs into lakhs of crores every year. For the benefit of readability lets round it off to say $20bn every year (1 lakh crore). Where does this money come from? Ours is a deficit economy as is and the $20bn is normally not provisioned along with the regular subsidies in the budget. So the government floats bonds - in effect postponing the eventual pain that'll surely result from such frivolous and foolish spending just to curry favour with the rural farmer who sadly does not understand how the government is pushing him into a bottomless pit. The bonds will have to be paid up by somebody, sometime and when that time comes, the government will have to rely on the only way it knows to make ends meet - increase taxes.

Subsidized fuel has lots of problems of its own. The incentive for more efficient uses for the fuel is lost. When fuel is so cheap, the incentive to invest in and adopt cleaner and efficient burning technologies is lost. What the fuel is used for is of greater concern. Most of it is used up in pumping up ground water to irrigate the fields leading to the eventual lowering of the ground water level which in turn leads to deeper bore wells being dug until one day, the ground water mixed with all the subsidized fertilizers and insecticides become so toxic that the whole area becomes inhospitable leave alone cultivation.

The government of course has to think about only getting re-elected within the next 5 years and it suits them well to throw away the hard earned money of the millions of tax payers without any remorse. Instead of subsidising this fuel, what if we'd used this money to improve the irrigation on the 60% non-irrigated area? What if we built canals linked to rivers or reservoirs to provide water round the year? If this results in an increase of agriculture output by say 20-30%, isn't that enough to compensate for the extra that the farmer has to pay for fuel, the consumption for which has surely come down since he does not have to use the borewells anymore? If we spend that same amount of money in the next 5 years and bring down the 60% of non-irrigated farmlands to less than 20%, then are the benefits going to disappear after 5 years? The construction of new canals and reservoirs etc. is going to provide jobs to lots of skilled and unskilled manpower. The inland waterways thus created could even be used for very efficient transportation of goods. The economy would be catapulted to a higher orbit and we would have taken the boldest step towards self-sufficiency and reducing our import bill in decades.

If it was all so obvious why haven’t our great leaders with their much vaunted Ivy league and Oxbridge degrees been able to do much good? Damned if I know.

The short debate also brought up the issue of 2g license pricing. The opinion put forward was that the abnormally low licensing fee was infact a subsidy to help increase tele-penetration. The corruption was bad enough but to know that even after 60 years of systematically weakening our economy with subsidies, we would try to do it all over again is sad. More rants on that in a different post.