3 May 2010, 0255 hrs IST, Subhash Narayan, Amiti
Montek Singh Ahluwalia is among the key figures who led India’s transformation into a liberal economy. The deputy chairman of the Planning Commission says there is a need to better target food subsidies to eradicate widespread poverty. He shared his views on wide-ranging topics such as the stagnation in agriculture and problems in infrastructure funding in an interaction with ET. Excepts:
Agricultural production looks to be stagnating. We have massive deficits for a number of commodities and investments are not happening...
We should not come to conclusion about agriculture in the middle of a drought year. If you look at 2009-10, there is a negative growth in output. But we have to look at the underlying trend. We have done this in the mid-term appraisal and our assessment is that by the end of the 11th Plan (2011-12), agriculture will be back at the 3.5% growth level, though it may fall short of 4%.
We will certainly have come out of the stagnation seen in the period 1996-2002. Investment in agriculture is rising. As for investments, the ratio of investment in agriculture to agriculture GDP shows a steady increase after 2002.
The mid-term appraisal has talked about delinking MSP with procurement price. Can you explain?
The basic function of MSP is to reassure the farmer that he can count on this as a minimum price. If there is a bumper crop, the normal tendency for prices to fall is countered, which helps the farmer. You can also have a situation when there is a shortage of rain, and a possible crop failure. In that case there is upward pressure on prices.
If you only offer the farmer the MSP, you may not get much procurement. If we have a large buffer stock, we can draw it down to meet procurement requirements but if we want to assure a certain level of procurement then we need an incentive. That is going beyond the MSP to offer an incentive price for procurements. This is justified in some circumstances but it should be absolutely clear than an incentive price is something that you resort to only when you have a shortage and is not a normal feature.
Is it possible to have two poverty lines, one for identifying beneficiaries of food security and one for other schemes?
You can have different poverty lines for different purposes, but we are not recommending it. One reason why you need a poverty line is you want to identify those below some agreed minimum as requiring special consideration and you want to monitor whether the growth process is bringing those below the poverty line to get out of poverty over time. For that you need a fixed poverty line.
You can also think of a situation where eligibility for say, food security is linked to one poverty line but eligibility for another benefit, say a scholarship, is linked to another. For example, subsidised healthcare may need to be extended to many who are above the poverty line but cannot bear the burden of sudden healthcare costs.
But you are thinking of changing the poverty line... Are you accepting Tendulkar committee’s recommendations?
It is natural for the poverty line to be revised after a while. Growth will reduce poverty over time with reference to a fixed lines. For example, according to our official estimates, poverty had gone down to 27.5% but many people said that the figures is too low because there are many dimensions where deprivation is more widespread.
Over 65% of women are anaemic and 45% children suffer from malnutrition. Consideration of such factors can lead to revising the poverty line upwards. We set up the Tendulkar committee to advise on this. The committee has said the urban poverty measure is reasonable but we should raise the rural poverty line. We have accepted this recommendation and are processing the matter for formal approval.
What are your views on transferring subsidy through coupons or cash?
There are several ideas floating around. Some state governments like Delhi and Bihar have said that the PDS system is too corrupt and the number of shops too large to be effectively monitored. They say they prefer that the central government should give the subsidy in cash which can be transferred directly to the bank accounts of the poor.
Another view holds that if cash is given, it will not be used for food, and the men will squander it on drink. We could of course give the money to the women, but even that is open to the danger that the men can extract the money from the women. Food coupons are said to be better as they ensure that you go to the PDS shop and get some food. However food coupons can be counterfeited.
A better version of coupons is a smart card system in which the PDS shop sells the grain at unsubsidised price but the poor get a smart card which credits the shopkeeper with the subsidy amount and what the customer pays is the subsidised price.
This also gets away from subsidised grain distribution, and the incentive for the middleman to divert grain disappears. Some people are opposed to these ideas because they fear it means abolition of procurement and dismantling of PDS shops. That is not so. Procurement will still take place but the grain will be sold through the PDS at non-subsidised prices.
Will this be discussed in the group of state chief ministers on reforming PDS?
We will pose all the options and hear the chief ministers. My personal view is that a pure cash transfer with no PDS structure will not be acceptable. But we can have a PDS which trades in unsubsidised grain while those who are to be subsidised get a smart card. In this way procurement and the PDS remain but you don’t have underpriced grain which encourages leakages.
What about the debate over the quantity of subsidised grain to be given to the poor under the Food Security Act?
I think we can meet the objective of providing a fixed amount of grain to the poor at an affordable price. However, the key to doing this lies in changing the present subsidy structure for the above poverty line (APL) cardholders. Today, almost 50% of the government’s food subsidy is going to APL families.
If APL supplies are heavily subsidised, which is the case at present, the demand for grain from this category is too large. Even if we could afford the subsidy we won’t have the grain. We should assure APL families of access to the PDS. But if the price is not heavily subsidised the demand in a normal year will be low.
The Planning Commission had estimated a requirement of $500 billion investment in infrastructure during the 11th Plan and over $1 trillion during the 12th Plan. Achieving the targets will mean huge investment from the private sector. Levying user charges is an ‘if’ issue in creating infrastructure. How then will private investment come in?
Well these (user charges) are legitimate issues. The prime minister has said that we should plan for investment in infrastructure sector of about $1 trillion in the 12h Plan. This investment has to be divided into Centre, states and the private sector. We have not yet done the sums, but my guess is that if we have to reach $1 trillion in the 12th Plan, about 45-50% of it will have to come from the private sector.
This can only happen if investors find it profitable and reasonable, and user charges are obviously critical. Keeping user charges low is only feasible if we bear some of the capital cost in the form of a capital subsidy. This is what happens in road projects where we allow up to 40% of the capital cost as a subsidy, the exact amount being determined by competitive bidding. But subsidies eat into resources. The more unwilling we are to levy user charges, the less infrastructure we will get.
Are we out of growth-inflation trade-off? Will we see another round of increase in interest rates?
There is a trade off between growth and inflation in situations where growth has not recovered to potential. In such situation tackling inflation too quickly can delay the recovery. If the economy has recovered, and inflation is between 4% and 6%, there is reasonable balance. If inflation is beyond that range and growth is doing well, which is the case at present, we should worry about inflation more than about the trade-off.
What is your assessment of the performance of the health sector, which has been given so much importance in the 11th Plan document?
Health is obviously critical but I should point out that for good health we need to focus not just on curative heath but also on public health and providing clean drinking water and sanitation, and also, of course, income. Having said that we should acknowledge that we have invested less public money than we should have in curative and public health. We are correcting this now.
The 11th Plan target was that public expenditure on health will have to be raised from just below 1% of the gross domestic product (GDP) to 2-3%. In the first three years of the current plan, we have only just got above 1% of the GDP. One reason for less than expected expenditure on health has been that the sector was not ready to absorb resources. There are also non-financial constraints. There is acute shortage of doctors especially in rural areas. On heath, we have to look at a 10-year horizon. There is a great deal to do.
