Fwd: The economic consequences of Professor Amartya Sen by Arvind Subramanian in Bus Standard

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From: sanjeev nayyar <sanjeevnayyar108@gmail.com>
Date: Wed, Jul 10, 2013 at 9:25 AM
Subject: The economic consequences of Professor Amartya Sen by Arvind Subramanian in Bus Standard
To: esams Nayyar <esamskriti@suryaconsulting.net>

The economic consequences of Professor Amartya Sen by Arvind Subramanian  in Bus Standard 10/7/13

Redistributive policies via rights and entitlements are ultimately self-defeating

 http://www.business-standard.com/article/opinion/the-economic-consequences-of-professor-amartya-sen-113070901024_1.html

This United Progressive Alliance (UPA) government is heading into the tenth and possibly last year of office, a tenure whose crowning achievement might well be the Food Security Bill. One may fault this government for incompetence, corruption, and delayed action but it cannot be faulted for lacking a vision. There has been an overarching idea that underlies many of its economic policies: namely, that the poor and underprivileged in society must be empowered by conferring them with new rights - to work, education, food, and presumably, all basic needs.

Call this the redistribution through rights and entitlements (RRE) approach, which is now associated with the articulate advocacy of Professor Amartya Sen, channelled effectively into policy through his co-author and long-time collaborator Professor Jean Dreze. Their latest book is a cogent exposition of the RRE approach. Nobody can question the moral urgency of helping the poor which is the key objective underlying this approach. But that should not exempt its methods and consequences from critical scrutiny. And this scrutiny reveals some serious failings.

1. RRE causes instability and vulnerability: Amongst emerging markets, India is the most macroeconomically vulnerable, with a deadly combination of high fiscal deficits, close to double-digit inflation, and high external deficits financed by short-term foreign capital inflows that may even now be starting to flow out of the country. How did we get here, though? Much of the blame must lie with the redistributional zeal of this government. The ultimate cause of macro-vulnerability is the high fiscal deficits in turn caused by the fact that government spending per capita (intrinsic to RRE) has increased by nearly 75 per cent by under this government (see Figure 1).

This spending contributed to instability directly, because it pushed up rural wages and procurement prices, thereby stoking inflation; and indirectly, because it put aggregate demand on steroids, even as supply capacity was left to languish, weak and under-nourished.

For some time, the macro-economic damage caused by RRE remained obscured. Headline fiscal deficit numbers actually declined during UPA-I, because its tenure witnessed a dream combination of high growth and low interest rates which should have resulted in headline deficit numbers substantially below actual ones. Similarly, headline fiscal debt numbers have declined throughout the UPA's tenure, but for bad reasons - India has reduced its debt through sustainedly high inflation. The government may have gained by this, but the aam aadmi has suffered, since his capacity to hedge against inflation is limited. And now, the underlying damage to the overall economy has been exposed now that international investors have become less willing to finance India, as reflected in the plight of the rupee.

2. RRE legitimises atrocious policies: If one were asked to single out the worst economic policy in India, energy subsidies - for diesel, kerosene and above all power - must be a strong contender. Consider the bad outcomes that power subsidies cause or abet: bad crop mix, depleted water resources, unprofitable and mismanaged state electricity boards, under-investment in power, lower economic growth and higher carbon emissions.

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