Over last many years, every sector specialist says that the country is not spending enough on his sector in terms of percentage of the GDP. Now, if you were to add up the total desired number for each sector, the sum would add up to an unrealistically high percentage of the GDP. What this discussion misses is not the percentage of GDP, but the GDP itself. So if the GDP was double, at the same percentage level, the expenditure would be double. This is a classic case of redistribution versus growth debate.
I believe that in their book “Saving Capitalism From the Capitalists”, Raghuram Rajan and Luigi Zingales argue: “The socialist economy eventually fails to increase the size of the societal pie or even to redistribute the shrunken remains equitably.” So, we should look at where we in Bharat would have been if there were sensible economic policies.
In each of the first seven decades of our independence, the growth of the economy per year was as follows:
3, 3, 3, 5, 6, 7, 7.
I think it is not at all unimaginable that we could have had the following growth rates for the seven decades:
4, 5, 6, 7, 8, 8, 8.
Here I am not talking about the double digit growth rates that were achieved by many of the East Asian countries for a sustained period of time. And, the way the economy was liberalized, first by stealth from 1980 onwards, and then a fair degree of openness, clearly shows that these rates were within the realm of possibility.
Had this happened, Bharat’s GDP would have been about three times what it is today. And we would have already been a nine trillion economy. Many of the social programmes (education, health, etc.) would have received three times the funding at the same level of percentage of GDP. So also expenditure on infrastructure projects, etc.
To better understand this factor of three, let us look at the defence sector. General (Retd.) Ved Prakash Malik, who retired as the chief of the army in 2000, said recently that the army’s expenditure on administration and salaries constitute about 60% of the budget, leaving 40% for procurement of equipment and weaponry. He also said that the 40% is a lower figure than desired. Of course, in today’s limited amount of defence expenditure, dictated by the size of the economy, this ratio may not be better than what it is.
If the total expenditure is tripled, in line with the increase in the GDP, and if the ratio is 50:50, we can see what happens. At an expenditure of Rs 1000, the amount spent on administration and salaries is Rs 600, leaving Rs 400 for equipment and weaponry. If the expenditure goes up to Rs 3000, at the revised ratio, the expenditure on each of the two broad heads is Rs 1500 each. The increase in administration and salaries would increase by 2.5 times, while the expenditure on equipment and weaponry would increase by 3.75 times.
Given the performance of the defence forces in recent time, particularly against China which has a huge monetary advantage over Bharat, this increase would make our enemies think many times before taking on Bharat in the future.
The same phenomenon would also be seen in all the other sectors of the economy and society. And it highlights the impact of the failure of the planners. Sadly, many individuals responsible for the failure are still around, and are projecting themselves as the go-to persons to dispense advice on what needs to be done for the economy.
While the intent of the policy makers was growth, at least till 1977, the impact was not seen. And the societal pie remained restricted. There is a need to compare why it happened, what was done since 1977, and what could have been done better. The last step of analysis gives a guide for the future.
We should also ponder what would have happened if the reforms through stealth had not started around 1980. Then the growth rates for the seven decades would have been:
3, 3, 3, 4, 4, 5, 5.
In which case the economy would have been half what it is today. Clearly the defence preparedness would suffer drastically, and the proportion in the two broad categories would have been 70:30. In which case, the expenditure on equipment and weaponry would have been only 40% of what it is now.
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