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The Rediff Business Interview/ Dr U Shankar

'Why should there be a government monopoly on procurement?'

Dr U Shankar, one of the widely respected economists in India, currently serves as director of the Madras School of Economics. Shobha Warrier spoke with him on the forthcoming Budget and related issues.

Finance Minister Yashwant Sinha has had several pre-Budget consultations with groups in the name of transparency. Do you approve of that?

I think the Budget-making exercise must be transparent. The rules of the game must be very clear. In every country, they have what they call a ''long term fiscal policy''. Therefore, the Budget must tell what will happen in the next ten years and not what will happen in the next year. The main purpose of the long-term policy is to generate expectations about the future so that entrepreneurs and economic agents can make plans. They should not be uncertain about what would happen to many things, for example the tax rate, every year.

There is nothing secret about the Budget as it is public money. Therefore, they must make their policies very clear. Of course, some unexpected changes may take place, both external and natural. So, it is a right thing that the finance minister is doing now.

The taskforce set up by the prime minister has given the example of the ten-year Industrial Master Plan of Malaysia's ministry of international trade and industry. The plan spells out not only the policies of Malaysian industry but a detailed duty structure too.

The Planning Commission has 15-year, ten-year and even five-year plans. Each five-year plan is drawn in the context of the longer-term perspective plan. Unfortunately, due to various reasons, the Planning Commission has not been very active. I think now they are trying to be active. So, the promise is there in India but what is missing here is the role of the government.

For example, in a country like Japan, the government is very active in helping industries and exports and also getting contracts with foreign countries. Even in the case of the USA, even though it is a market economy, the US government plays a key role in pushing their exports and investments. It happens because the embassies and consulates have not only civil servants and leaders but also economists and business experts.

But it is not so in India. Japan always has a pro-industry policy to help the big industries and their exports. So, governmental help in the form of guidance, information, etc, is very important, especially in a very competitive world.

But in India till 1990, we had a socialist government. That means lack of trust in the private sector in general and particularly in business and traders. That attitude must change.

Do you feel that attitude still persists?

That legacy is still there. But the whole world has changed now. Throughout the world, they are talking about globalisation, liberalisation and more powers for the market and the private initiative. See a government cannot do everything. Even when the government does, it turns out to be very costly.

You mean the Public Distribution system?

Yes, the Food Corporation of India is responsible for collecting rice, wheat and various other commodities, storing, transporting and then distributing

Recently they have found that when the actual cost of one quintal of wheat is around Rs 450, the cost of storing, distribution, etc makes it about Rs 800. More often than not, the cost of distribution is more than the procurement price. As a result, if you want to give subsidies, you have to keep the price far below the cost. And the gap in the subsidy is coming to about Rs 100 billion. The question is, can the government do it at such a high price? Can't the private market do it cheaply?

How can we do away with PDS especially when we have nearly 35 per cent of the population below the poverty line? Will the private market be able to do it? Will they do it is the question.

We cannot do away with the PDS. Yes, even now 30 to 35 per cent of the population is below the poverty line. The question is how to ensure that only the poor benefit from the PDS at a lower cost. I feel the private sector can do it.

A large number of studies have shown that high cost of the distribution system is partly because of the inefficiency, storage loss and so on. Of course we have to protect the poor particularly those who are below the poverty line. Nobody denies that. Can't we give it to the traders on a competitive basis, on the basis of a contract where they have to bid and then provide the service? This way they can reduce the drain on the government Budget.

Why should there be a monopoly on procurement? It is not the case of food alone. In Maharashtra, for example, cotton can be sold only to the Maharashtra Trade Corporation. Why not encourage competition?

Recently while increasing the prices of the PDS rice, wheat, etc, the finance minister said, the government's deficit would increase by another Rs 140 billion because of the subsidies. How long can we continue with the subsidies?

There was a discussion paper on subsidies issued by the ministry of finance in 1997 where they have calculated the subsidies, both direct and indirect, explicit and implicit and commodity-wise, and they have found out that the total subsidies come to nearly 14 per cent of the GDP.

They have also classified subsidies as merit subsidies and non-merit subsidies. Subsidy for the poor under the Public Distribution System, primary health, primary education, etc, comes under the merit subsidy. Non-merit subsidy has mainly commercial operations like electricity, transport, communications, and higher education. According to them, only 3.5 per cent of the GDP comes under merit subsidies. That means around 10 per cent of the subsidy goes to people who do not merit them.

Nearly Rs 1.6 trillion are in the form of irrigation subsidy or fertiliser subsidy or electricity subsidy where the cost is not recovered at all. The government gets only three per cent when the market borrowing is 14 per cent or so. Why this loss? Why this inefficiency? Ultimately we must make sure that the price must be related to the cost in a market economy.

Of course we cannot do it immediately. It is not possible anywhere in the world. You need a transition time, five years, six years, seven years so that we can make every effort to recover the cost.

Take the case of higher education. Why should the tuition fees for the university students be less than the private school fees? Why should those who can afford enjoy subsidies like this? Why should everybody get rice at Rs 5 a kg? This is what you call undeserving subsidy. The other day, Dr Manmohan Singh was saying that Rs 300 billion was lost as electricity subsidy alone.

Tomorrow: Dr Shankar on infrastructure, healthcare and education

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Budget 1999-2000

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