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Spend more in productive areas to overcome recession, Khusro tells government

Eleventh Finance Commission chairman A M Khusro has advised the government to go in for a massive expenditure programme in productive areas to get the economy out of the recessionary phase, insisting that it would not be inflationary in view of the idle capacities in the industry.

The eminent economist also suggested that the government should not support the rupee and cut down on subsidies in a phased manner.

He was delivering the third Prem Bhatia Memorial Lecture on Indian Economy: Present State, Future Prospects in New Delhi on Tuesday. Former finance minister Manmohan Singh, who also spoke, was in the chair.

Professor Khusro said the government, at the moment, should not be too concerned with controlling fiscal deficit as this preoccupation could deepen the recession.

While praising many aspects of the Budget, he said the governmental policies had not been in touch with the realities of recession. ''If policies are geared up, it would not be difficult to kickstart the economy,'' he commented.

Khusro favoured a massive step-up in the investment on infrastructure, including roads and communications, a liberal housing policy and drastic cuts in interest payments, apparently substituting loans with foreign investments.

Another component which needed a relook, he felt, was the huge defence expenditure which could be cut down substantially with a good foreign policy.

Khusro, former chairman of the National Institute for Public Finance and Policy, advocated that India unilaterally stop competitive build-up in order to reduce defence spending. ''A good foreign policy is a substitute for defence expenditure while a bad foreign policy is a complement to it,'' he said.

In this regard, he cited the then United States president Ronald Reagan's proposed strategic defence initiative, popularly known as Star Wars, which did not find favour with the American as his Soviet counterpart Mikhail Gorbachev had launched a major peace initiative. ''We should also shun one-upmanship and leave the adversary no choice,'' he said stressing good neighbourly relations with Pakistan.

The advice of Khusro, who has held key positions in the government and academia, comes at a time when there is a possibility of increase in defence expenditure during the course of the year in the light of the nuclearisation of the subcontinent.

An expert on monetary economics as well as land reforms, Khusro suggested a fresh thinking on subsidies saying they should be divided into 'merit' and non-merit' categories. He advised better targeting of subsidies to enable the beneficiaries to graduate away from it over a period of time.

On phasing out of subsidies, he gave the example of Indonesia where fertiliser subsidy was eased out between 1989 and 1993.

Khusro also called for selecting spots spread across the country to develop infrastructure which would generate growth and consequently employment. An enhanced public expenditure would mean an automatic increase in private sector spending.

''The private sector loves infrastructure and not tax holidays,'' he said.

In the present Indian context, he underscored the relevance of Keynesianism which laid emphasis on public works programme to overcome the great depression of the 1930s. Lord J M Keynes had even suggested that the government should give employment to people even if it involved digging holes in the ground. A reference to this was made by Khusro.

In his concluding remarks, Manmohan Singh stressed on the need to cut down non-productive expenditure and subsidies. He, however, felt mere increase in aggregate demand would not serve the purpose as ''structural and micro-issues are more important''.

He said the fiscal deficit both at the Centre and the states was ''dangerously'' high and attributed this to a crisis of governance at both levels. Traditional solutions would not work in a modern integrated economy, he said. ''Acceptance of change is more important than the macro issues.''

With export growth rate in the negative and business confidence at an all-time low, India needed to think afresh, he concluded.

UNI