Growth compulsions, fiscal arithmetic

Paper:

Mains: General Studies-III: Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management

Context:

The economic situation warrants enhanced government expenditure; the policy challenge is to minimise the growth fall

Key Details:

  • India’s growth in the first quarter of 2020-21 at (-) 23.9% showed one of the highest contractions globally.
  • Global growth prospects for 2020 have been projected by a number of multilateral institutions and rating agencies including that for India.
  • The 2020-21 real GDP growth for India is forecast in the range of (-) 5.8% (the Reserve Bank of India’s Survey of Professional Forecasters) to (-) 14.8% (Goldman Sachs).
  • The Organisation for Economic Co-operation and Development (OECD) in its September 2020 Interim Economic Outlook has projected a contraction of (-) 10.2% in FY21 for India.

Gross Domestic Product and CPI

  • The annual projections also indicate a strong likelihood of even the nominal GDP growth showing a contraction for 2020-21.
  • The latest data released by the Ministry of Statistics indicate a Consumer Price Index (CPI) inflation rate of 6.7% for August 2020.
  • The average CPI inflation during the first five months of 2020-21 is estimated at 6.6%.
  • Given the injection of periodic liquidity into the system and the inflation trends, the year as a whole may show a CPI inflation of close to 7%.
  • In the first quarter of 2020-21, the GDP-based deflator was only 1.8%. If we take the OECD’s real GDP growth projection at (-) 10.2% and a deflator-based inflation of about 5%, the implied contraction in nominal GDP is about (-) 5.0% for 2020-21.
  • It is true that some of us felt at one time that the economy might not do too badly because some key sectors such as agriculture and related sectors, public administration, defence services and other services may perform normally or better than normal given the demand for health, relief and revival expenditures.
  • Surprisingly the Q1 data the sector ‘Public Administration, Defence and other Services’ contracted at (-) 10.3%. This means that there was no fiscal stimulus.
  • Independent estimates show that States’ capital spending fell by 43.5%. The worsening of the fiscal deficit appears to be because of decline in revenue than increase in expenditure.

Revenue erosion

  • The policy challenge for the remaining part of the fiscal year is to minimise this sharp contractionary momentum in real and nominal growth.
  • A sharp contraction in nominal GDP growth has significantly adverse implications for the prospects of central and State tax revenues, which may both contract.

Gross tax revenues

  • In the first quarter of 2020-21, the Centre’s gross tax revenues contracted by (-) 32.6% and the CAG-based data pertaining to 19 States show a contraction of (-) 45% in their own tax revenues.
  • This implies a negative buoyancy of about 1.65 in the combined tax revenues of central and State governments in the first
  • Given the adverse impact of the lockdown, even the budgeted non-tax revenues are not likely to be realised.
  • Some estimates indicate that the tax and non-tax revenue and non-debt capital receipts in the current fiscal may fall well short of the budget estimates by an amount higher than ₹5-lakh crore.
  • The combined fiscal deficit of the Centre and the States will have to make up for the shortfall in tax and non-tax revenues, if the level of budgeted expenditures is to be maintained.

Fiscal deficit

  • In order for the central government to maintain the level of budgeted expenditure and also provide for additional stimulus, its fiscal deficit may have to be increased to close to an estimated 8.8% of GDP.
  • If one adds the Centre’s and States’ fiscal deficit, the combined fiscal deficit amounts to 13.8% of GDP. If the nominal GDP actually contracts in 2020-21, the fiscal deficit as the percent of GDP would go up further.
  • This also does not take into account any additionality to borrowing because of the Goods and Services Tax (GST) compensation.
  • It may be noted that the Centre’s fiscal deficit to GDP ratio for the Q1 of 2021 was 17.4%. The Centre’s fiscal during the first four months of 2020-21 as a per cent of annual budgeted target was at 103.1%.

Limits to deficit

  • How high can fiscal deficit go? The International Monetary Fund, in its June 2020 update of the World Economic Outlook, estimated the fiscal deficit of India and China at 12.1% of GDP.
  • All the other countries except the United States and a few others have a deficit lower than this.
  • The dollar as a reserve currency has its own advantages and this benefits the U.S. Coming back to India’s fiscal deficit, there are not adequate resources to support a fiscal deficit of nearly 14% of GDP.

Possible solution

  • All this will therefore require substantial support from the Reserve Bank of India which will have to take on itself, either directly or indirectly, a part of the central government debt.
  • In the direct mode, the RBI takes on the debt directly from government at an agreed rate.
  • It took India long to move away from the automatic monetisation of debt. It happened in the early 1990s.
  • The indirect method is preferable as the market still sends out the signals on interest rate. In both cases, the RBI is the provider of liquidity. The indirect route is not new.
  • The question ultimately relates to the extent of debt monetisation that may be undertaken. The country has also to guard against high inflation.
  • This Fisc is caught in a serious dilemma. The economic situation warrants enhanced government expenditure.
  • The fiscal deficit will go well beyond the mandated level — more than twice the mandated level. This has to be accepted.

Perhaps the best course of action would be to keep the combined fiscal deficit at around 14% of GDP in the current year and find ways to finance it. This will have to be brought down gradually. It may take several years of normalisation.


Diagnosing what ails medical education

Paper:

Mains: General Studies- II: Governance, Constitution, Polity, Social Justice and International relations.

Context:

Confusion over policy for human resource development and economic policy is affecting quality, equity and integrity

Key Details:

  • The new National Education Policy (NEP) 2020 aims to provide “universal access to quality education…” and bridge the “gap between the current state of learning outcomes and what is required… through undertaking major reforms that bring the highest quality, equity and integrity into the system, from early childhood care and education through higher education”.
  • It suggests that where it differs from previous policies is that in addition to the issues of access and equity, the present policy lays an emphasis on quality and holistic learning.
  • The outcome sought in higher education is “… more than the creation of greater opportunities for individual employment.
  • It represents the key to more vibrant, socially engaged, cooperative communities and a happier, cohesive, cultured, productive, innovative, progressive, and prosperous nation”.
  • In a brief paragraph on medical education, it states that the aim is to train health care professionals “primarily required for working in primary care and secondary hospitals.”

On private entities

  • Successive governments have been faced with the quandary of how to quickly expand educational opportunities while simultaneously addressing the issues of quality and equity.
  • In the field of health care, there is a continuing shortage of health-care personnel. The infrastructure required for high-quality modern medical education is expensive.
  • Faced with public demand for high-quality medical care on the one hand and severe constraints on public resources on the other, private entities have been permitted to establish medical educational institutions to supplement government efforts.
  • Though they are supposed to be not-for-profit, taking advantage of the poor regulatory apparatus and the ability to both tweak and create rules, these private entities, with very few exceptions, completely commercialised education.
  • None of the three stated objectives of medical education has been achieved by the private sector — that is, providing health-care personnel in all parts of the country, ensuring quality and improving equity. The overwhelming majority of private medical colleges provide poor quality education at extremely high costs.

Judiciary and Executive’s role

  • Faced with this situation, the public has approached the polity, the executive and the courts to ensure equity, if not quality. The results have been patchy.
  • On and off, there have been attempts to regulate fees, sometimes by governments and sometimes by courts. Faced with the fundamental contradiction that all governments have been complicit in violations of their own policies to ensure quality as well as equity, these efforts have not been fruitful.
  • The executive, primarily the Medical Council of India, has proven unequal to the task of ensuring that private institutions comply with regulations.
  • When the courts are approached, which issues are seen as important depends on the Bench. Some judges wish to ensure quality and equity; others give importance to points of law on the rights of private parties, federalism and such issues.
  • It was in this situation that the board of governors, which replaced the Medical Council of India, as an interim before the National Medical Commission became operative, introduced the National Eligibility-cum-Entrance Test (Undergraduate), or NEET-UG, as a single all-India gateway for admission to medical colleges.
  • It is well known, though not easy to prove, that entrance examinations being held by almost all private colleges were a farce, and seats were being sold to the highest bidder. Challenged in courts, after an initial setback, the NEET scheme has been upheld.

NEET has worsened equity

  • NEET may have improved the quality of candidates admitted to private institutions to some extent, but it seems to have further worsened equity.
  • Under any scheme of admission, the number of students from government schools who are able to get admission to a medical college is very low.
  • With NEET, the number has become lower. The high fees of private medical colleges have always been an impossible hurdle for students from government schools, whatever the method used for admission.
  • Allowing government medical colleges to admit students based on marks in Standard XII and using NEET scores for admission to private colleges will be more equitable right now.
  • The basic cause of inequity in admission to higher educational institutions is the absence of a high quality school system accessible to all.
  • In medical education, the situation is made far worse by the rent seeking and profiteering of the majority of private medical colleges.

It’s about political resolve

  • The fundamental problem in achieving quality, equity and integrity in education, the stated objectives of the new NEP, is confusion on the part of successive governments between policy-making for human resource development and economic policy.
  • On the one hand, the Ministry of Human Resources Development repeatedly says that quality and equity are the cornerstones of good education.
  • On the other, the economic policies consider education a consumer good which can be sold to the highest bidder.
  • No amount of tweaking the methods of admission can address this contradiction. Only a resolute government, determined to ensure that economic policy facilitates quality and equity in education, can do it.