Like Mr Kapil Sibal’s policy of ‘one nation, one examination,’ the Reserve Bank of India has a policy of ‘one nation, one interest rate’: it offers the same rate whether it is a rich city such as Mumbai or a poor village in Keonjhar, Odisha. The fact that it has not produced the desired results has made no impact on the central bank.
Further, our rulers have little self-respect or concern for honour. For instance, they made a mistake and Messrs Vodafone took advantage to make huge profits. Instead of accepting with grace their error, the Union Government tried to change the law with retrospective effect. The Government lost the case in the court and, what is far worse, lost the confidence of foreign investors. It is probable that the rupee would not have fallen as much as it has if the Government had accepted its mistake and merely tried to change the law for the future.
Too little, too late
The Government is also timid. Recently, it has tried to infuse some confidence in the market. But those measures are too little, too late. Even some Ministers are getting worried. For instance, Mr Jairam Ramesh has bluntly criticised the policy which effectively subsidises the business of digging holes and filling them up as a sop for the rural poor.
According to World Bank reports, the top 20 per cent of India’s population earns seven times the bottom 20 per cent and 14 times the bottom 10 per cent. That is about the world average. However, the statistics hide the fact that the bottom 20 per cent, certainly the bottom 10 per cent, does not have enough to eat and is mired in absolute poverty without shelter, without sanitation, without education and without healthcare.
Thanks to the Government’s policy of denying their children admission to good schools and good colleges, the rich send them abroad. So much so, it is the accepted belief in the country — among politicians, activists, bureaucrats and media — that the IITs will be polluted if they admit children of the rich, even when they are willing to pay hefty fees. But it is ok for them to study in Harvard or Oxford.
It is also accepted that it is ok for the country to release precious foreign exchange for the purpose. However, because the value of the rupee has plummeted and is going down, the rich too are unhappy.
The basic issue is whether our country has a unified economy or two economies, one for the urban rich and the other for the rural poor. Is it not a fact that the well-to-do have a surplus to save, and the poor suffer from large deficits in the form of debts? If so, can a common policy help both?
Investing in rural areas
The Government should accept that its policies have promoted the generation and accumulation of black money. Hence, it has to rethink.
In wealthy nations, the rich rarely leave their wealth to their children and spend substantial parts on charity to help the poor. We do not have a tax regime that encourages the rich to do so.
Hence, because poverty is endemic in rural areas, it should consider whether instead of giving doles, it should subsidise roads, mass transport, sanitation, water supply, energy, schools and hospitals in rural areas; instead of spending most of its capital in expensive, increasingly congesting cities, it should invest more in rural areas; and instead of depending on tax income only, it should encourage the wealthy to invest in rural areas by reducing interest rates there.
The classic objection to the last idea is that it will not work: money is fungible and if you make it cheaper in villages, that money will leak away to cities.
However much that may be true of consumption articles that is not true for real estate or for infrastructure — because they cannot be transferred. Then, suppose the Government brings out a policy on the following lines:
Any investment in rural areas by a private party in real estate and in infrastructure will get capital at interest of 2-3 per cent;
The low interest rate will be available only where the standards are the same in rural areas as they are in cities;
Interest rates in urban areas will remain as high as they are at present.
Further, the Pareto principle is enforced: the richest 20 per cent will pay 80 per cent of the costs.
In the case of housing, the upper half will have 80 per cent of the space and the bottom half the remaining 20 per cent.
How much of such investment in wide, well-paved roads, drainage and sanitation, protected water supply, electric power, school buildings with play grounds, hospitals and their equipment, and residences for the poor can be transferred from villages to cities? Some money will leak away but that will be small and should be controllable.
The Indian economy is in a shambles; the rural-urban divide has turned into a wide chasm. The State is losing control over larger and larger parts of rural areas to Naxalites.
The country has two choices: go as before; waste capital on ineffective subsidies to the rural poor and let rural poor migrate to awful city slums.
Alternatively, offer subsidised capital to rich entrepreneurs on the condition that they invest in rural infrastructure and rural real estate, and also obey the Pareto rule, that is, let at least 20 per cent of infrastructure be for the benefit of the poor and use 20 per cent of space to house the poor.
(The author is a former Director, IIT, Madras. Response to >indiresan@gmail.com and >blfeedback@thehindu.co.in )
This is 332nd in the Vision 2020 series. The last article appeared on June 16.