India's National Magazine
From the publishers of THE HINDU

Vol. 16 :: No. 02 :: Jan. 16 - 29, 1999

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COLUMN

Top-down vision

In Andhra Pradesh, the collapse of growth in a year when major sacrifices of existing benefits were being demanded, has quickly showed up the dangers of high-profile, top-down restructuring strategies which take away a range of benefits in return for the mere promise of a great future.

C.P. CHANDRASEKHAR

GOVERNANCE in a democracy is tricky business, as Andhra Pradesh Chief Minister N. Chandrababu Naidu would testify. Barely a year back, observers in the media had bought the idea that his tenure as head of the State Government was a bold experiment that was bound to change the nature of governance at the State level. With elections to the Assembly less than a year away now, supporters for such a view are more difficult to find. Opinion now is being swayed by indications that the subjects of Chandrababu Naidu's experiment - the people of Andhra Pradesh - are more sceptical of his reign.

Chandrababu Naidu claimed that he had a vision ("Vision 2020"), epitomised by his declared preference for being designated as the chief executive, rather than as the Chief Minister of Andhra Pradesh. That vision involved transforming Andhra Pradesh into a haven of prosperity by the end of the second decade of the next century, merely by adopting a better commercial and corporate style of management of the human and material resources of the State. Since such a vision presumed a high degree of centralised monitoring and control of developments in different spheres of economic activity, he chose the most obvious means to facilitate such control: information technology. Sitting in the cybernetic comfort of his offices in Hyderabad, Chandrababu Naidu hoped to use an expensively built and ostensibly transparent management information system to access, act upon and monitor information on the myriad activities that constitute the development process of a State.

To realise his vision, Chandrababu Naidu chose the World Bank as his adviser, and private investors (both domestic and international) as his partners. Virtually at the start of his tenure, the World Bank, which was keen to spread its reformist tentacles from the Central to the State government-levels, prepared a report titled "Andhra Pradesh: Agenda for Economic Reforms".

The report argued that despite the fact that Andhra Pradesh had the resource base required to make it one of the fastest growing States in India, its growth performance had been poor. The average growth rate of Gross State Domestic Product (GSDP) since 1980 had been significantly lower than the national average. The thrust of the report was that persistent neglect of infrastructure was the key factor responsible for this poor performance. And the cause for this neglect was traced to two sources. First, inadequate public expenditure in creating new infrastructural capacities and maintaining existing ones because of a fiscal crunch created by the diversion of resources into welfare schemes and subsidies. The ratio of public sector investment to GSDP in Andhra Pradesh was, at 7 per cent, well below the national average of 10 per cent. Secondly, the failure to develop a "policy/legal environment conducive to private sector participation in infrastructure development." What is more, since during those years Andhra Pradesh had, according to the Bank, "developed an anti-poverty strategy based on massive public expenditure on broad-based subsidy and welfare programmes and rapid expansion of public employment," the strategy was fiscally unsustainable and ineffective in terms of the impact on poverty.

A. ROY CHOWDHURY
Andhra Pradesh Chief Minister Chandrababu Naidu at work.

THE implications of this analysis were obvious. Growth, according to the Bank, had to be made the fundamental objective, central to the realisation of which was fiscal restructuring that would reduce the budgetary deficit and the State's borrowing requirements as well as immediate release of resources for capital expenditure. In the medium term, the curtailment of the deficit was expected to reduce the interest burden on the Government's budget and permit sustenance of capital expenditure. What was made clear, however, was that additional tax revenues garnered through higher rates was to be avoided. Efforts to increase revenue, it was argued, must "concentrate more on simplification, administrative improvements and base-broadening to improve buoyancy, rather than rate increases."

In the event, the only real source of additional revenue generation has been the repeal of prohibition. Thus, the thrust of fiscal adjustment was not to be revenue generation, but expenditure restructuring and reduction. Given the fact that the fastest growing item in the State's expenditure budget was that on welfare programmes, whose share in non-interest expenditure had risen from 10.9 per cent in 1980-81 to 27 per cent in 1995-96, a sharp reduction in such expenditure in order to increase (non-wage) operation and maintenance and capital expenditure was recommended.

Central to the welfare schemes in Andhra Pradesh has been a wide public distribution system, through which the principal staple - rice - was provided at a specially subsidised price. The rice subsidy scheme, which began in 1982-83, was considerably enhanced in December 1994, when the issue price per kg was reduced from Rs.3.50 to Rs.2, and the allocation per person and family raised from 4 kg and 20 kg to 5 kg and 25 kg respectively. The scheme reportedly covered as much as 85 per cent of the population.

As a preparation for his World Bank-inspired strategy of development in the State, Chandrababu Naidu reversed the increase in rice subsidy to its level prior to December 1994. The World Bank was, however, unsatisfied with this initiative alone, and recommended that the coverage of the rice subsidy scheme should be reduced to 30 per cent of the population from 85 per cent, by targeting it at those below the poverty line, and that even for these sections, the issue price should be set at a level equivalent to at least 50 per cent of the cost incurred by the government on purchase, storage and distribution.

Despite this recommendation that food subsidies should be drastically curtailed, the revenues required to sustain a combination of necessary capital and current expenditures proved difficult to garner, even on paper. Two consequences followed. First, a litany of typical World Bank-style recommendations with regard to raising user charges (for power, irrigation and higher education, for example), restructuring and privatising public enterprises, reducing public sector employment and the like aimed at reducing budgetary subsidies and wage costs and garnering some additional resources. Secondly, a case for substantially liberalising and facilitating the operations of private investors, especially in the infrastructural sector, and for allowing pricing that renders such investment profitable for private operators.

INTOXICATED by the warm reception that his search for corporate glamour received in the media, Chandrababu Naidu has gone along with the World Bank on many of these counts. As part of a multi-component Andhra Pradesh Economic Restructuring-Rehabilitation Project (APERP), which was to attract funding to the tune of $550 million in 1996 itself, the power tariff for the agricultural sector was raised from a flat rate of Rs. 50 per HP to levels ranging between Rs.150 and Rs.400 per HP depending on the capacity of the pumpset; the Road Transport Corporation fare structure was raised by one paisa per km; the Rs.2-per-kg rice scheme was reversed and the coverage of the rice subsidy scheme was reduced to 72 per cent with the promise of a further reduction to 57 per cent by December 1997 and 45 per cent by January 1999; and the water rate for irrigation which ranged between Rs.20 and Rs.120 per hectare was raised to between Rs.60 and Rs.350 per hectare. Since then, under pressure from the World Bank and its monitoring teams, the Government has gone ahead with reforms in the power sector, the public sector, and the fields of irrigation, roads, primary education, primary health and nutrition. It has also agreed to reduce public sector employment at the rate of 1 per cent a year.

For the people of Andhra Pradesh, the implementation of this strategy, which places heavy burdens on the people in the form of higher prices, reduces subsidies and curtails employment, could not have occurred at a worse time. The year 1997-98 saw a virtual collapse of the agricultural sector in Andhra Pradesh, with production falling by 20 per cent in the case of rice, by 10 per cent in the case of coarse cereals, by 25.2 per cent in the case of pulses, by 39.7 per cent in the case of oilseeds, by 8.1 per cent in the case of sugarcane and by 30 per cent in the case of cotton. Industry too experienced the effects of the nation-wide recession, with sickness and closure affecting not merely the small scale, but also the medium and large scale sectors.

To a population devastated by the vulnerability of agriculture, the principal source of livelihood in the rural areas, the promise of two new Independent Power Producer fast-track power projects and several others in the public sector, a few World Bank-funded primary health centres and primary schools, a hi-tech park in the capital city and the choice of Hyderabad as the location for a glitzy new management school financed by the top brass of Indian business, offered little solace. The whole restructuring strategy is premised on improving the quality of life of all, other than the most desperately poor, through growth. Hence, the collapse of growth in a year when major sacrifices of existing benefits were being demanded quickly, showed up the dangers of high-profile, top-down restructuring strategies which take away a range of benefits in return for the mere promise of a great future.

THIS, of course, is not to say that such growth is guaranteed. What Chandrababu Naidu and his advisers have not taken into account are the problems of being a State in a highly centralised Union. Not only are the revenue-generating capabilities of a State limited, making additional resource generation crucially dependent on curtailing explicit and implicit subsidies, but in product markets, local producers compete with producers from other States. This implies that any reduction in producer subsidies through a hike in water rates, for example, can significantly affect competitiveness in crucial markets. While the jury is still out till more definitive evidence comes in, it could be surmised that the unusual collapse in agricultural production, driven in substantial part by a reduction of acreage under different crops and not just of the yield on existing acreage, was partly the result of such a loss of competitiveness. According to official sources, foodgrain production in Andhra Pradesh fell by 19 per cent in 1997-98, mainly owing to a significant 14.1 per cent fall in the area under foodgrain cultivation. And this fall is not explained by a shift to other crops.

Even if it is argued (without basis) that restructuring of cultivation in the medium or long term would reverse the decline in production in acreage, the question of sustaining employment in the interim remains. The entry of a Microsoft, hi-tech hospitals, new business schools and a few power producers can hardly compensate for the decline in this crucial sector from an employment point of view. And even these investors are being assiduously wooed by other States, necessitating huge concessions to corporations, when the poor and middle classes are being called upon to make major sacrifices. Yet the contribution of the investors to output is meagre and to employment lower still, with many of the benefits going to upper class migrants to the State. Add to the loss of employment, the consequences of cuts in food subsidies, public distribution system (PDS) coverage and user charges for a range of services, the unfolding scenario of rising morbidity, starvation deaths and suicides among artisans and cultivators appears related to the strategy the Chandrababu Naidu Government has chosen.

Restructuring of the development process at the level of States is indeed inevitable. But rather than pursue an unworkable top-down strategy mediated by information technology, Chandrababu Naidu could have thought of more decentralised development solutions of the kind being experimented with in Kerala. Even early results make clear that if at all there is likely to be a "model" for State-level development from the south of the subcontinent, it would come from Kerala and not from Andhra Pradesh Inc. Perhaps the coming Assembly elections may drive home this point.