Archive for May 5th, 2011

Two alternative Development strategies

May 5, 2011

Kerala, somehow, always gets it right before others:

Remarkably, however, Kerala in the recent past has shown a slightly higher growth rate than the Indian economy as a whole, and only a slightly lower growth rate than Gujarat with which it is always compared unfavourably as a destination for private capital. The gross domestic product at factor cost in constant (2004-5) prices in 2009-10 was 25 per cent higher than in 2006-07 for the country as a whole; for Kerala the gross state domestic product was 28 per cent higher and for Gujarat 31 per cent higher. Growth rate, though much advertised these days by Central government spokesmen, is an utterly inadequate index for judging economic progress. Even by this criterion, however, Kerala, despite not joining the rat race for attracting capital, has performed quite creditably.

Some may argue that Kerala would have done even better if it had also exerted itself to be hospitable to private capital; but that is erroneous. A state cannot both expand welfare expenditure significantly and be generous in providing inducements to private capital. State government resources being limited, a strategy of providing inducements to private capital takes up so much of these resources that little is left for increasing welfare expenditures noticeably. According to a report in The Hindu, for instance, the Gujarat government promised to give out Rs 31,000 crore, no doubt spread over several years, to induce the Tatas to shift their Nano plant to that state. With such largesse, clearly the scope for increasing welfare expenditure gets severely constricted.

Putting it differently, we have here two alternative development strategies, which cannot really be combined. One uses the public exchequer to induce capitalists to invest in the state in the belief that this investment will generate growth. The other uses the exchequer to increase government expenditure on a variety of schemes, in particular welfare schemes, in the belief that this will not only directly benefit the people, but also, as a consequence, enlarge the domestic market, to cater to which there will be an automatic increase in investment, not necessarily of big capitalists but of a range of small entrepreneurs.

I do not have to tell you which one of the strategies is better!