Public spending must pivot to building human capital
Why in News?
India’s skill gap is widening and AI as well as automation will worsen it. Our higher education challenge is one of scale and affordability. For sustaining Chinese-style high growth we can’t let our human capital lag as the resources available to us differ.
Chinese-style high growth:
- China’s extraordinary growth over three decades was fuelled by exports and domestic capital spending. At the peak, it enjoyed an 8% net export surplus consistently, which led to an accumulation of massive foreign exchange.
- On the other hand, its very high domestic savings rate was deployed to build infrastructure and expand industry.
- These sometimes led to excesses which manifested, for instance, in the phenomenon of ‘ghost cities’ and the country’s current excess capacity for electric vehicles.
- But its export surpluses have continued unabated. Since much of its industry is state-owned, the profits accruing to capital were also a fiscal benefit, which were then generously invested in physical capital, leading to a high investment- to- GDP ratio.
- There is a charge against China that its capital spending is wasteful, and returns on investment are inferior to world averages.
- On the other hand, India’s investment was comparatively frugal, but has had higher returns in terms of GDP growth. India is now poised to generate consistent high growth over multiple decades.
Differences between India and China in macro-economic terms:
There are many stark differences between the two in macroeconomic terms, even excluding the obvious political-economy factors, which are as follows:
- First, India has had a consistent trade deficit, which means that foreign capital is flowing in, adding to domestic investment. These inflows are just about 2-3% of GDP.
- The rest has to come from domestic savings, which are much lower than in China. And that ratio has been falling, which is worrying.
- The second difference is in the large pre-emption of domestic savings by the state. A big bulk goes to revenue spending on pensions, salaries, bloated bureaucracies, interest payments and subsidies. This is India’s fiscal challenge.
- It is not only the size of revenue spending, but also its quality and efficacy that needs to be thoroughly examined.
- Third, unlike China, industrial expansion is not going to take place only driven by state-owned enterprises. Indeed, they are shrinking, while the private sector expands.
- The state’s limited fiscal resources are being deployed to build physical infrastructure in the form of roads, bridges, airports and city metro systems.
- This build-up is visible, is being executed within the time-frame of an electoral cycle, has electoral rewards, and incentives for bureaucrats are also aligned with them, so they are putting their weight behind such projects.
- As such, India’s infrastructure spending as a share of GDP is rising healthily, and there is a large backlog to fill up.
- But it will always be constrained by our fiscal limitations, unlike in China where the profits of state-owned enterprises are additional resources over and above taxes collected.
Other differences:
- Beyond these three major differences, we must note that India’s manufacturing sector accounts for only 17% of GDP, much lower than in China or other East Asian peers.
- The sector can expand only with substantial private (not public) investment, enabled by easy entry and exit policies, and ease of doing business.
- Much policy attention is on this aspect, covering issues like taxation, labour laws, production-linked incentives, logistics and the tweaking of the law for special economic zones. It is possible that India will be a pioneer in growth driven by agro-based industries, green and circular economy initiatives, rapid digitalization and large-scale service exports. Such a model has not yet been seen anywhere.
- This brings us to the most important determinant of sustainable and inclusive growth: spending on building human capital.
- This does not show results immediately, and certainly not within electoral cycle timelines for bureaucrats and politicians to crow about.
- We already have a co-existence of shortages in skills and jobs on a big scale, and must focus on building the skills and talent required for tomorrow’s jobs.
- The rot in school education, as revealed by repeated ASER surveys, need not be debated here. Both in school and higher education, there is a tiny slice of institutions that can claim to be world class, but they are isolated oases in a vast barren landscape.
- China already had an advantage in its spending on school education. Since it did not have universities in the top global ranks, it expanded spending on higher education with a focus on creating world-class universities; now institutions like Tsing-hua and Peking University are high ranked. India too can achieve this with focused efforts and resources.
- India’s skilling and higher education challenge is one of scale and affordability. The vast majority who need training and education inputs will not be able to afford the cost it entails. It does not mean that we suppress salaries and fees in higher education. In the US, this is solved by a sizeable student-loans market.
Way forward:
- Investment in higher education helps the individual substantially, and resultantly the nation. But there is no reason why private debt should not fund it.
- For primary and secondary education, however, we need much higher public spending.
- Education is a state subject, so central fiscal resources should be made available to states and third-tier governments to beef-up their spending.
- India’s public capital outlay should now pivot from highways and airports towards building long-term human capital. We must achieve the benchmark of 6%-of-GDP sooner rather than later.
Conclusion:
India’s future is based on the public spendings in capital budgeting like skill development, infrastructure, education, health etc. Because if we want to grow like the Chinese high growth model we have to learn from them as their public spending is far higher than us. Focusing on human capital will be road to long lasting growth of the Indian economy.
