The so-called social sector is not just for soft hearts; it’s a hard fact that it can create much-needed jobs and boost economic growth.
Financial markets and macro economists often look upon health, education and the wider social sector as a side show. They believe these services are a desirable “public good” but not central to markets, growth or even a stable economy. We believe this is wrong. Look carefully. Health and education play a vital role in the economy in more ways than you can imagine. Let’s start with what’s going to hit us as 2017 begins — the central government budget. India made great strides in 2015 when it channeled the extra fiscal resources made available by falling oil prices towards higher capital spending (roads, rails and bank recapitalisation). These kinds of things do much more for growth than so-called current spending, such as subsidies, because the benefits last for years. And indeed, through the year, government investment added a record two percentage points to India’s GDP growth. But why stop there?
Health and education spending can be even more helpful than capital or current. Unfortunately, we only feel the benefits after the first five years (between the sixth and eighth year), well beyond the tenure of the government of the day. Not much political benefit there. It is therefore not surprising to see that the quantity and quality of India’s social sector spending is below average for both emerging markets and the world.
This needs to change. As India’s new Fiscal Responsibility and Budget Management committee submits its reports and hopefully reiterates the importance of lower government debt and deficits, bureaucrats will have to focus on the expenditure that is best for growth, for that alone can bring down debt and deficits sustainably over time. Moreover, health and education are the last bastions the central bank has to conquer if it is going to meet its newly legislated 4 per cent medium-term inflation target. Our estimates suggest that even if all other components of the inflation basket (food, fuel, household goods, etc) fall sharply, it will not be possible to keep overall inflation sustainably at 4 per cent if health and education prices remain high.
If you look at health and education inflation carefully, you will see it has a life of its own. It is affected far more by so-called supply side bottlenecks than other sectors. Doing something about those will make a big difference to how many rate cuts will be possible and whether the central bank’s inflation targeting can work.
But doing something about the social sector has an impact on more than just effective spending and inflation. India needs to create 80 million jobs over the next10 years, at a time when global demand is likely to remain weak and domestic demand will have to work overtime to compensate. However, prospects at home are not encouraging. Over the last decade or so, labour has been departing agriculture (as it has in similar transitions elsewhere), but is only going to construction and unregistered (that is, informal sector) manufacturing, which are not markedly better jobs. Services, where labour tends to be most productive, are not generating the additional jobs the country needs.
If business-as-usual continues, India will be staring at 24 million missing jobs over the next decade. Not a pleasant picture for political stability.
Is there any reason to be optimistic? We’ve looked at the new sector, e-commerce, and while it looks promising, at best we
believe it can close only half the jobs gap. Only those sectors that drive domestic demand, such as health and education, can comfortably 0fill the other half. And the personnel gap there is glaring. Focusing on raising the skills that the health and education sectors require will go a long way in generating quality jobs. In short, social sector spending is not just desirable for its own sake, but is also central to economic growth and political stability.
What should the government do?
It should allow decentralised spending decisions by states and focus on the quality of learning. And in the health sector, it should change the focus from tertiary to primary care and spend more there. In India’s season of bold policy moves, the budget on February 1 is a good chance to look beyond just the current five years and undertake steps that bring many benefits over equally many years.
If we don’t, we will all eventually have to foot the bill.