Central To The Market

Long-term investments in social sector are essential for growth, political stability.

Written by Pranjul Bhandari | Published:January 11, 2017 12:02 am
  social sector, social sector investment, long term investment, political stability, economic growth, economy, indian economy, financial market, GDP, GDP gowth, education growth, indian express column, india news, business Financial markets and macro economists often look upon health, education and the wider social sector as a side show. (representational image)

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.

The writer is chief India economist, HSBC

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  1. K
    K SHESHU
    Jan 11, 2017 at 2:25 pm
    The words of amartya sen must be followed. Education and medical sectors must be primary investment targets
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    1. A
      Atheist
      Jan 11, 2017 at 7:56 pm
      Dumb article by dumb commies................... Everyone deserves an education but you need to work for it. Take a well thought out stand if college degree is worth the money and time you spend on it.lt;br/gt;lt;br/gt;Also, government subsiding education will only benefit the private colleges who will churn out degrees like sausages.
      Reply
      1. M
        MIGHTY BOMBER
        Jan 11, 2017 at 5:58 pm
        What Ms.Bhandari is trying to say ? There is a clear distinction between government run healthcare, government run education system and private healthcare, private education insutions. Government run healthcare, Government run education system is in shambles; do Ms.Bhandari wants government to improve situation by employing more people or she is just referring to personal loans on lesser interest rates. “It should allow decentralised spending decisions by states and focus on the quality of learning.” Ms.Bhandari, What exactly do you mean ? Open more government schools, government run engineering colleges or anything else. Please be specific.
        Reply
        1. D
          Damodar
          Jan 11, 2017 at 7:14 am
          Both education and health sectors will provide long-term benefits if there is accountability on the part of the service providers. For example, poor quality education is currently destroying the youth. Excessive political interference is partly to blame for the poor state of affair. Although the country is ripe to receive demographic dividends, dis-illusion about corrupt and low quality education is forcing many bright students to go abroad. As a result, the resources used to educate them do not benefit the country. On the other hand, high quality education and health service, if delivered, will be of paramount importance will make India great international arena.
          Reply
          1. A
            Anil
            Jan 11, 2017 at 12:01 pm
            As someone who came out of a below poverty family, I must say the interest for education loan is very high and strange. I had to pay 14.75% interest on my education loan. The funny thing is buying a car is possible with much lesser interest, just 9.65%. Why is interest on education loan much higher than car loan? I would say, it is clearly a very wrong priority from the government. In China and European countries, students can get 0% interest loan for education. Shouldn't we make a change?
            Reply
            1. M
              Mahender Goriganti
              Jan 11, 2017 at 1:31 am
              Health and education indeed are true social sectors nothing else. Bottomline is productivity is the basis for GDP and better life especially in a poor country. service sectors like finance, (Banks, stock market), law and order are necessary service sectors evils for facilitating orderly life, democracy, and trade bargains that are equitable and fair. everything else when some are bloated and wants to social series like politics (unfortunately is a vulture industry now) and others
              Reply
              1. S
                SP
                Jan 11, 2017 at 10:17 am
                We should look at health and education as soft infrastructure and investment should be encouraged by Government taking the lead. Unfortunately state government run schools and hospitals have got a bad name. That needs to change first.
                Reply
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