Fiscal Responsibility or Fisc’s Liability? Some Quick Comments on the Impact ofFiscal Targets in FRBM Acts of Sub-National States

[Paper presented at National Institute of Public Finance an Policy, New Delhi, June, 2007]


1 Introduction

From the neoclassical perspective the deficit is an arbitrary accounting construct whose value depends on how the government chooses to label its receipts and payments [Kotlikoff 1989]. However, in an era of Structural Adjustment and Stabilisation Policies, the concept of govt. deficit then and there summons a sceptical closer look and deficit reduction becomes a hallowed objective to be implemented across-the-board. Macro economic and debt stabilization are indeed economic objectives to be aimed at in a developed economy that too in a long run perspective but its relevance in a developing economy like India is in suspicion where the primary concern is development itself rather than the growth rates and its associated trickle-down effects precisely for the reason that there is abject poverty, illiteracy and virtual stagnation of the agricultural sector where still 50 percent of the work force belongs.

Furthermore, the eventual objective of the FRBM Act is highly susceptible given the words of the all-influential Milton Friedman, the champion economist of free market economy who clearly articulated that “A balanced budget amendment . . . is a means to an end. The end is holding down the growth of (or better sharply reducing) government spending” (Wall Street Journal, 4 January 1995, p. 12). It is pointed out that while such an objective may or may not be desirable on its own merits, the statement clarifies that the current budget debate has less to do with solvency and more with preferences over the optimal size of the public sector [Corsetti and Roubini 1996]. The context is irrelevant, given the increasing all-embracing influence of the ideology of free market economy, wherefore reminds to approach the issue askance.

It is in this backdrop the study attempts to dissect the impact of FRBM Acts enacted by selected state governments and its impact upon the developmental interventions and the consequent implications for growth and development prospects of the state economies in particular and the national economy in general.

2 Structure of the Paper

The paper has been divided into eleven parts: the first and second sections are introductory, the third gives a brief note on the international experience, the fourth furnishes the essence of the Act, the fifth explains the backdrop of its extension to the sub-national level, the sixth critically reviews the literature, the seventh, eighth, ninth and the tenth sections deals with the context and analysis of the study and the last section gives the concluding remarks.

3 A Peek on International Experience

The recent kick-starting towards govt. deficit reduction is made by the US enactment of The Gramm-Rudman-Hollings Balanced Budget and Emergency Deficit Control Act of 1985 during the Reagan era. But it could achieve only modest deficit reductions, given the mandatory social security expenditures, which compelled its revision to the Budget Enforcement Act 1990 which did not impose any deficit target but made a distinction between mandatory expenditures (not subject to targets) and discretionary expenditures (subject to targets). Experience shows that the Act has been a success in a limited sense for the reason that it restricted only the discretionary government expenditure and really honoured only in the breach, through shifting many expenditures of the US federal government to off-budget heads [Chandrashekar and Ghosh 2004]. New Zealand enacted The Fiscal Responsibility Act in 1994, but it is a country where the government even gave up control over its central bank, and was fully committed to the policies of economic orthodoxy. Eventually, the Growth and Stability Pact of 1997 read with the Maastricht Treaty for the European Union, which stipulated the member countries to keep their deficits below 3 per cent of GDP. But it is also coming under severe pressure, and France and Germany are already seeking ways to make it effectively meaningless and inapplicable to actual fiscal policy [Chandrashekar and Ghosh 2004] .

4 The Act in Essence

The Fiscal Responsibility and Budget Management (FRBM) Act 2003 came into effect on July 5 2004, following the issue of the notification by the Finance Ministry with a garland of objectives[1]. There are four major requirements in the FRBM Act. First, it requires that along with the Budget the Government has to place before Parliament three statements viz, Medium Term Fiscal Policy, Fiscal Policy Strategy and Macroeconomic Framework. Second, the Act lays down fiscal management principles or the so-called fiscal rules, that the Centre govt. must “reduce the fiscal deficit" (the Rules prescribe 3 per cent of GDP, no target is mentioned in the Act, though) and "eliminate revenue deficit" by March 31, 2008. Third, the Act prohibits the Centre from taking borrowing from the Reserve Bank of India, in effect, bans deficit financing. Fourth, the Parliament must be informed through quarterly reviews on the implementation of the stipulations of the Act to take corrective measures if there are any deviations and no deviation shall be permissible without the approval of Parliament.

There is nothing sacrosanct in the Act, however. The FRBM Act can be amended easily by simply adding a clause to the annual Finance Act and the first amendment has been effected within three days of the Act coming into force, to postpone the date for elimination of revenue deficit from March 2008 to March 2009!

5 The Sub-National Clones of the Act


It is the Eleventh Finance Commission that set the ball to roll. It recommended the contents of the monitorable fiscal reform programme and the role envisaged for the next finance commission in reviewing the monitoring and implementation of the grants given under Article 275 of the Constitution[2]. Prof. Amaresh Bagchi, member of the Eleventh Finance Commission, has given a note of dissent that the commission is not competent to make grants given under Article 275 of the Constitution conditional on implementation of a monitorable programme. But his views were brushed aside[3] by taking shelter in the normative concept of sound finance in the Article 280 (3d) of the Constitution[4] .
As such the Twelfth Finance Commission made the recommendations that state should enact a fiscal responsibility legislation (Chapter 16 of Twelfth Finance Commission, Summary of Recommendations, Item No. 8, Para 4.79)[5] and linked it as a pre-condition for availing debt relief (Item No. 45, Para 12.36)[6]

Thus the stage was set for enacting FRBM Acts across states as a pre-condition for getting debt relief including debt swap with a larger view to furnish an enabling environment for the celestial navigation of the market reform process, ironically enough, brought about through state intervention! By and large, the Acts enacted by state governments religiously follows the spirit of the fiscal prudence rules in the Centre’s Act; small differences in the targets can be observed however.

6 Review of the Literature

In this section a brief review of the various arguments posited in relation to the legislation of FRBM Acts has been attempted. The arguments in support of the Act that may bring about macro economic and debt stabilisation are given in the first part and then the studies that critically dissect it are given.

I

Kopits (2001) argued that India’s public deficit bias and indebtedness cannot be sustained much longer, especially with stepped-up external liberalisation. In these circumstances, the promotion of capital formation, maintenance of market confidence, and high sustained growth, require formulation of a broad strategic approach at fiscal consolidation – with close attention to the quality of adjustment. A central aspect of such a strategy is the adoption of a permanent framework for a rules-based fiscal discipline, as proposed under the Fiscal Responsibility Bill.

Rangarajan (2007 a & b) pointed out that even if we achieve zero revenue deficit and use borrowings only for investment expenditure we still need a control over it since the investments made out of the borrowings do not generate returns sufficient to service the debt and whatever good results it generated in the recent past is only the result of a fortuitous combination of circumstances that are beginning to reverse where the slack in the economy has been fully absorbed and the ‘output gap’ fully bridged. Hence, it is pointed out that the persuasive argument for an expansionary fiscal stance has no space. Hence he argued that it is important to be committed to fiscal responsibility which will strengthen the growth momentum which in turn makes it possible to meet deficit targets and still leave enough resources for meeting the expenditure needs.

Srivastava (2006) mentioned that one important advantage of a deficit ceiling is that it introduces a hard budget constraint and forces the government to prune unproductive expenditures and substitute these by productive expenditures.

II

Patnaik (2001 and 2006) questioned the idea that government expenditure financed by a fiscal deficit either through monetisation or borrowing will necessarily leads to an unsustainable burden of public debt. He accentuated that fiscal deficit will finance by itself by generating an excess of domestic private savings over private investment exactly equal to itself whether the economy is demand or supply constrained. He also pointed out that the target fiscal deficit ratio cannot remain constant as stipulated by the Act as it is not independent of the rate of inflation in the economy.

Bhaduri (2006) observed that since the act was not crisis-driven, but strategy-driven and wherefore it is logical to consider what strategic interests of the Indian economy would be served by this act. He remarked that it is a cruel joke in the present Indian context to talk of inter-temporal optimal choice involving successive future generations when about half of our children remain undernourished, with India heading in the 21st century as the country with the highest number of illiterates and homeless and as such, crippling government action certainly does not serve the interests of the poorer section of the Indian population.

Rakshit (2001) argued that borrowing to finance the govt. expenditure will not necessarily put burden upon the future generations as taxes for servicing public debt and those receiving interest incomes from the government, both belong to the same generation. Moreover, the structural features of the developing countries will render monetary policy relatively ineffective but will make expansionary fiscal policy effective.

The concept of ‘deficit pessimism’ in the literature on reforms has been put under critical scrutiny by Ram Mohan, Dholakia and Karan (2004) [7]. They eventually raised the question whether the Act is required in the first place as they found that a growth rate of 6.5 per cent is enough for the purpose of making central debt position sustainable based on the data on debt that is publicly available[8]; that too at a level of fiscal deficit that is higher than that mandated by the FRBM Act.

At last even the Planning Commission itself realised that the targets in the present form of FRBM Act does not give much attention to the need for counter cyclical fiscal policy and the cyclically adjusted fiscal deficit and suggested that there exist a case for redefining the approach to FRBM [GOI 2006].


7 The Context of the Study

As mentioned above the FRBM Act mandates four requirements to be complied with. The paper, however, zeros in on only the second aspect of the FRBM Act familiarly called as the fiscal prudence rules that the fiscal deficit must be contained to 3 percent of the GDP and zero deficits in the revenue account.

Simply put, fiscal deficit is the expenditure of the govt. made over and above the revenue receipts and the non-debt creating capital receipts of the govt. It is the amount of govt. borrowings needed to finance its expenditure. When the fiscal deficit is in the increase, homilies are often invoked liking it to as running the total home expenditure through borrowing, that it will eventually undermine the financial condition of the home. Hence, fiscal deficit is often approached as a monster that undermines the stability of the economy from a macro perspective. It is pointed out that however that whether the fiscal deficit will lead to instability depends upon a number of factors like how productively the investments are made and how effectively is the govt. mobilizing tax and non-tax revenue from the additional income generated from the investments [Gulati 1993; George 2006].

On the other hand, it is often argued that there should not be any sort of revenue expenditure financed through the borrowed funds since it is tantamount to meeting household consumption out of outside borrowing and it is pointed out that, both at the Centre and in the states, a significant proportion of the borrowed funds are used up for current consumption like payment of salaries, pensions and subsidies [Rangarajan 2007 a].

But it is already illuminated that the distinction between revenue and capital account is not helpful to dissect the effect and purpose of govt. spending [Gulati 1993]. For instance, the spending on education has a much larger revenue component than on many capital outlays that falls under capital account but is highly productive. It is computed that the return on social services that includes education is 7.0 percent much higher than that of many capital outlays [George 2006].

The age old accounting practise of making the distinction between revenue and capital account expenditures is gravitating criticism from various quarters.

Rakshit (2001) punctuated that some important items of government expenditure that are treated as current, benefit the future (by raising the community’s future production potential) rather than the present generation[9] but have a negative impact on the government’s revenue balance, as conventionally measured. For this very reason these types of expenses are considered crucial for long term development of a country and any practice of putting them on the same footing as other items of revenue expenditure cannot but produce gross distortions in budgetary measures.

Recently [GOI 2006] punctuated the necessity to re-define revenue-capital distinction in the govt. expenditures though in the context of grants[10] under various central schemes nevertheless points to the attenuating distinction between revenue and capital expenditures. In addition, it has already been argued that we need to incorporate the concept of Quality of Fiscal Discipline instead of focusing merely on quantity of reduction of deficits as a proportion of Gross Domestic Product [Kannan and Mohan 2003].

What boils down is the present classification of govt. expenditures into revenue and capital account does germinate grave classification problems that have far reaching consequences in titanic dimensions at multiple levels to the nation’s economy in the post FRBM milieu. It is in this backdrop the present study attempts to take a closer look upon the classification of various expenditures of the govt. and attempts to approach the expenditure items from a different angle by giving due importance to that expenditures which are so essential to the economy to raise its productive capacity continuously which will even have inter-temporal benefits. There is an express need to re-classify the expenditure items by taking into account the essence of the discussion already made. Apart from that it is high time to look upon the composition of fiscal deficit rather than focussing robotically upon its absolute quantity.

8 Incongruity between expenditure adjustment and its effects


In elucidating the significance of the twin targets in the FRBM Act, Rangarajan (2007) argued that even a zero revenue deficit would not suffice as still borrowings can be used to finance capital expenditure which will certainly become revenue expenditure tomorrow and therein lays the significance for twin targets. Two options then follows that either the govt. must cut capital expenditure financed by borrowing even in the midst of zero revenue deficits or it must be financed entirely through revenue surplus.

Generating revenue surplus hinge on the space available for revenue mobilisation and the extent by which the revenue expenditure is being cut. Given the fact even a modest rise in tax-GDP ration required at least fifteen years of tax reform process, any dramatic increase could only be expected over a fairly long stint of time that too with in the pale of the tax optimality constraints, it would be safe to place little optimism in this regard. It will compel to take recourse in the inescapable option of revenue expenditure cut and how much it would be cut down hang on how much increase in revenue receipts could be brought about. It is worth noting the fact that there exist obvious limits to the revenue mobilisation given tax optimality constraints, the pinch will be felt certainly by the revenue expenditure.

Be that as it may, the expenditure on social and economic services; where the education, health, irrigation, upon which the formation of human capital and the productivity of the economy so decisively reside; will be the causality at least over a fairly long period of time over which only the tax-GDP ratio would improve even in an optimistic scenario. Since it is the present stock of capital that decisively determines factor productivity of the economy, the growth and development prospects of the future generation is sacrificed so effortlessly at the alter of intergeneration equity. True, the revenue expenditure cut on social and economic services can be reinstated at any point of time when there is an increase in tax-GDP ratio but, disfigurement inflicted upon the human capital formation cannot be restored retrospectively, given its peculiar nature thereby highlights the incongruity between expenditure adjustments and the beneficial effects.

9 Post FRBM Scenario and its effects upon State Finances


Arguments for deficit reduction are often replete with homilies like—the state cannot live beyond its means, often draws an analogy between the state and a household. Whether it is legitimate or not, taking the cue out of it, why does it cannot be argued that; since the household resorts to borrowing to fund higher education of its children even at a higher rate than that offered on luxury cars—what deters the state in resorting to borrowing to finance its education or social service expenditures even under revenue account. Households seldom consider spending on education out of borrowed money or even financing it through selling assets as current consumption. Then why does the same thing done by the state is considered as current consumption[11]?

What boils down is it is instructive to compute how much of revenue receipts and borrowings are spent on current consumption. The study attempts to find out these figures by excluding: (1) the productive expenditures under revenue account for computing the revenue deficit since expenditure on social and economic services are generally considered as developmental and productive and hence not part of current consumption[12], and (2) excluding the total developmental expenditure from the fiscal deficit to arrive at a more meaningful measure to better comprehend the amount of borrowing that is required to meet the current consumption of the govt. They are called as adjusted revenue deficit (ARD) and adjusted fiscal deficit (AFD) just for the sake of convenience in referring them. It is underscored that these are only measures to just find out how much expenditure is incurred out of revenue and borrowings to meet the current consumption of the govt. in the limited context of this paper. Three states are taken into account for the analysis and they are Kerala, Karnataka and Punjab. The first one has remarkable achievement in human development which has a huge revenue component as per the convention, the second is generally considered as the most frugal in fiscal matters and the third one achieved fiscal improvement but one among the richest states of the nation. These peculiarities formed the basis of their selection.

10 The Impact upon Selected States


As mentioned in the above section the study attempts to analyse two facts: (1) how much money is spent from revenue and borrowings on current consumption by focussing upon the ‘adjusted revenue and fiscal deficits’ computed in the limited context of the study and (2) what happened to the developmental expenditure especially in the revenue account and there by computed the ratios of (a) development expenditure in the revenue account to revenue receipts, (b) total development expenditure to total receipts, (c) total development expenditure to total expenditure. To get a fuller view of the process the performance in revenue and fiscal deficit has been juxtaposed along with these results with the help of figures adjoined below.

Regarding the first aspect it is found that, all the three states are not spending for current consumption out of borrowed funds and there is surplus in the revenue account in the limited sense drawn for the purpose of the study (See rows 21 and 22 in tables 2, 3 and 4 adjoined below).

Turning to the second aspect of—development expenditure in the revenue account to the total revenue receipts; it is found that during the last three years there is a considerable squeeze in the development expenditure in the revenue account for the most fiscally improving states of Karnataka and Punjab (See row 27 in tables 2, 3 and 4). In the case of the former it nosedived from 68. 83 percent to 52.84 percent (2002-03 to 2004-05) and in the case of the latter it plummeted from 51. 96 percent to 43.12 percent (2003-04 to 2005-06). Nonetheless, it remained almost same in the case of Kerala however it declined marginally. The fact that to be noticed that, in Karnataka and Punjab, there happened impressive improvement in the reduction of revenue deficit, but it seems that it happened at the cost of development expenditure in the revenue account.

With respect to the last two aspects in the second question, the remarkable deficit reduction in Karnataka and Punjab did not result in any improvement in the development expenditure (See table 1). In the case of Karnataka the TDE/TR ratio (total development expenditure to total receipts) registered only a marginal rise and in the other cases it declined noticeably. The decline in the case of Punjab is carefully explored further as it is a state that achieved remarkable improvement in fiscal health as per the conventional standards. In Kerala both these ratios declined but slightly.

Tables and Diagrams are excluded. For the full text: http://www.santhoshtv.in/





11 Concluding remarks


The study attempted to analyse the impact of FRBM Act on the developmental expenditures of selected states. It approached the issue by critically discussing and dissecting the backdrop of FRBM initiates and its consequences upon the future growth and development prospects of the economy. For analytical purposes the study used its own measures and explained their relevance in the context elsewhere.

The study found that the popular notion that the govt. is meeting its current consumption out of borrowed funds is not correct. It seems that the remarkable improvement in the fiscal health of Karnataka and Punjab happened at the cost of developmental expenditures in the revenue account. It also found that there is no improvement in the total development expenditure of all the three states even in the midst of improvement in fiscal health as per conventional standards. All this witnessed in the post FRBM scenario and will certainly have consequences upon the economy, whether it is beneficial or detrimental can be answered conclusively only by exploring deeply. If it is detrimental then it would become a liability to the fisc.

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References

Bhaduri, Amit (2006): ‘The Politics of ‘Sound Finance’’ Economic and Political Weekly November 4, 2006, pp 4569-4571

Chandrasekhar C P and Ghosh, Jayati (2004) ‘Fiscal Responsibility and Democratic Accountability’ The Hindu, Friday, Jul 23, 2004.

Corsetti Giancarlo and Roubini Nouriel (1996) ‘European versus American Perspectives on Balanced-Budget Rules’ The American Economic Review, Vol. 86, No. 2, Papers and Proceedings of the Hundredth and Eighth Annual Meeting of the American Economic Association San Francisco, CA, January 5-7, December. 1996, pp. 408-413.

George, K K (2006): ‘Major Issues in State Level Fiscal Reforms’, in Srivastava, D K and Narasimhulu, M (2006): State Level Fiscal Reforms in the Indian Economy, (New Delhi: Deep and Deep Publications)

GOI , (2006): ‘Towards Faster and More Inclusive Growth: An Approach to the 11th Five Year Plan’, (New Delhi: Planning Commission)

Gulati, I S (1993): ‘Taackling the Growing Burden of Public Debt’, Economic and Political Weekly, May 10, 2006.

Kannan K P, Mohan R (2003): ‘India's Twelfth Finance Commission. A View From Kerala’, Working Paper 354 December, (Trivandrum: Centre of Development Studies)

Kopits, George (2001): ‘Fiscal Policy Rules for India?’ Economic and Political Weekly March 3, 2001, pp 749-756

Kotlikoff, Laurence J., (1989): ‘From Deficit Delusion to the Fiscal Balance Rule: Looking for an Economically Meaningful Way to Assess Fiscal Policy’ Working Paper No. 2841, (Massachusetts Avenue Cambridge: National Bureau Of Economic Research)

Patnaik, Prabhat (2001): ‘On Fiscal Deficits and Real Interest Rates’, Economic and Political Weekly, April 14, 2001, pp 1160—1163.

Rakshit Mihir (2001): ‘Restoring Fiscal Balance through Legislative Fiat:The Indian Experiment’, Economic and Political Weekly, June 9, 2001, pp 2053-2062.

Ram Mohan T T, Dholakia H and Karan, Navendu (2004): ‘Is India's Federal Debt Sustainable?-Revisiting an Old Debate’ IIMA Working Papers No. 2004-11-02

Rangarajan C (2007a): ‘Earnest about Fiscal Responsibility’ The Economic Times, Delhi Edition, 19-02-07, pg 15

Rangarajan C (2007b): ‘In Defence of Fiscal Adjustment’ The Economic Times, Delhi Edition, 20-02-07, pg 16

Srivastava D K (2006): ‘FRBM Act and Eleventh Plan Approach Paper’, Economic and Political Weekly November 4, 2006, pp 4553-4559.


Endnotes

[1] It is an Act to provide for the responsibility of the Central Government to ensure inter-generational equity in fiscal management and long-term macro-economic stability by achieving sufficient revenue surplus and removing fiscal impediments in the effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability through limits on the Central Government borrowings, debt and deficits, greater transparency in fiscal operations of the Central Government and conducting fiscal policy in a medium-term framework and for matters connected therewith or incidental (Underline not in the text)
[2] Ar. 275. Grants from the Union to certain States.—(1) Such sums as Parliament may by law provide shall be charged on the Consolidated Fund of India in each year as grants-in-aid of the revenues of such States as Parliament may determine to be in need of assistance, and different sums may be fixed for different States:
Provided that there shall be paid out of the Consolidated Fund of India as grants-in-aid of the revenues of a State such capital and recurring sums as may be necessary to enable that State to meet the costs of such schemes of development as may be undertaken by the State with the approval of the Government of India for the purpose of promoting the welfare of the Scheduled Tribes in that State or raising the level of administration of the Scheduled Areas therein to that of the administration of the rest of the areas of that State:
Provided further that there shall be paid out of the Consolidated Fund of India as grants-in-aid of the revenues of the State of Assam sums, capital and recurring, equivalent to—
(a) the average excess of expenditure over the revenues during the two years immediately preceding the commencement of this Constitution in respect of the administration of the tribal areas specified in Part I of the table appended to paragraph 20 of the Sixth Schedule; and
(b) the costs of such schemes of development as may be undertaken by that State with the approval of the Government of India for the purpose of raising the level of administration of the said areas to that of the administration of the rest of the areas of that State.

(1A) On and from the formation of the autonomous State under article 244A,—
(i) any sums payable under clause (a) of the second proviso to clause (1) shall, if the autonomous State comprises all the tribal areas referred to therein, be paid to the autonomous State, and, if the autonomous State comprises only some of those tribal areas, be apportioned between the State of Assam and the autonomous State as the President may, by order, specify;
(ii) there shall be paid out of the Consolidated Fund of India as grants-in-aid of the revenues of the autonomous State sums, capital and recurring, equivalent to the costs of such schemes of development as may be undertaken by the autonomous State with the approval of the Government of India for the purpose of raising the level of administration of that State to that of the administration of the rest of the State of Assam.
(2) Until provision is made by Parliament under clause (1), the powers conferred on Parliament under that clause shall be exercisable by the President by order and any order made by the President under this clause shall have effect subject to any provision so made by Parliament:
Provided that after a Finance Commission has been constituted no order shall be made under this clause by the President except after considering the recommendations of the Finance Commission.

[3] It is instructive to take note of the fact that he is the only expert in the Eleventh Finance commission on Public Finance and his arguments were summarily rejected. It is often pointed out in the media that it is the politicians alone who sideline economic rationale for their own ‘political’ ends. In the instant case it is economists and non politicians that unloaded the weighty arguments of the expert in Public Economics!

[4] Ar 280 (3d) any other matter referred to the Commission by the President in the interests of sound finance.

[5] Each state should enact a fiscal responsibility legislation, which should, at a minimum, provide for (a) eliminating revenue deficit by 2008-09; (b) reducing fiscal deficit to 3 per cent of GSDP or its equivalent, defined as the ratio of interest payment to revenue receipts; (c) bringing out annual reduction targets of revenue and fiscal deficits; (d) bringing out annual statement giving prospects for the state economy and related fiscal strategy; and (e) bringing out special statements along with the budget giving in detail the number of employees in government, public sector, and aided institutions and related salaries.
[6] Each state must enact a fiscal responsibility legislation prescribing specific annual targets with a view to eliminating the revenue deficit by 2008-09 and reducing fiscal deficits based on a path for reduction of borrowings and guarantees. Enacting the fiscal responsibility legislation on the lines indicated in chapter 4 will be a necessary pre-condition for availing of debt relief.

[7] They subjected this proposition to critical scrutiny in two ways. First, using a decomposition model, they separated out the effects of growth and government behaviour over the past decade. Assuming that government behaviour of the recent past will continue, it asked what growth rate would be required in order to make the central debt position sustainable. Sustainability here means bringing the debt to GDP ratio down to 50 per cent by the end of the decade, that is, 2009-10 from the present level of 56.8 per cent. They found that a growth rate of 6.5 per cent suffices for the purpose. Even if the growth rate falls below this level, the order of fiscal adjustment required would be modest. Next, positing a growth rate of 6.1 per cent in the coming years and making suitable assumptions about revenue buoyancy and other receipts, they empirically estimated the growth in primary expenditure that would be permissible.

[8] There is an inexplicable accretion to debt of around Rs 100,000 crore every year in the Kelkar Task Force (KTF) projections. Their projections were based on the data on debt available in the public domain and reflected in the estimates of Rangarajan and Srivastava (2003), CMIE and the CAG. They further pointed out that if there is some hidden component to the debt that is known only to those in government and that is impacting on the whole question of sustainability, that is a obviously a matter on which they cannot comment at this point.

[9] The most important of these items are education, health, grant for supporting (public or private sector) R and D and costs incurred in connection with setting up institutions for improvement in the working of the economic system.

[10] For example, the entire budgetary expenditures on Bharat Nirman, the National Employment Guarantee, the Backward Regions Grant Fund, the Jawaharlal Nehru National Urban Renewal Mission, and all new schemes in agriculture such as the National Horticulture Mission are classified as revenue expenditure since they are in effect grants to implementing agencies in the states, even though they finance asset creation on the ground.
[11] Whether the state can recoup the money spent on education in the revenue account is another issue that should be dealt in another plane given the fact that these types of expenditures generate wide ranging pecuniary externalities spread across the nation. It all depends upon the efficiency of the tax administration and collection machinery of the state since it is axiomatic that proper education will certainly raise factor productivity through human capital formation and if wages are equal to marginal product there will be a corresponding increase in the income of the individual.

[12] It is true that some sort of wastage can still be observed even in this classification, but by and large these developmental expenditures are safe to be considered as developmental expenditures.

Sky-High Fortunes for Combating Ground-Low Prices:
A Case for Agricultural Processing

[Paper presented at the annual meeting of Rotatry Club, Kanjirappally, Kerala, India on 30-08-2006]

First of all, I would like to thank Mr. Theyyachan and family for the daring decision to invite a person like me to an august gathering like this. Furthermore, I would like to appreciate the Rotary Club for setting aside valuable time for serious discussion even in the midst of an otherwise relaxed ambience like this.

Since the freedom to choose the topic has been given to me, I became thoughtful as to decide the subject matter on which I have to talk. My training in economics motioned me to zero in on the economic aspect of whatever subject I may choose eventually. By and large, all of us including me, one way or other, belong to agricultural families and live in a region characterised by agricultural activities. Hence I decided to select an issue from agricultural sector. In this way I resolved to highlight some economic aspects of high price realised for natural rubber.

The Period of Plenty and the Upcoming Scenario


For the last several months or so, we are experiencing very high prices for natural rubber (Around Rs.70 per Kg as on 30-08-2006). Some may argue that, given the loss incurred due to the long period of slump in rubber prices starting from late 2001, this high price is only just enough to cancel out the pervious losses.

At the same time we are well aware of the downside of this upward movement of the prices. Everyone knows that price will not remain like this for ever. It will eventually climb down and when it would happen is the only thing to be known. For this much, one need not get expert advice from any economist or a market analyst. In short, we all know that price will not continue like this for ever and move in a cyclical manner.

Media is abounding with the stories of agricultural crisis especially from the Waynadu district. And we also experienced the burnt of it, some years back when the natural rubber price nosedived to Rs. 22 or so. I recollect that, during that period when I was working at the Department of Economics, St.Berchmans College, Changanacherry, I submitted a presentation on a topic titled as ‘The Crash of Cash Crops’. Now I am talking about exactly an opposite issue!

Anyway, along with this, consider the tailspin in Vanilla prices that happened from its captivating levels of Rs 2000 per kg for raw Vanila beans to Rs. 200 per kg or so and the crisis through which the Vanilla farmers are currently getting through.

This is a situation that everybody wants to by pass. How we could circumvent this impending crisis hence must become an issue to be discussed seriously. Admittedly, learning appropriate lessons from past experiences is the building block for future fortunes.

The Paradox of Low Price for Farmers and High Price for Manufacturers

We often experienced the contrast of farmers getting low prices where as the manufacturers whose use these agricultural products as raw materials realise high prices. John Kenneth Galbriath, the celebrated American economist and the former US Ambassador to India, put forwarded an explanation for this paradoxical situation.

He pointed out that farmers are facing ‘Perfect Competition’ where as the manufacturers are facing ‘Monopolistic Competition’ and hence the price differential. Perfect Competition is a market situation where the sellers do not have any control over the price because of the existence of very large number of sellers. Hence it is difficult to form farmers’ organisations to lobby for remunerative prices. On the other hand, Monopolistic Competition is a market situation where the sellers enjoy total control over the price due to the presence of only few number of sellers. They can easily form producers’ cartels and can even influence government and policy making.

In addition to it, the farmers are dealing with products that are highly perishable or having small shelf-life. Hence they are compelled to sell their products at whatever low prices prevailing in the market.

The Way Out

A two-folded strategy can be adopted to deal with this situation. Firstly, farmers’ organisations can be formed to lobby effectively for appropriate government interventions for getting remunerative prices. Secondly, we can take steps either to increase the shelf-life or decrease the perishability of the agricultural product or adding value to the product with a view to increasing the bargaining power of the farmers.

The first strategy has already been taken, for instance “InFarm”, but could realise only very limited benefits. Moreover, the formation of “InFarm” brought about a handful of controversies. This result is not an unexpected one from an organisation that is supposed to represent the interests of a large number of farmers and is quite typical to any organisation like this. It is quite natural that the interests of the leaders of these types of organisations often get in conflict with the interests of the members. In economic theory, this problem of conflict of interests between leaders and members of a big organisation is called as “principal-agent problem”.


Thus the ray of hope lies in the second strategy of increasing the shelf-life or value addition of the agricultural products. This is a virgin pathway yet to be explored at least in our country. Thus we reach the dynamic terrain of agricultural processing.

The Terrain of Agricultural Processing

Generally speaking, agricultural processing means the processing of agricultural products that will result in value addition, increased shelf-life etc with a view to increasing the bargaining power of farmers which is essential to reap remunerative prices for their products. For instance, activities like making RSS-1 rubber sheets, latex processing, bitumen processing etc. Thus agricultural processing will help framers either to realise good prices even in a situation of adversity or to minimise the number of burn marks resulting from falling prices.

Admittedly, these activities involve more participation and engagement from the part of farmers. Furthermore, it requires collective action in many situations. Above all, in a bountiful period like this people tend to take leisure rather than worry about the future downturn.

But it is wise to ‘make hay while the sun shines’. At least a part of the increased income from the present high level of prices should be set aside for engaging in processing activities. Remember that only during a period of plenty that we can afford investment in activities like this.


These processing activities may need more labour but labour deficiency could be dealt with by resorting to labour saving techniques or the judicious blending of labour and technology. Remember that all the present labour saving tools and machines that we presently use like cutting machines, nifty gadgets, excavators etc are the inventions out of desperate need to confront acute labour shortage in Western countries.

It is said that “think big is good but act big is foolish”. Anyway I submit these ideas for your consideration. I conclude with the words of visionary industrialist Jamshedji Tata. “Nothing worthwhile could ever be achieved in this world without deep thought and conviction”.

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Summary of the Paper: Situating the Reservation Debate

(Paper Submitted as part of Refresher course in Economics 5 December—26 December, 2006Academic Staff College, Jamia Millia Islamia, New Delhi)



It is pointed out that preferential treatment given in public employment and in higher education on the basis of caste is discriminatory in nature and violates the principle of equality. The apex court also aired the same view in the recent judgement on Nagaraj case delivered on 16-10-2006.

The paper argues that such a preferential treatment seldom violates the concept of equality rather it reinforces and under grids the concept of equality. A mere statement of equality in the constitution is meaningless unless it is matched with a “set of resources” that is required to take benefit out of the constitutional guarantee. If any section of the society has any deficiency with respect to that “set of resources” then they cannot take benefit out of the mere conferment of equality. Hence for maintaining equality, such sections of the society must be given some type of preferential treatment to acquire that “set of resources”.

If the said deficiency is in terms of human capital, acquired in the form of education, it could be surmounted by providing the desired level of education to such sections of the society. Wherefore the clamour for reservation in higher education becomes a natural corollary of the efforts taken by the state to ensure 'equality'!

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Situating the Reservation Debate:
Some Signposts from Economic Theory

(Paper Submitted as part of Refresher course in Economics 5 December—26 December, 2006
Academic Staff College, Jamia Millia Islamia, New Delhi)


The recent decision to set aside seats in the so-called islands of excellence in higher education to the socially backward classes and the apex court judgement on 16-10-2006 in the M. Nagaraj and others versus Union of India and others where in it pronounced about the validity of the Constitution (Eighty-Fifth Amendment) Act, 2001 inserting Article 16(4A) of the Constitution retrospectively from 17.6.1995 providing reservation in promotion with consequential seniority for SC/STs have opened the floodgates of criticism and counter criticism on the issue of reservation. The high-voltage campaign is kick started by the high profile and the most senior chief minister of the nation Mr. M. Karunanidhi by writing directly to all chief ministers and asking them to implead themselves in the reservation case before the nine judge constitutional bench of the apex court and decry even many of the opinions vented out by the judgement like reservation has to be used in a limited sense otherwise it will perpetuate casteism in the country etc. (The Hindu: 2006b). In this backcloth, even a cursory reading of the arguments from both sides points that, it is imperative to situate the reservation debate in its proper setting to draw appropriate conclusions. The paper is an attempt in that direction and is divided into six sections. The first section gives the main arguments from both sides and the judgement. This has been given to show the plane in which the core arguments of the debate are taking place. The second section deals with the concepts of equality, efficiency and the extent of reservation. It discusses the importance of proper initial state of distribution of income and resources for generating efficient outcomes. The third section delineates the nexus between equality and reservation in, public employment and centres of higher education and the fourth section briefly discusses the external benefits of reservation. The fifth section examines the issue of reservation and the ‘fear’ of de-secularisation and the final section gives the concluding remarks.

1 The Plane of Reservation and the Nagaraj Case

1.1 Arguments supporting Reservation

A number of weighty arguments are advanced from various quarters to posit the case for reservation in higher education and employment. However, all can be encapsulated in a single argument that it is the duty of the state to dispense social justice to the socially and educationally backward classes given the age-old discriminatory and exploitative regimes that rendered a large section of the populace downtrodden and depressed. Furthermore, set against the view that preferential treatment on the basis of caste, that too in promotion violates the concept of equality which is a basic feature of the constitution, it is highlighted that the concepts flowing from the preamble to the Constitution alone constitute the basic structure; that, basic structure is not found in a particular Article of the Constitution; and except the fundamental right to live in Article 21 read with Article 14 , no particular Article in Part-III is a basic feature and wherefore equality mentioned in Articles 14 and 16 is not to be equated to the “equality” which is a basic feature of the Constitution. Put otherwise, equality of opportunity in matters related public employment as given by Article 16 and equality before law as given by Article 14 cannot be equated to the equality mentioned in the preamble to the constitution which is a basic feature of the constitution. Hence preferential treatment in matters of public employment both in initial recruitment and promotion, that too with consequential seniority is well within the pale of constitution and seldom violates the basic structure or results in reverse discrimination.

1.2 Arguments against Reservation

Equality is a part of the basic structure and it is impossible to conceive of the Constitution without equality as one of its central components and it is the basic feature referred to in the preamble to our Constitution. Hence Article 16(1) is integral to equality that, Article 16 has to be read with Article 14 and with several Articles in Part-IV.

It is further argued that equality of opportunity cannot be overruled by affirmative action. Moreover, “equality in employment" consists of equality of opportunity [Article 16(1)], anti-discrimination [Article 16(2)] , special classification [Article 16(3)] , affirmative action [Article 16(4)] which does not obliterate equality but which stands for classification within equality, and lastly, efficiency [Article 335] . What distils down is any affirmative action taken must be in ‘balance’ with the equality and efficiency clauses wherein it highlights the fact that affirmative action has only a limited work space. In other words, there is a conflict between the affirmative action and equality and efficiency and wherefore they must be properly balanced. By balance they mean that there should not be any consequential seniority in promotion or breach of 50 % limit for reservation.

1.3 The Judgement of Apex Court

Firstly, the apex court observed that there can be no rule of law if there is no equality before the law and the rule of law and equality before the law are designed to secure among other things justice both social and economic which is mentioned in the preamble to the constitution. Secondly, Article 14 confers rights which are elementary for the proper and effective functioning of democracy. So "equality" is the essence of democracy. Considering both these aspects the court observed that "equality" is a basic feature of the Constitution. Furthermore, the concept of ‘public employment’ is socialistic and therefore, also falls within the preamble to the Constitution.

The court observed that the claim of individual right under Article 16(1) with which the general class seeks equity and the preferential treatment given to a backward class [Article 16(4)] through which the backward classes seek justice is conflicting. Moreover Article 16(4) has a limitation in the form of Article 335. Hence these conflict and limitation are to be balanced and in this context the extent of reservation comes in to the picture.

The court found that, the impugned amendments consider all these requirements and do not obliterate any of the constitutional requirements flowing from them namely the ceiling-limit of 50% for maintaining ‘balance’ (quantitative limitation), the concept of creamy layer (qualitative exclusion) etc. The compelling reasons namely backwardness, inadequacy of representation and the overall administrative efficiency are also not obliterated by the impugned amendments. With these remarks the court upheld the validity of the amendments. Further it observed that since the constitutional requirements and the compelling reasons are not violated the structure of equality of opportunity in Article 16 does not collapse.

However regarding the question of reservations in promotions for SCs and STs the court observed that in each case the Court has got to be satisfied by placing before it the requisite quantifiable data and satisfy the Court that such reservations became necessary on account of inadequacy of representation of SCs/ STs in a particular class or classes of posts without affecting general efficiency of service as mandated under Article 335 of the Constitution.

1.4 Other Arguments

There are many arguments which point out that caste based backwardness is not the only of backwardness and there exist other forms of ‘disadvantages or deprivation’ and hence there should not be any policy design that consider only caste-religion based backwardness (Economic Times: 2006), (Pant: 2006), (Deshpande and Yadav: 2006). But it seems that they all missed the woods for the trees. If there are other forms of backwardness that have the same degree to that of caste-religion based backwardness then the policy prescription is not to summarily reject the caste based quota policy but to include them too on a case by case approach. Furthermore, Pappu et. al. (2006c) discerned that the shift in emphasis from discrimination to deprivation is a terminological obfuscation by positing that “affirmative action" is tantamount to "reservation." They argued that affirmative action in the U.S and our reservation policy must be differentiated as the policy objectives of both are rather different and addresses different problems. Affirmative action in the U.S. is meant for a numerical minority whereas in India the sections contending for the provision of reservation were and are a numerical majority. They rightly pointed out that the poor are not a marginalised community but an economic class where as the "lower castes" in India on the other hand are marginalised communities. So the discussion is back to the stage where the apple of discord is the conflict between the equality and social justice through reservation.

2 Equality, Efficiency and the Extent of Reservation:
Conflict or Consonance?

It is to be noted that the court accepted the view taken by the petitioners and a large section of people who oppose reservation in public employment and higher education that there exist a conflict between Article 16(1), 16(4) and 335 and hence a proper balance must be maintained. Nonetheless there is nothing new in it and the 50 % limit for reservation, in whatever circumstances, spring from the keenness to keep this balance between the conflicting concepts of equality, justice and efficiency.

The natural question arises is if a state is so backward that 80 % its population comprises of backward classes, then whether sticking to the
50 % limit for reservation is logical or not. The state of Tamil Nadu follows this question and says that its backward class population is more than 70 % and so it gives 69 % of reservation to them. But given the various pronouncements of the apex court, 50 % limit cannot be breached and so it took shelter in the Ninth Schedule [Article 31(B)] of the constitution and put the legislation for
69 % reservation in it with a view to keeping it out of the pale of judicial review. The nine judge constitution bench now examine this practice of overpopulating the ninth schedule.

It is certain that the constitution bench would declare that the practice of overpopulating the Ninth Schedule with the objective of keeping legislations out of judicial review is invalid given the views of court as expressed in various judgements including the above said case where it opined that even though it would be meaningless to say that reservation should not cross 50 %, if a state has 80 % backward class population, it has to take into account the majority view in the Indra Sawhney case where it held that the rule of 50 % laid down in the Balaji case was a binding rule and not a mere rule of prudence and is compatible with equal opportunity for all.

2.1 Reservation and Resource: Signposts from Economic Theory

But it is to be noted that, as observed by the apex court and highlighted by others, as a matter of fact; there is no conflict between the concepts of equality, justice and efficiency as given in Articles 16(1), 16(4) and 335 respectively. If there is no conflict between them then there is no need to maintain any balance!

It is now well settled that equality of opportunity which is in fact egalitarian equality is a basic feature of the constitution and is vital to the functioning of democracy. Mere equality of opportunity is meaningless unless it is backed with resources enough to enable an individual to benefit from it. If a particular section of people have deficiency with respect to certain resources that are required to take benefit from the right to equality of opportunity in matters of public employment ensured by Article 16(1), a mere conferment of equality of opportunity will not deliver any benefit at all and would become hollow and useless. Since this situation stems from the absence of resources it can be surmounted through the provision of deficient resources. But if the relevant resource basket to be provided comprises of human capital or social and cultural background then it cannot be supplied all on a sudden and takes much time for its dispensation. If the society prefers to wait till then, suffice to say, up to that time there will not be any sort of equality in public employment. Furthermore, this will in turn create repercussions in many spheres of public life and would spread the message that the state is not concerned with the issue of equality in public space. In short, absence of equality in public employment would be seen as absence of equality in public sphere. Hence it becomes imperative to the state to ensure equality in public employment.

2.1.1 Allocation of resources and the State of Distribution

In the classic text book on Public Economics, renowned economist Musgrave (1959:17) while formulating the multiple theory of public household, argued that the budget of allocation branch can be formulated only on the assumption that there exits a desired or proper state of distribution to begin with. Unless the state of distribution is given, individuals cannot translate their preferences into patterns of effective demand. Thus unless the initial sate of distribution of income is proper, the resulting pattern of effective demand cannot be taken as a guide for efficient use of resources or the resulting allocation of resources will not be an efficient one.

Musgrave further pointed out that even in a market economy, distribution of income and wealth depends upon a number of factors including the laws of inheritance, the distribution of innate talents, the availability of educational opportunities, social mobility and the structure of markets. If the so-called efficient markets are so influenced by such a variety of social factors, their influence would be so decisive in a society that has a fractured structure where discrimination on the basis of caste etc was well entrenched over ages. Viewed from this angle, it is imperative to the state to intervene in the society to bring proper state of distribution of income and wealth by removing the factors that engender inequality like absence of basic resources for any economic activity, unequal opportunity in education, absence of social and cultural capital, unequal distribution of innate talents, social mobility etc as accentuated by Musgrave (1959:17). He further punctuated the importance of ‘equality of opportunity’ (1959:19) in determining the proper state of distribution as welfare based measures or concepts will result in uneven distribution of income which hardly corresponds to the commonly understood meaning of equality. In short, economic theory says that there must be a proper state of distribution of income and wealth to begin with. With out that the resulting allocation of resources will be not become an efficient one. Besides, the proper state of distribution of income and wealth is judged on the basis of ‘equality of opportunity’ and is determined by the availability of educational opportunities, social mobility etc.

Viewed from this backdrop, the purpose of Article 16(4), which ensures reservation, becomes translucent. The state wants to ensure equality in all spheres of public life and not ready to wait till it is achieved through its natural way. The enthusiasm of the state to maintain equality in public life is manifested and amplified in the inclusion of Article 16(4). For this reason there exist no conflict between Article 16(1) and 16(4) and hence no need to maintain balance between them.

Once the notion of conflict between the Articles and the consequent maintenance of balance are made not relevant, the limit on the extent of reservation tends to depend upon the numerical strength of the section of people to whom reservation is given. As a sequel, a high proportion of backward classes eclipses the 50 % limit to reservation.

In this backcloth it is instructive to learn the observations of the court made in the Nagaraj case against proportionate reservation. It quotes the judgement of Reddy, J. in the Indra Sawhney case where it noted that Article 16(4) speaks of adequate representation not proportionate representation although proportion of population of backward classes to the total population would certainly be relevant (emphasis added). Admittedly, the Article 16(4) speaks of adequate representation but in any case if it comes below proportionate representation by the same extent it will deny benefits to the needy people and would badly derange, that ‘equality of opportunity’ it painstakingly attempted to shelter!

Reservation per se will not compromise efficiency unless matched with relaxation in minimum requirements. In addition, efficiency depends upon the set of skills and other resources required for a task and how best they are utilised to produce the desired results. Even if there is a relaxation in the minimum requirement the expected loss of efficiency can be bridged by giving tailor-made and customised training programmes if the society is so keen to maintain equality in opportunity. In the light of these, efficiency requirements as given in Article 335 does not seem to be a limiting factor to extend the extent of reservation in relevant cases.

3 Reservation in Higher Education

3.1 The Importance of Equality

Elsewhere it is mentioned that certain remarks by the apex court in the Nagaraj case judgement attracted protest from different quarters. One such remark is its advice that the State will have to see that its reservation provision does not lead to extend the reservation indefinitely. Implied in these protests and in the advise of apex court, is both party’s eagerness to maintain equality of opportunity, though in a different way, that the court which wants a balance between equality and justice feels that the long continuation of reservation would undermine equality where as the protesters feel that in the social milieu of continuing discrimination any discontinuation of reservation scuttles down their prospect in achieving equality in opportunity!

As pointed out earlier, mere equality of opportunity is meaningless unless it is backed with resources enough to enable an individual to benefit from it. The crucial one among those resources is the resources embodied in the form of human capital and is chiefly provided by education. The provision of higher education to all sections of the society assumes added importance in this context. Needless to say, the unequal distribution of educational opportunities across sections of the society, adversely affects the prospects of poorly endowed classes. Denial of proper access to the centres of higher learning prompts the deprived classes to adopt the natural recourse strategy to maintain equality by seeking reservation for long periods. Once the educational attainment of the backward classes becomes comparable to that of the privileged classes they would certainly realise that reservation is decreasingly important for maintaining equality in opportunity. Backward class members who possess good educational qualifications openly declare that they do not need reservation any more and media is abounding with their stories and revelations. In short, the discussion inches to the inescapable point that reservation to the backward classes in centres of excellence in higher education is decisive to the achievement of equality in opportunity.

3.2 The Magnified Prospect of Threat

All the arguments painstakingly yet deliberately woven to thwart the reservation attempts to the so-called centres of excellence in higher education are remarkably brittle when set against the simple facts of the case. The argument that reservation candidates would largely dilute the quality of these excellent institutes may deceive many but the fact remains that it is not the quality of students alone that build excellence but the academic practises and the innovative attempts that mark an institute make it a class apart. Some administrators of these institutes say that reservation candidates could not complete the course with in the stipulated period and they would eventually become a drag upon the system. But it is to be reminded that excellence of an institution does not lie in cornering good placements with good students alone rather repeating such stellar performances with different categories of students in different situation. This is not like asking to produce high quality automotive steel from low grade ore and a distinction must be drawn between the process of education and the mechanical production function.
A number of tools and techniques of education are available to deal with different categories of students having different cognitive skills and academic ability and they are capable to churn out desired results for any institute. Imaginative educational designs can certainly produce satisfactory results and excellence in higher education encompasses these aspects also. Furthermore, all these institutions already have a reservation policy for SC/STs hence what damage could be done additionally to these institutions by the inclusion of better endowed students from other backward classes, intriguingly difficult to understand. Moreover, Ram Mohan (2006) pointed out that the dilution in quality due to reservation is far less than is commonly supposed. In similar vein Ghosh (2006) argued that merit is an alibi for preserving the brahminical status quo where access to and control over knowledge and institutions is restricted to an elite minority.

The discussion distils down to the fact that the prospect of threat magnified by the various interest groups to the higher education sector in the wake of reservation is not that much serious to keep it outside the pale of possible corrective measures. Besides, it is to be remembered that reservation in higher education is only a corollary of the endeavour to maintain equality of opportunity in public sphere.

4 External Benefits of Reservation in Public Employment

4.1 Virtues of Democracy and Efficient Outcomes

The multidimensional benefits of providing access to the backward classes in public employment are not well understood especially in reinforcing the democratic elements and producing efficient outcomes in the public sphere. The more visible and direct benefits like permanent employment, income, pension, status etc are not the only benefits. Apart from these individual specific benefits there are “external benefits” that are decisively important in fortifying virtues of democracy and ensuring efficient outcomes by obliterating monopolistic tendencies from the public sphere. To establish a democratic republic, democracy in election process alone is not enough and it must be extended to all spheres of public life. Policy making must be an open process and it is a well settled fact that bureaucracy at all levels exerts their own varying influence in the process.

All the available data shows that public employment at all levels are lopsided and majority are from the privileged class. It is a well accepted fact that their caste considerations play a crucial role in the process of policy, decision and opinion making, though in a very subtle way. Recall the recent anti-reservation protests by a small group and the more than proportionate coverage they received in the national media both print and electronic. A survey (Hindu: 2006a) later found that Hindu upper caste men who form 8 % of country’s population hold 71 % of the top jobs in the national media. Need any more explanation for the high media coverage for the anti-reservation protest?

In this backdrop, to curb the monopolistic behaviour of the privileged class it is important to give access to all sections. Access to policy and decision making process will be greatly enhanced if there is proper representation especially in public employment. Increased participation of all sections/groups of the society in the policy, decision and opinion making process will also root out the monopolistic interests and there by bring about competitive elements which could alone secure efficient outcomes to the society.

4.2 Determinants of Efficient Outcomes

It is pertinent to identify the determinants of efficient outcomes in the process of policy and decision making in the public sphere. It is to be noted that decisions taken by efficient persons or through efficient channels/mechanisms may not be necessarily the efficient outcomes to the society as whole. There must be a distinction between efficient outcomes and efficiency of the channel that produces those outcomes. It seems that discussion on efficiency often centres on the latter aspect. But economic theory says that efficient outcomes are that outcomes which turn out from a competitive bidding process. If different sections of the society are not allowed to participate in the process with equal status then the dominant group would exhibit monopolistic behaviour and however efficient the monopolistic players, the process miserably fail to generate efficient outcomes from the view point of the society. Thus it is the extent of representation and the engagement of different sections of the society in the process that determine efficient outcomes. The case of British rule highlights this fact and we know that it was carried out by exceptionally efficient persons through efficient administrative set up with good governance but pathetically failed to generate best outcomes to the society! What boils down is that all sections of the society must be given proper rather than name sake representation for cultivating democratic practices and securing efficient outcomes in public sphere.

5 Reservation and Secularism

Many of the arguments against reservation in higher education are raised only to create more obscurity and confusion and to deceive even right thinking people. The argument that (Mahajan: 2006) caste based reservations would result in de-secularisation of the society or take away the secular content is one among them and emanates from the objective to create a smoke screen and to divert the issue at core. It only manifest pathological fear and slight over the fact of the matter that reservations are not aimed to strengthen the caste system but to help the hapless people to move out from the yoke of caste apparatus by amply displaying the undeniable fact that they can also think and perform equally well as compared to the so-called robotically efficient privileged class provided they get adequate opportunity. Accordingly reservation on the basis of caste will eventually derange the well entrenched notions and symbols of caste system there by attenuate the importance of caste difference in the society. It may take time and in the interregnum period might result in caste solidarity, but it is certain that in the long run such caste consciousness would come down remarkably as and when they acquire equal status in the society. As like the reservation given on the basis of gender does not embed gender divisions rather winds down gender discrimination, reservation given on the basis of caste also will not fortify caste divisions in the long run and wherefore does not result in the de-secularisation of the society, the fears otherwise are simply surrealistic!

6 Recapitulation


The study attempts to situate properly, the reservation debate in its appropriate setting. The study is conducted in the context where the reservation debate took a dramatic turn when high voltage campaign is initiated by senior politicians and the apex court is started to hear in a constitution bench, the validity of certain reservation related legislations and the hearing is generally perceived as the precursor for another batch of litigations regarding reservation in higher education. The study briefly discussed the recent judgement in the Nagaraj case by pointing out the various arguments from both sides. The discussion highlighted that it is the need to strike an appropriate balance between the conflicting concepts of equality, justice and efficiency that became the cornerstone for the apex court judgement.

However the study punctuated the fact that it is the equality of opportunity that is more important and there is no conflict between equality of opportunity, the cry for justice and efficiency in administrative services. Accordingly the issue of extent of reservation may be settled by considering the numerical strength of the eligible classes.

As a matter of fact reservation to centres of higher education is only a corollary of equality of opportunity. Moreover the achievement of equality even through reservation generates efficient outcomes to the society and there must be a need to make a distinction between efficiency of the channel and efficient outcomes.
[This is revised version of the paper contributed to “National Seminar on Sociology in 21st Century” November 16-17, 2006, B.S.A. College, Mathura, Uttar Pradesh. The usual caveats apply notwithstanding.]

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7 REFERENCES

1. Despande, Satish and Yadav, Yogendra (2006) ‘Redesigning Affirmative Action Castes and Benefits in Higher Education’, Economic and Political Weekly, June 17, 2006, Pg 2419-2424
2. Economic Times (2006), ‘No more quotas: Needed, Intelligent Policy Intervention, Chennai Edition, 11-04-206, Pg 8.
3. Ghosh, Pothik (2006), ‘The ghost in the quota machine’, Economic Times, Chennai Edition, 17-04-206, Pg 10.
4. Mahajan, Gurpreet (2006), ‘It will trigger de-secularisation of society’, Economic Times, Chennai Edition, 12-04-206, Pg 10.
5. Musgrave, R. A. (1959), ‘The Theory of Public Finance: A study in Public Economy’, (New York: McGraw Hill)
6. Panchamuki (2006), ‘Reflections on Globalisation and Social Development’, Keynote address to the 5th Refresher Course in Economics, UGC Academic Staff College, Jamia Millia Islamia, New Delhi, 5 Dec to 26 Dec, 2006.
7. Pant, Manoj (2006), ‘A Workable Formula ’, Occasional Papers in Economic Times, Chennai Edition, 16-06-206, Pg 8.
8. Pappu, Rekha et. al. (2006), ‘Reservation or affirmative action?’, The Hindu, New Delhi Edition, 12,December,2006.
9. Ram Mohan, T. T. (2006), ‘Costs and benefits of quotas’, Economic Times, Chennai Edition, 24-04-206, Pg 8.
10. The Hindu: (2006a) ‘Uppercaste dominate national media, says survey in Delhi’, Kochi Edition, Monday, June 5.
11. The Hindu: (2006b) ‘All States must implead themselves in the reservation case: Karunanidhi’, Kochi Edition, Thursday, October 26.


ENDNOTES

[1] It also considers the validity the Constitution (Eighty-First Amendment) Act, 2000 inserting Article 16(4B) but is not given emphasis here.

[2] It is the seniority that the reservation candidate enjoys in the promoted post over the general category candidate once he catches-up.

[3] 21. Protection of life and personal liberty.—No person shall be deprived of his life or personal liberty except according to procedure established by law.

[4] 14. Equality before law.—The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

[5] 16. Equality of opportunity in matters of public employment.—(1) There shall be equality of opportunity for all citizens in matters relating to employment or appointment to any office under the State.

[6] 16 (2) No citizen shall, on grounds only of religion, race, caste, sex, descent, place of birth, residence or any of them, be ineligible for, or discriminated against in respect of, any employment or office under the State.

[7] 16 (3) Nothing in this article shall prevent Parliament from making any law prescribing, in regard to a class or classes of employment or appointment to an office under the Government of, or any local or other authority within, a State or Union territory, any requirement as to residence within that State or Union territory prior to such employment or appointment.

[8] 16 (4) Nothing in this article shall prevent the State from making any provision for the reservation of appointments or posts in favour of any backward class of citizens which, in the opinion of the State, is not adequately represented in the services under the State.

[9] 335. Claims of Scheduled Castes and Scheduled Tribes to services and posts.—The claims of the members of the Scheduled Castes and the Scheduled Tribes shall be taken into consideration, consistently with the maintenance of efficiency of administration, in the making of appointments to services and posts in connection with the affairs of the Union or of a State:
Provided that nothing in this article shall prevent in making of any provision in favour of the members of the Scheduled Castes and the Scheduled Tribes for relaxation in qualifying marks in any examination or lowering the standards of evaluation, for reservation in matters or promotion to any class or classes of services or posts in connection with the affairs of the Union or of a State.

[10] Since equality is the basic feature of the Constitution and any treatment of equals as unequals or any treatment of unequals as equals violates the basic structure of the Constitution.

[11] As consequential seniority in promotion has been limited to SC/STs only.

[12] M. Nagaraj and others versus Union of India and others: October, 2006.

[13] Indra Sawhney versus Union of India: November, 1992 (the Mandal case).

[14] M.R. Balaji vs. State of Mysore: 1963.

[15] Resources include education, skills, social and cultural background etc. Moreover, Panchamuki (2006) urged that participant teachers from remote locations must somehow shed their feeling of ‘diffidence’ as they are also capable to compete with anybody who hails from a advantageous location, in fact, broadly refers to the social and cultural capital.
[16] But he argued that by making transparent the costs and benefits of quotas should help evolve a policy that is acceptable as much to the disadvantaged groups as to those who see themselves as losers.

[17] But he took a cautious view regarding the desirability of reservation.

[18] Also called as positive externalities and are benefits available to the society but transmitted out of the market mechanism.

[19] During the months of June and July of 2006 and at New Delhi.