Rupee, the Fourth R

THE tragedy in Gujarat requires a swift measured response, not least in making available material and financial resources rapidly to those most affected. It is a poignant reflection of the vision-free public policy environment in present-day India that State response has been feeble and ineffective. The media has matched the government's incompetence with shallow cynicism. Grotesque colour photographs of suffering fill the pages of our newspapers but economic information is thin, garnered almost exclusively from government press notes.

The two important analytical questions are: what resources are needed and how are these going to be delivered and financed? The Indian government has already promised Rs 500 crore directly and intends collecting Rs 1,300 crore through direct tax surcharges. International agencies, ngos et al should collectively provide a multiple of that amount. Even the World Bank has offered a large loan (yes, a loan even if a very soft one—the money goes right back to Washington, eventually).

How is the money to be spent? Disaster expenditures involve spending on three Rs: Relief, Rehabilitation and Reconstruction. Relief spending is consumption expenditure. So is the bulk of rehabilitation expenditure. Once affected people are in a situation where their capacity to look after themselves improves, these expenditures taper off. Reconstruction spending, however, is like investment spending. It replaces assets like roads, bridges and power lines, and benefits the region—in this case northern Gujarat.

Ample assistance for relief and rehabilitation is being promised, in both cash and kind. For example, the French are providing 40 medical personnel, medical equipment and nine rescue personnel each with a sniffer dog. The UK kindly provides the same, plus bottled water, two coaches, three cars and two trucks. More than a hundred national and international organisations are providing similar assistance. If the state manages to use all this help, then this aspect of the problem is resolved.

The question is: who is going to use these cars and trucks, be saved by sniffer dogs, and drink the bottled water? The government's job is to ensure all this reaches those most in need. Not the people in high-rise buildings that make such good photo material, but the people who were in need of relief and rehabilitation even before the earthquake, the poorest of the poor. It is they who are the most vulnerable, who will die first, suffer the most. We can't expect the French, Americans, etc, to find these people. This is the state government's job and on their present track record, we may be forgiven for doubting their capacities. A government unable to protect innocent nuns in normal times can hardly be expected to be on the ball in a disaster situation.

Reconstruction poses other problems. The bulk of the World Bank loan will be for reconstruction. So will be a large chunk of the Centre's assistance. There are two strategic issues here which ought to be confronted at once.

The first issue is the Bank "assistance" (currently promised to be about $300 million). This money will be advanced from existing resources. This means it will be subtracted from money available for present projects all over India. True, the amount is likely to be added on to future loan allocation for India. But "later" is another word and carries with it conditionalities and evaluations. And will the loan obligation be borne by the Centre or the state? Clearly, hard strategic economic thinking is needed.

The second issue is of targeting. If the Indian government intends to preserve its pre-disaster budget, then expenses on the three Rs must be met exclusively through tax increases. The imposition of surcharges on direct taxes will not generate Rs 1,300 crore. Direct taxes are inelastic, evaded easily and have to be constitutionally shared between the Centre and all the states. Besides, the government intends providing excise and import duty concession to "rehabilitation and relief items". This is nonsense. Who will decide whether a matchbox or a TV sold in Ahmedabad is a rehabilitation item? Effectively this would represent a large cut in indirect taxes in Gujarat, at a time when fiscal resources are desperately needed in that state! These tax pronouncements are just incompetent attempts to assuage the imf and the investment community.

Thus, if the government is to provide the three Rs adequately, it will also have to either cut existing spending expense and/or borrow more. This raises serious equity issues. Gujarat is one of India's richest states, though it has many poor people just like any other state. More to Gujarat means less to Bihar and Orissa, if deficit financing or expenditure cuts are to finance allocation. Is this right? People in other states wouldn't grudge the money to Gujarat's poor, but might be peeved if the money was taken from the Indian poor to finance reconstruction of middle-class and affluent lifestyles in Ahmedabad, Rajkot, even Bhuj. Should money that could fund a famine-prevention watershed project in Bolangir be spent on reconstructing highways in Gujarat? I'm not saying it shouldn't be, just that all reconstruction money must be transparently, demonstrably spent on providing relief to the poorest of poor. But doing this can be complicated and acrimonious.

The tragedy in Gujarat is a tragedy for all Indians. But once the immediate shock is over, sympathy tends to wane and hard questions begin to be asked about money spent in an affluent state like Gujarat at the expense of poorer states. These are not questions with "correct" answers but they will be asked in the corridors of power. And answered honestly if promises are to be kept. Too many governments have broken too many promises in this country for the word of the state to mean much to anybody, anymore.

(The writer is a public economist, on leave from soas, University of London. email: rr1@soas.ac.uk.)