Cost versus benefit

Cost versus benefit

Narendra M Apte

Cost benefit analysis is a formal study of costs and benefits, especially to measure utility of public or government expenditure. Economists and Social scientists have developed cost benefit analysis tools which are regarded as important tools for evaluation of efficacy of government expenditure on welfare schemes as also on projects like dams, thermal power and nuclear power plants.

In case of government expenditure on education, public health, building of infrastructure in rural and urban areas, irrigation schemes, etc., cost benefit analysis of such expenditure is an academic exercise through which citizens wish to know whether objective for which expenditure was incurred has been achieved.

If many citizens feel that a particular industrial project, be it in public or private sector, is neither in public interest nor does it appear to enhance common welfare, citizens have every right to oppose it. When such a situation arises, systematic and unbiased cost benefit analysis of the industrial project would be desirable to decide whether permission should be given to go ahead with the project.

When social scientists and economists wish to do cost benefit analysis of public expenditure, they often encounter one major difficulty: it is not always possible to measure impact of governments’ policies and programmes in monetary terms. For example, it may be difficult to measure exact monetary impact of governments’ policies and programmes aimed at reducing alcoholism or tobacco consumption. Nevertheless, a study of (estimated) cost and (probable) benefits would be useful to decide the manner in which such policies could be implemented.

Though tools for doing a systematic cost benefit analysis, and thereby a systematic study of impact of implementation of economic policies and programmes are available, economists and even policy-makers wish to know whether the government officials entrusted with the job of such implementation are actually doing what is expected of them. Though on record, (that is, on paper), expenditure is shown to have been incurred, still economic growth in rural areas continues to be below par in many regions of our vast country.

We know that it takes many years to complete a project like construction of a dam or a hydro-electricity power plant. What we notice is this: while the government officials are committed to spend money on such projects, not all of them are committed to ensure that benefits of the project reach those sections of society for which the project is being implemented. Often we find that there are many slippages in execution of projects which result in cost overruns and consequent waste of public money. Obviously, there is a clear need to ensure that benefits of government expenditure actually reach those sections of the society for which it is intended to be incurred.

My view is that a regular review of impact of expenditure incurred on construction of dams, construction, of school buildings, water supply schemes, etc., etc., with assistance of cost benefits analysis tools, would be a useful exercise.

If we wish to reduce income and wealth inequalities in our society, we should make efforts to ensure that families who are below poverty line in both urban and rural poor areas derive benefits from projects implemented for them. For this to happen, Central and State governments’ policies and programmes meant for the poor in rural and urban areas have to be integrated to ensure that basic objective of incurring government expenditure on welfare schemes, etc., is achieved.

Here I wish to mention invisible (and perhaps huge) cost of unplanned urbanization. It is an accepted fact that Central and State governments’ programmes have not succeeded in creating job opportunities for millions of the rural poor. This non-availability of job opportunities in rural areas often leads to migration of rural poor to urban areas. When thousands migrate to urban areas, civic infrastructure in urban areas is found to be inadequate. It is often observed in such situations that the civic infrastructure in our cities, towns and other urban areas cannot cope-up with burden of the migrating rural poor. Housing facilities for the poor, who migrate to urban areas, simply do not exist. Invariably the rural poor are forced to live in slums and shanties, where there is dearth of basic amenities.

As I see it, we are paying a very huge indirect cost of non implementation of appropriate government programmes for the rural poor, and, therefore, we have to reconsider our policies on urbanization.

After liberalization of economy, we have witnessed rapid growth of automation in many industrial sectors. Robots and Artificial Intelligence techniques are being used extensively. Increased use of modern technology means fewer jobs, especially for the unskilled workforce. Perhaps we will have to pay very huge cost in terms of displacement of unskilled and semi-skilled youth, at least in the short term. Question is this: are governments and society in general prepared to face problems created by a new industrial environment in which robots will displace many workers? How much will be non-monetary cost of displacement? We need to do a systematic cost benefit analysis of industry’s investment for automation of operations and processes.

(Narendra M Apte, a qualified chartered accountant, is a freelancer.)