Economic Agenda for the New Government

The path of growth with efficient and inclusive redistributive strategies will be a key challenge for the next government. Photo: The Hindu

A man walks past the statue of a bronze bull placed in the premises of the Bombay Stock Exchange building in Mumbai, India, Tuesday, April 1, 2014. Reserve Bank of India (RBI) Governor Raghuram Rajan announced Tuesday that the key policy rate will remain unchanged since retail inflation still remains "sticky" but introduced steps to increase liquidity and contain volatility in the money market, according to a local news agency. (AP Photo/Rafiq Maqbool)

One of the key challenges for policy-makers lies in charting out measures to revive the Indian economy, which is buffeted by an unfavourable international climate. In this commentary for The Hindu Centre for Politics and Public Policy, S. Narayan, former economic advisor to the Prime Minister, points out that there is ample opportunity for the next government to put India’s economy back on the track to growth.

The Indian election process is close to completion, and the country is eagerly looking forward to the results. There appears to be a consensus that the Bharatiya Janata Party (BJP) and the National Democratic Alliance (NDA) will do far better than the Indian National Congress (Congress) and its allies, and are likely to be in a position to form the Government.

The discourses at the beginning of the campaign were all about the unfinished economic agenda, the low rates of economic growth and of the need to provide for growth and employment. The Congress has been stressing the steps taken by it to ensure entitlements, while the BJP manifesto talks of reforms and infrastructure spending. As the campaign progressed, there has been less discussion about the economy, and rather more, much more, personal comments and criticisms.

The noises in the media are much more about whether the BJP’s prime ministerial candidate, Narendra Modi, is good for the country or not, with certain newspapers, including The Hindu, taking strong positions. Surprisingly, there has been little discussion on the economic alternatives and the way forward. Even more surprising is the fact that there has been little debate about foreign policy options. India is now a globalised country, a member of G20 and all the major economic collectives, yet this election has been silent on the future role of India in the world arena.

Once the election results are announced, rhetoric will pass and the Government will have to confront issues that have not been tackled in the last two years of the United Progressive Alliance (UPA) Government. At the top of the list would be the economic agenda, and the growth prospects of the economy.

It is important to take stock of the current realities. First, 2013-14 has been a bad year for growth, and growth rates have been at a decadal low of 4.9 per cent. Even here, the contribution of agriculture at 16 per cent has shored up the dismal performance of industry as well as the slowing down of services.

The concern over poor growth is exacerbated by the poor showing in industry, mining and manufacturing. Chart 2 gives the components of India’s Gross Domestic Product (GDP) by sectors. Manufacturing grew rapidly in the period 2004 to 2008, then at a slower pace till 2010, and has subsequently stagnated. The share of agriculture in total GDP is dropping, but is not offset by the number of jobs being created in the services or the manufacturing sectors. Between 1998 and 2004, close to 50 million new jobs were created (NSS survey), while in the decade after 2004, only 27 million jobs have been created.

The poor performance in growth is reflected in the current account deficit as well. Exports of manufactured goods have not been resilient improving only when the rupee has depreciated. Non-oil, non-gold imports have continued to soar, indicating that there are supply-side constraints in the economy that is pulling in imports.

Recent measures taken by the government and the Reserve Bank of India have contained the rupee-dollar volatility to some extent. Some extreme measures, such as curbs on imports of gold, as well as incentives for NR deposits and external borrowings have eased up the exchange rate, but these are short-term measures that have a price tag attached to them.

There have also been concerns about the persistent high inflation. Low growth in manufacturing, persistent consumer demand as well as supply side constraints are possibly one element of this. At the same time, welfare programmes like the NREGA, regular increases in support prices for rice, wheat, cotton and sugar, have had the result of putting up wages in the primary sector which in turn has driven up consumption. An important claim of the UPA regime is that in a drive for inclusive growth, it has provided entitlements and incomes to those that were disadvantaged, poor and in the rural areas. It is argued that better standards of living are visible in the smaller towns and rural habitations, and that the 10 years of UPA rule has enabled 20 million people to come out of poverty.

Inflationary pressures have been most felt by the wage and salary earning middle class in formal employment, usually in the cities and urban centres. Savings rates for these categories have fallen, and asset-based investments in real estate and cars have slowed down. To cushion the urban sector against price rises, there have been subsidies to fuel, including cooking gas and diesel, as well as subsidies granted by several State Governments for power and food articles supplied through the Public Distribution System. These subsidies, at the State as well as the central levels, have put pressures on public finances at both levels.

The combination of these factors has had a deleterious effect on central government finances. Fiscal deficit has mushroomed after 2009, and market borrowings have increased from Rs. 2,470 billion in 2008-09 to Rs 5,075 billion in 2012-13. The average annual growth of fiscal deficit in the last 10 years has been 13 per cent. Increasing fiscal deficit has had an effect of restraining capital expenditure, and reducing public expenditure on infrastructure and other development expenditure.

In short, the new Government has to contend with low growth, high inflation, high current account deficit and fiscal stress as well as with low employment generation. Business as usual is no longer an alternative, for the economy would continue to go downhill.

There is another worry, and that is the rate of growth necessary to put the economy back on track. If the target were 6.5 per cent for the next two years, in effect, the sales of cars and scooters would still be lower than their peak in 2008-09, cement and steel sectors would not be able to ramp up to full capacity, and most importantly, only around 35 million jobs would be created, as against around 85 million entering the employment market. At 6.5 per cent growth, reduction in poverty would also slow down, to around 17 per cent by 2018-19, from 22 per cent in 2011-12.

The economic tasks before the new Government are formidable, and it is surprising that the election rhetoric is not capturing the essence of all that has gone wrong, and the need to do something about it.

Addressing the burden of expectations

The new Government is likely to come in on great expectations, and therefore will have lesser time to deliver successes, as people would want results quickly. It is likely that their strategies would be constructed around immediate, medium term as well as long term objectives.

The short-term strategies would need to focus on correcting things that have gone wrong− more a mechanic’s job than a driver’s or a designer’s one. It is important to fix things that have gone wrong and are not working, for there is little use in putting in experts and managers and drivers when the engine is sputtering. It is easy to identify a few priorities that could be attended to within the first hundred days.

There are a large number of infrastructure projects that are stuck. There are three kinds here. First those that are held up because delayed approvals have increased project costs making them unviable, and need to be re-examined from the point of view of viability and progress. Those that are close to completion should be funded to completion, and those that are no longer viable should be dropped and taken off the books. Second, there are projects where the government concession agreements are faulty and need revision to make them viable. This is due to inflexibilities built into these agreements by the current Planning Commission, and need immediate review. Third are those projects, especially in the power and road sectors, where output prices need to be determined with clarity to enable revenue generation. Again, given the regulatory frameworks in existence, this is just a task of expediting decisions rather than re-inventing the wheel. These administrative steps would get projects going that have been stuck for over two years, and simultaneously resolve the problems with the public sector banks that are holding these non-performing assets.

The next short-term target should be attention to agriculture, logistics of food chain movements as well as food preservation and processing. The agricultural production has been at an all-time high this year, and yet food price inflation is very high. Clearly, there is an opportunity to free up agriculture product markets, to make farm to market access easier at least in all surplus States. This is where foreign direct investment (FDI) in retail would help, but even in the absence of that, there are models of market access (for instance, in Tamil Nadu) that would keep food price inflation under control.

We are looking at 2014 as a year that would probably be a bad monsoon year, and the need to control food prices becomes all the more important. Simultaneously, a huge focus on building warehouses and cold storage chains through public as well as private initiative could be announced. This would be an agro-based infrastructure initiative, and would provide needed logistic linkages to the small towns, once the rural connectivity projects are completed.

Re-energising the manufacturing sector

The third initiative should be on manufacture. Again there are several strands that could be attacked simultaneously. First, exports are getting affected due to high interest rates for credit as well as a host of non-tariff barriers being erected by countries setting up alternate standards that include, to name a few, human right violations, pesticide levels, sources of inputs, quality and the efficacy of drugs. India does not have a mechanism to certify standards and the Bureau of Indian Standards (BIS) is not equipped to manage the multifarious needs of importing countries. The BIS is focusing on setting standards for domestic manufacture, and exporters in segments such as processed food and drugs and pharmaceuticals, are not able to meet country-specific standards. A quick strengthening of the BIS, and a standardisation of procedures would lead to immediate results in export off-take.

There is also need to get the incentives for manufacture and for exports rights. There are certain products that provide natural advantages for India. These include drugs and pharmaceuticals, textiles, food and food products, light engineering and automobiles, petroleum products and their derivatives, gems and jewellery and the like. A massive programme of incentives to this sector in terms of investment allowances, capital subsidies and tariff concessions would vitalise this sector.

There is serious need to relook at excise duties for manufactured goods, and perhaps there is a need to roll these back. Importantly, there are a number of concessionary tariffs in excise, customs and income tax that benefit a few, and several that have outlived their usefulness. It would be easy to announce a cessation of these concessions from a three months future date and then examine the need to continue a few of them. The budget documents reveal that revenues foregone from these concessions amount to several lakh crores of rupees. The very first budget could remove concessions, reduce excise duties, and give a blast of concessions for manufacture and for exports.

These are the easy ones. They make good announcements, can be implemented in a short time, and would lead to immediate results, and are unlikely to be politically sensitive. There could be several more, but the above few would lead to immediate improvements in sentiments as well as in growth numbers.

The medium-term strategies need to focus on employment creation and on fiscal and monetary corrections. The structure of employment has changed in that manufacturing is hardly absorbing additional manpower. Perhaps it is time to recognise that given worker preferences as well as advances in technology, manufacturing is unlikely to absorb the increasing wage seekers. There is need for skilled service providers in an urban environment, be it structural services, plumbing or electrical services, air-conditioning and landscaping and a host of other maintenance services that can absorb a very large manpower, if properly trained and equipped. There is need to institutionalise these services and to provide major skill development and absorption programmes along with seed capital for entrepreneurship. The National Skill Development Corporation (NSDC) alone cannot do this task, and strategies to make this happen need to be thought through and implemented. The task should be to create at least 10 million to 15 million jobs a year, with over half coming from the services sector. There should be welfare health and insurance programmes targeting this sector that would provide a safety net for these skilled workers.

There is an opportunity in increasing production in the defence sector—not just planes and ships, but uniforms, equipment, small arms, protection gear for the armed forces and the police. A policy on this, with manufacturing in the private as well as the public sector, would prove to be a great boost to manufacturing.

Fiscal corrections are simply an arithmetic of reducing expenditure and increasing revenues. Energy and fertilizer prices need to be realigned, perhaps over a period of one to two years. It is shocking that revenue receipts as a percentage of GDP are falling even while the economy is growing. This is either due to poor revenue realisation machinery or due to unwarranted tax concessions. Both need to be addressed, substantially an administrative measure. On the monetary front, there is a clear case for monetary policy becoming more investment friendly, a look at the interest rate regime is important.

There is also a need to look at the international scene, not just from the point of view of diplomacy, but from the advantages of trade and trade agreements. There are over 22 trade agreements under negotiation, which need to be taken to speedy completion and implementation.

A focus on the above would yield strong results in growth and in improving the governance climate, but is likely to leave media and the international investors not quite happy—“where are the reforms?” they would ask. And that leads to the longer term agenda.

There has been considerable comment in the media and several suggestions in place on what the new government should do, and there is no need to re-emphasise these. These include financial market reforms, greater product diversity in trading, quicker detection of frauds and punishments, especially for non-banking financial companies (NBFCs). They also include the completion of stalled initiatives like the insurance Act and the opening up of FDI in more sectors. Improvements of ease of doing business with transparent clearance norms for natural resources projects and for environmental clearance, as well as initiatives in health and education have already been mentioned in the poll manifestos.

Retain redistributive strategies

That just leaves the final question. What about the entitlement programmes like the Food Security act and the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA)? What happens to the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and the Pradhan Mantri Gram Sadak Yojana?

Political rhetoric has condemned several of these programmes, and even academic judgment has been divided. The proponents of market based reforms frown upon welfare programmes, and there is a real worry that these programmes may be at risk. That would be unfortunate. It is now very clear that these programmes, including the Right to Work, increase in Minimum Support Prices, and urban renewal programmes, have done a great deal in reducing poverty in the last decade. It would be uncharitable to condemn these programmes, as the benefits in terms of improved living standards are visible across all small towns and rural areas.

More importantly, the very debate between inclusive growth policies and market oriented policies appears a little warped. This is because most State Governments have social welfare and food subsidy programmes that far exceed the entitlements the UPA has been talking about. Tamil Nadu’s Public Distribution System (PDS) delivers 25 kg of rice free to cardholders every month. Programmes such as the Amma Canteen provide subsidised nutritious cooked food on a daily basis at subsidised rates, while the midday meals programme in schools has been running successfully for over 32 years.

The State Governments are unlikely to roll back their welfare programmes in quest of a national consensus on market growth versus welfare. On the other hand, States are extending their welfare programmes to schools, to the unemployed, as well as to women and children. At the same time, there is little evidence that the fiscal position of the States has deteriorated as a result of these give-aways. The latest RBI report indicates an improvement in the fiscal balances of the States, with over 40 per cent of the States reporting revenue surpluses. Most States are also reporting healthy growth in revenues. It is difficult to argue that what the states consider right is wrong for the centre. Certainly the States are managing revenues better than the centre, and this should be an eye-opener and an opportunity. However, poor revenues should not be an excuse for doing away with these large flagship programmes. There is considerable scope for improvement in administration and for reduction of leakages; for ensuring that funds are well spent and also for tweaking the programmes to be more effective and efficient. The target should be to achieve productive and efficient use of capital deployed, rather than to throw the baby out with the bath water.

Even politically, any damage done to these programmes is likely to reflect negatively on the new government, and lead to opposition and criticism. Far better to make the programmes work, and to work more efficiently. States should be given a greater flexibility in deciding projects, and participate in implementation and monitoring.

There appears to be empirical evidence for this. In a recent discussion paper at the IMF (IMF Staff Discussion note SDN/14/02 of February 2014), Redistribution, Inequality and Growth, the authors have examined cross country evidence of market based strategies and redistributive strategies and conclude that we cannot assume that there is a big trade-off between redistribution and growth. In fact, their evidence points to the fact that redistribution is generally benign in its impacts on growth. The combined direct and indirect efforts of redistribution, including the growth effects of the lower inequality, are on an average, pro-growth.

In short, the redistribution strategies that have been adopted appear to have had considerable benefits, and need to be retained.

Amidst all this, there is need to ensure that the implementation machinery works. There have been several reports on regulatory delays, about reluctance in decision making, and the slow pace of bureaucratic implementation. An importance task of the new Government would be to ensure that the system works. Administration appears to have lost confidence, with ministers shying away from taking responsibilities, and officers getting arraigned for decisions. To make things work, it is important to have a strong central authority that can oversee implementation. In the past, this has been the PMO. More recently, with a weak PMO and an ineffective bureaucracy there, implementation has suffered. It is important that there should be a strong PMO that can implement economic as well as foreign policy decisions of the Government.

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