Suncapital: Governments have usually ignored the advice of their economic advisers. Rumour has it that the finance ministry is haunted by the ghosts of past economic advisers brandishing copies of neglected economic surveys and wailing loudly.
Be that as it may, over the years, thanks to insistent repetition, governments have incorporated some of the reforms championed by the authors of economic surveys.
As John Maynard Keynes put it, “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
Let’s hope chief economic adviser Arvind Subramanian’s voice, too, is heard by those in authority, in spite of him being neither a “defunct economist” nor an “academic scribbler”.
We shouldn’t look to the Economic Survey to provide hints about likely announcements in the budget. What the survey does is mark the road ahead for the government. It provides a laundry list of things that need to be done for making India a modern and vibrant economy. It is a master plan for building the economy.
The Economic Survey, therefore, also serves as a yardstick with which to evaluate the Union budget. The question is: how far does the budget travel in the direction laid out by the survey? That is the basis on which we should indulge in the traditional practice of giving marks out of 10 to the budget.
What then are some of the key measures outlined in the survey? Listed below are a few of them:
1) Unlike last year, this year’s Economic Survey is rather pessimistic about growth, saying real gross domestic product (GDP) growth will be 7-7.75%, with a downward bias. It’s also pretty certain inflation will come down further, which suggests nominal GDP growth could be even lower than in the current year. That means the assumptions in the budget about revenue growth, if they are to be realistic, must be low.
2) It presents arguments both pro and con about sticking to the fiscal consolidation road map, but there does seem to be a tilt towards relaxing it a bit, especially as public investment needs to be strengthened further. And it calls for a re-look at the medium-term fiscal consolidation targets. This is one argument the finance minister will be tempted to grab with both hands.
3) The survey talks of the twin balance sheet problem of banks and the corporate sector. It says the way out is through the 4Rs—recognition, recapitalization, resolution, reform. Last year’s survey had talked of the 4Ds for banking—deregulation, differentiation, diversification and disinterring for the banking system. We can infer two things from this: a) the prime minister’s preferred style of speech-making seems to be making a strong impression, and b) the budget must have a credible scheme for recapitalizing banks and an indication of what the government plans to do to prevent the problem from arising in future. The survey says the government must sell off its non-financial companies and the Reserve Bank of India (RBI) must also contribute to recapitalization.
4) The survey says the benefits provided on account of small savings schemes and the tax/subsidy policies on cooking gas, railways, power, aviation, turbine fuel, gold and kerosene “provide a bounty to the well-off of about Rs.1 lakh crore”. It says this “represents a substantial leakage from the government’s kitty, and an opportunity foregone to help the truly deserving”. Ending these subsidies will, therefore, be a pro-poor measure. The implication is also that any benefits provided to income tax payers will go to the comparatively rich 5.8% of the population who pay income tax. Will the government be able to bite this deadly political bullet? Rather surprisingly though, there’s no mention of changes in the capital gains tax.
5) The survey points to the damage to the economy caused by the lack of exit policies. The bankruptcy bill is already in Parliament; so what else can the central government do? It could a) reform wasteful fertilizer subsidies, b) allow sick central public sector units to exit, c) disinvest in banks and d) do something to stanch the losses from Air India.
6) It calls for greater government investment in health and education.
7) It calls for greater attention to agriculture, including “the need for reorienting agriculture price policies, such that MSPs (minimum support prices) are matched by public procurement efforts towards crops that better reflect the country’s natural resource scarcities”. It calls for minimum floor prices for crops and price deficiency payments to farmers.
8) On subsidies, it wants the annual cap on household cooking gas cylinders to be pared to 10 from 12 and wants the distinction between commercial and household uses to be removed. But for other subsidies, it says the direct benefits transfer scheme is not yet ready.
9) It warns against protectionism, asking “is India really pro-competition or is it just pro-business?”
10) And it sums up its approach by saying, “the legacy of the pervasive exemptions Raj and corporate subsidies highlights why favouring business (and not markets) can actually impede competition. Similarly, scepticism about the state must translate into making it leaner, without delegitimizing its essential roles and indeed by strengthening it in important areas”.
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