Sunday, February 17, 2013

Liberate economic policy from partisan politics



By
Randeep Wadehra


Although the government is not in agreement with the CSO’s GDP growth projection of 5%, even the more optimistic projections – by both the RBI as well as the Finance Ministry – too peg it at below 6%. This is quite a tumble from the 9+ growth in 2006, when the talk of two-digit GDP growth was very much in the air. However, the CSO figures cannot be dismissed offhand, since these are based on the methodology prescribed by the National Accounts Estimates. The estimates project a dismal picture indeed. For the year ending March 2013 the projected growth of manufacturing is down to 1.9% from 2.7% last year, farm output is 1.8% (3.6%), and services 6.3% (7.4%).

Different sources cite several factors that have contributed to this situation. While the global economic slowdown, especially in western economies, is the most cited factor, our domestic economic policy’s cramping by coalition politics too has been a major contributor. While it would be easy to blame the UPA for its “policy paralysis”, one needs to understand that the phenomenon was far more complex, comprising the prevailing international economic situation, India’s domestic political scenario and the RBI’s cautious fiscal approach to the galloping inflation that required a balancing between dampening of demand and discouraging of corporate investment.

Now that the inflation is showing signs of flagging and the RBI is willing to cut lending rates (albeit with due caution) one hopes that a more investment-friendly climate would be fashioned in the fiscal 2013-14. This would, first require revival of the private sector consumption, making the reduction in interest rates by up to 100 basis points imperative. Simultaneously, the possible inflationary sentiment would be dampened by a better agricultural growth in 2013-14 (projected by some agencies at more than 3%), which is expected to bring down the Wholesale Price Index. There is a possibility that the inflation rate would be kept around 7% during 2013-14. There is also a need to factor in the 2014 General Elections that would impel the central and state governments to spend on rural development and various other social sector schemes, thus giving a fillip to demand. According to Crisil and Goldman Sachs, a favorable demand will help Indian economy to grow by 6.5% to 7.5% in the coming year. However, these are all imponderables and not really a very wise of reviving the economy on a firm footing. A more meaningful perspective needs to be developed vis-à-vis economic policies.

There is a need to develop infrastructure at a much faster rate than what has so far been. Power, transportation, storage, communications etc need urgent upgrades. There is no way these sectors can anymore be treated with the callousness that has been meted out to them so far. Similarly, reforms in tax administration need to be such that evasion should become both risky and costly. For this, on the one hand, detection of tax evasion needs to become efficient, and on the other hand, implementation of various tax laws should become more effective. According to various estimates, more than two-thirds of the taxable population is presently evading income tax. Even if we halve this figure, it goes into billions of rupees in losses to the exchequer. Most of the defaulters are, clearly, not from the salaried classes but from middle level businesses having incomes of around ten lakhs or so annually. If only tax administration could be ramped up, a major source of income to the government could be tapped more fruitfully.

Again, it is time to streamline agricultural development. There is a strong need for consolidating agricultural holdings and introducing more scientific methods of irrigation, cultivation, harvesting, storage and marketing of agricultural produce; not to mention the prevention of pilferage and perishing of food stocks in different parts of the country. This will require cooperation from all stakeholders across the social and political spectra – a complex and tough assignment for any government, but something that needs to be tackled, if the government is serious about taking agricultural growth to the next level on a more enduring basis.

There has also been some movement on reforms. Like reduction of subsidies on diesel, capping of the supply of subsidized LPG cylinders, direct cash transfer of subsidies to the poor, allowing FDI in multiple brand retail, raising of FDI cap in insurance to 49%, etc. However there are several sectors that are still to get due attention. Among these, human resource development is the most prominent. The much talked of demographic dividend could go waste if adequate attention to education and skill development is not paid on an urgent basis. A young, skilled and enabled youth population can certainly lift India to its rightful status as the third largest economy in the world. Indeed, Kapil Sibal had initiated reforms in the education sector but much more needs to be done. For example, we have yet to align our education system to the needs of our industry and markets. Similarly, along with technological skills there is a need to pay adequate attention to humanities and ethics in order to ensure a healthy social environment that is vital for the all round improvement in various socio-economic indicators. One hopes to see some of these elements reflected in the forthcoming budget.

Finally, but equally important, is the issue of governance. In order to encourage a better mobility of highly skilled labor force there ought to be suitable structures of governance in place. These include law and order, social security, provision of quality education, housing and healthcare as well as other facilities and amenities conducive to the improvement in quality of life.

The government as well as the opposition will have to sit together and decide upon a roadmap to India’s economic revival on an enduring basis. So far, we have seen that even the most sensible economic initiatives are opposed for scoring temporary brownie points with various vote banks and constituencies. This tendency ought to change. There is a need to understand that Indian economic growth cannot be held hostage to partisan politics. Only a stable growth oriented economic policy regime, low inflation and efficient governance can encourage corporate investment, which requires political consensus at the national as well as regional levels.


Published in The Financial World dated 15 February, 2013

No comments:

Featured Post

RENDEZVOUS IN CYBERIA.PAPERBACK

The paperback authored, edited and designed by Randeep Wadehra, now available on Amazon ALSO AVAILABLE IN INDIA for Rs. 235/...