Economic issues are set to dominate the agenda for the coming elections, more than any other in the past. As the major political parties prepare to release their manifestos, three eminent economists along with political commentator, S. Gurumurthy, came together on a common platform to examine the current scenario, and think up ideas for the next government.
The panel discussion, featuring Arvind Virmani, Former Chief Economic Adviser to the Government of India; Rathin Roy, Director, National Institute of Public Finance and Policy; Ajit Ranade, Chief Economist, Aditya Birla Group; and S. Gurumurthy, Corporate Adviser and Commentator on Political and Economic Affairs, was thought-provoking, and threw up refreshing ideas.
The ball was set rolling by the introductory remarks by N. Ravi, Editor-in-Chief of The Hindu, who moderated the panel discussion. Mr. Ravi laid out the questions: What reforms remain to be done? How far can India go with this rights-based and entitlement approach? How can the trade account be made more sustainable? How can the rent-seeking opportunities in the economy be checked?
Mr. Virmani identified malnutrition as one of the biggest problems facing the country. The corporate sector needed to be revived in order to sustain high growth, and the regulatory environment should be made conducive for promoting investments, he said. Using empirical evidence
Mr. Virmani showed that the maximum catching up was required in the area of malnutrition. “The malnutrition problem has to do with sanitation rather than food and poverty,” he said. “India is an outlier only on sanitation, and has more or less caught up on poverty and food,” he pointed out. Mr. Virmani said empowerment had suffered as the focus of the Government was too much on budget allocations. “Nobody is fighting to produce results or outcomes,” he said.The successful reforms in the past had triggered catch-up but sustaining the process for decades was a different ball game, Mr. Virmani said, adding that the learning from countries that had grown fast was that high growth in one decade was no guarantee of high growth in the next.
To ensure sustainable high growth, Mr. Virmani recommended reviving the corporate sector where investments and productivity had ‘collapsed’. Citing the example of the infrastructure sector, Mr. Virmani said that the focus of government was more on getting funds for the sector, rather than providing a regulatory and policy environment that was conducive. “The problem in the infrastructure sector is not funds; if the policy and regulation problems are addressed, tonnes of funds will come automatically,” he said.Different take
Mr. Gurumurthy presented a different perspective based on his understanding of Indian society and anecdotal evidence from the field to challenge the convention of using theories and wisdom of the Western economies to address Indian problems. He emphasised the need for expertise and research to be India-centric rather than be inspired by Western approaches. One example he cited was the lack of discourse and research, and, therefore, policy ideas for the diamond cutting industry of Saurashtra. “There is a disconnect between institutions and economic agents…where is the study on diamond cutting when nine out of ten diamonds in the world are cut in Saurashtra?” he asked.
He decried what he called as the “Wall Street approach” to policy formulation that was focused excessively on the corporate sector and stock markets. “In the U.S., 55 per cent of families are linked to stock market compared to a minuscule percentage in India. We cannot transplant those policies here,” he said. Dishing out further data to support his arguments, Mr. Gurumurthy said: “only 11 per cent Japanese savings are invested in the stock market, while in the case of Germany, it is 7 per cent.” He pointed out that the market capitalisation of the 30 Sensex companies taken together did not account for more than 1.5 per cent of GDP. “Even if one takes the BSE 500, which accounts for 90 per cent of India’s listed companies, its market capitalisation is less than 5 per cent of the country’s GDP. Why, the contribution of the total corporate sector to GDP is just around 15-16 per cent. Yet, policies are focussed more on the corporate sector. There is something basically wrong about our approach here,” Mr. Gurumurthy pointed out.
Mr. Roy came up with an interesting observation. According to him, States were better in their fiscal policies. Pointing to data, he declared that the states had completed the process of fiscal consolidation. He said that institutions needed to be able to translate ideas into results. According to him, the fiscal deficit problem today “is not as visible in the States as it is with the Centre’’.
“With consistently improving quality of management of public finances despite their continued demonstrated ability to give hand-outs, the States have completed fiscal consolidation,” he pointed out. “India does not even spend as much as small countries such as Kenya and Nepal on education and health,” Mr. Roy said. “Through the plans, we are spending more on health. It is still not enough. And, whatever we are spending is not delivering any results,” he pointed out.
Of the 30 Millennium Development Goals targets set in the 11th Plan only two — roads and infrastructure and forest cover — were achieved. Given the fact that the States were proving to be better fiscal managers than the Centre, the solution, Mr. Roy said, was to shift to greater devolution of funds and responsibilities to the States. This idea, however, would not find takers in New Delhi, he said, adding that the impulse for it would have to come from the States. “The Centre is a well-meaning institution but the assumption that it is capable of delivering either human development or take care of tax payers money can be questioned,” Mr. Roy said.
In response to a question from the audience, Mr. Roy said the reason for the superior fiscal performance of the States could be their proximity to, and, therefore, better understanding of the ground realities.
“States know better about the ground realities. So, the efficiency is better,” he said. In his estimate, about 60 per cent of the fiscal consolidation in the States could be attributed to expenditure controls prescribed by the Fiscal Responsibility and Budget Management reforms.
The balance 40 per cent of the fiscal improvement could be explained by the efficient generation of States’ own tax revenue through genuine superior management, he added.