In the interest of growth

These essays in honour of Vijay L Kelkar, who played a key role in India’s economic reforms, prove an invaluable contribution to the growing sophistication of Indian policy debates

Vijay Kelkar, who chaired the 13th Finance Commission of India, is one of India’s economic reformers, in the great tradition of I G Patel, M Narasimham, Y V Reddy and others who have created a climate and framework for growth that we have witnessed in recent years.

More than a decade ago, in a seminal article published in the Economic and Political Weekly (August 14, 1999), Vijay Kelkar argued that the growth and transformation of the Indian economy was affected by five critical factors that included the relative neglect of international trade, agriculture, incentives for good management in the public sector, dysfunctional subsidies and cross-subsidies, and growth of government consumption, squeezing the space for investment.

He, therefore, argued for corrective measures and improvement of quality of governance through greater autonomy for RBI and strengthening of other regulatory agencies, greater competition in product, service and financial markets, and other measures. This thinking carried forward the agenda of economic reforms initiated in 1991, eventually setting the tone for the spurt in growth in the last five or six years.

This collection of essays is a wonderful tribute to Vijay Kelkar, containing insightful and critical analysis of the growth experience in the Indian economy that largely bears out his thinking.

Arvind Panagariya, who takes on Kelkar’s theme of “India on the Growth Turnpike”, shows that in every one of the 18 larger states that represent 93 per cent of the population of India growth has accelerated for six years since 2003-04 — and poverty has either declined or remained unchanged. Indeed, the growth poles that are created in this process have the potential to spread growth wider, with “spread effects” outweighing “back-wash effects”, as set out by Gunnar Myrdal in his classic analysis nearly half a century ago. I agree with Panagariya’s broad conclusion that India has indeed moved on to a “growth turnpike”, going by the experience of the last six years, though there is much scope for growth — in quantum and quality — to be much better.

In an interesting contribution, Nitin Desai highlights the steadily rising ratio of savings and capital formation and GDP growth — with the exception of the turbulent years of the 1970s. Desai makes the interesting point that import substitution — the policy pursued in the early years of independence and much blamed for the poor growth of India in those years — may be the way to capacity building and self-reliance — though he recognises that, in the longer run, export-oriented strategies are necessary for success. The difficulty, often, is how to summon the will for change from one paradigm to another, for each strategy creates its own set of vested interests.

An interesting theme that beguiles all of us is the issue of “transparency in macro-economic policy”. But what do we mean by it? This is the question that Indira Rajaraman tries to deal with, and I agree with her that the standards beamed at developing countries carry components that are diagnostically flawed and unsuited to them. She argues rightly that the monetary and fiscal authorities should have the freedom to choose targets in a context-specific manner. The RBI, for example, cannot tailor its monetary policy entirely in the manner of, say, the Bank of England, working to a 2 per cent or 4 per cent inflation target. As she says, “single-minded pursuit of price stability could result in disastrous instability, both real and financial”.

In an insightful contribution, S S Tarapore raises the issues related to monetary policy management in the broader context of fiscal and external sector policies — and addresses the question of whether a little inflation is desirable — and strongly comes out against the “seductive doctrine that we should tolerate inflation in the interest of growth”, which he believes is dangerous. This reviewer, for one, agrees — though he believes that in the wider context of the world economy, the danger of falling into a deflationary trap — as we have seen in Japan — is a grave risk, too.

On the question of whether India has opted for excessive accumulation of foreign exchange reserves, with the attendant constraints on monetary policy, Arvind Subramanian makes the point that if India had gone into the recent crisis with just $100-150 billion reserves, instead of $300 billion, she would not have been able to handle the crisis as well. As we notice from China’s policies, a good war chest of reserves is important — notwithstanding the many difficult issues that the management of capital inflows poses.

An important theme of recent debate has been the importance of financial inclusion in promoting both growth and equity. K C Chakrabarty, in his contribution, ably argues that inclusive growth is essential for achieving an equitable society — an objective that should not be too difficult to pursue, as the poor are bankable. Of course, universal access to electronic payments — about which Laveesh Bhandari and Sunmit Khale write — makes this a much more realistic ambition. Ajay Shah and Ila Patnaik put forward the interesting argument that financial inclusion, by improving the integration of formal and non-formal financial markets, can improve the efficacy of monetary policy instruments — thus contributing to the effectiveness of monetary policy.

Vijay Kelkar made a significant contribution to tax reform. Surjit Bhalla, in his paper, discusses evidence for the Laffer Curve — that tax revenues will rise with cuts in tax rates. Some cynics, of course, have said that if tax rates are cut to zero, there will be no tax revenues — trivialising the point! The author shows that tax cuts — in a given range — can indeed enhance tax revenues. I believe that it is important to appreciate that when tax rates are taken to too high a level, taxpayers and tax-collectors adopt nefarious behaviour — and it takes some time to drive out such culture before tax reforms can be productive in promoting tax-compliant behaviour.

In his excellent contribution, Shubasish Gangopadhyay reflects on issues related to developing a market for land — an important challenge in the process of industrialisation — and sets out a theoretical model as to why “market-driven voluntary transactions may not work”, resulting in a “hold-up” problem that is ultimately socially sub-optimal. To get around this, he calls for the development of “a take-over code”. I believe there is much value in this suggestion.

In the last essay in the volume, Hari Sankaran reviews the PPP models for the development of infrastructure, including international experience in this regard. He argues strongly for taking forward the PPP model, including for social sectors such as housing.

This volume of essays shows how far Indian policy debates have come and is a valuable contribution to them.

The author is Director-General of the Administrative Staff College of India, Hyderabad

INDIA ON THE GROWTH TURNPIKE
Essays in Honour of Vijay L Kelkar
Editor: Sameer Kochhar
Publisher: Academic Foundation
Pages: 317
Price: Rs 995