India’s economic growth faltered towards the end of the last decade and all hopes of touching nine per cent in 2011-12, roughly the first year of the second decade, have been dashed. With reforms steadily losing pace, even seven per cent looks like an optimistic forecast now.
So, what needs to be done to spur growth? A Critical Decade, written by officers of the Indian Economic Service, seeks to provide some answers. As the 12th Plan (2012-17) takes final form, the Introduction says this book serves to highlight the issues for the next level of reforms in this critical decade. Well, the final Plan document looks nowhere near ready although India is already into the first year of the 12th Plan. In the absence of an overarching official vision for the economy, this book could serve as a useful blueprint for the issues at hand.
Economic growth, with all its implications for the development of large sections of the population, will not occur on its own, as Chief Economic Advisor Kaushik Basu rightly points out in the Foreword. Using a mountaineering analogy, he says the Indian economy has gone past base camp and stands poised on the slopes, ready to take on that serious ascent to the conclave of industrialised nations. The final climb is not a foregone conclusion and, by no means, a matter of simply ambling along.
“The nation still needs resolve, initiative and, above all, ideas to make the big climb. In that sense the decade that we have just entered and remains largely ahead of us is the critical decade that will determine whether the national will make it or not,” he writes.
This is a bold statement since it came not long after the government deferred its own Cabinet decision to open multi-brand retail to 51 per cent foreign direct investment (FDI) on the back of strong opposition from allies in the ruling coalition. The book does not specifically mention retail, but Seema Gaur, economic advisor in the Competition Commission of India, suggests most sectors that are not natural monopolies or networked industries should be left to the forces of competition. In the chapter “Role of Competition Law and Policy”, she also talks of the chain of intermediaries between farmers and customers in the agriculture sector, one of the compelling reasons to relax FDI in retail.
Another question is: why is the country unable to forecast, with any degree of accuracy, the impact of global economic developments on the domestic economy?
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In a chapter titled “Refocusing the Union Budget”, Rajeev Malhotra, economic advisor to the finance minister, says a globalised economy must be prepared to face more frequent episodes of exogenous economic shocks that could undermine short- and medium-term policy objectives. He suggests a division for tracking international developments and regional/country desks be set up in the Department of Economic Affairs.
Many of these prescriptions have been made by any number of economists. But they hold significance in this book because they come from within the government. For instance, the chapter on refocusing the Union Budget prescribes that tax and expenditure policy be restructured. This means curtailing tax concessions and exemptions, bringing them in line with the proposed exempted list of items under the goods and services tax (GST) and the Direct Taxes Code (DTC), even as the two tax reforms await implementation.
This also means taking steps to rationalise public expenditure. Budget 2012-13 did specify a cap on subsidies — below two per cent of GDP for next fiscal and 1.75 per cent over the next three years. But the moot point is whether this is possible given the proposed food security law and political opposition to the deregulation of diesel prices. Obviously, meeting these targets and jettisoning populism require political will, a point that serving officers can hardly make.
The Reserve Bank of India has drawn flak for adopting the old tools of raising policy rates to control inflation, which also attracts huge capital inflows, creating problems for exchange rates and exports. Pursuing two nominal anchors of monetary policy together – price and exchange rate stability – could lead to one of the objectives being compromised. “It may also not always be successful because the periods of surge in capital often coincide with boom phases of the business cycle. This leads to higher oil and commodity prices that stoke cost-push inflation, further increasing price pressures,” says Anil Bisen, economic advisor in the Department of Economic Affairs.
The book has an interesting take on labour reforms. India’s so-called rigid labour laws have drawn criticism for stunting manufacturing growth in the organised sector. Critics suggest a loosening of these laws to put manufacturing on the growth path. A chapter, authored by Vinita Kumar, who is adviser in the labour and employment ministry, also prescribes reforms in labour laws but of a different type.
The author says there is evidence of rapid expansion of employment and investment in the organised manufacturing sector between 2005 and 2009. However, the increase in employment was mainly on account of the growing engagement of contract workers on terms and conditions far inferior to those for regular workers. The analysis in the chapter shows notable growth in labour productivity, but at the same time suppression of wages and statutory dues of workers. So, the employer-driven demand for liberalising labour laws appears misplaced, the author says, suggesting there is, however, an urgent need to protect the fast-eroding labour standards in India.
A CRITICAL DECADE
Policies for India’s Development
Edited by Rajeev Malhotra
Oxford; 454 pages; Rs 695