An enabling state for inclusive growth

The Union finance ministry’s Economic Survey of financial year 2009-10 outlines a new agenda for economic and governance reform to create, as the Survey says, “an enabling government.”

Outlining an agenda of fiscal and institutional reform, with a focus on improving public finances, increasing agricultural production and productivity and investment in infrastructure and education, the Survey recommends putting in place a new system for food security based on cash coupons for the poor by 2012.

In a bold assertion of independent thinking on second generation reforms, the Survey calls for greater flexibility in the labour market, aimed at “creating market conditions that result in greater demand for labour.” The Survey also calls for a reduction of petroleum and fertiliser subsidies and investment in agricultural research and higher education aimed at increasing land and human productivity. The Survey also recommends bringing down peak Customs tariff from 10 per cent to 7.5 per cent.

Expressing concern about food price inflation, the Survey seeks a new “standard operating procedure” (SOP) for the “kind of actions that the state ought to take in the event of a skewed price rise in the food sector”. In a clear admission of the government’s lack of preparedness for the current financial year’s inflationary spiral, the Survey dubs it a new price phenomenon restricted to a few commodities and coins the phrase “skewflation” to describe it.

While setting out this agenda for governance reform, the Survey asserts that “the economy’s fundamentals are strong”, with a gross domestic savings rate of 32.5 per cent and a gross domestic capital formation rate of 34.9 per cent in fiscal 2008-09. Based on the assumption that these macro aggregates will be sustained and improved upon, the Survey forecasts a national income growth rate of 8.5 per cent (+/-0.25 per cent) growth in 2010-11, with the potential to record above 9.0 per cent growth in 2011-12.

Enthused by the growth prospects, the Survey, on the first page of the first chapter, suggests that the time is ripe for starting a withdrawal of the stimulus measures, albeit gradually. Giving credit to the government for the economic recovery, it says: “…the broad-based nature of the recovery creates scope for a gradual rollback, in due course, of some of the measures undertaken over the last 15 to 18 months, as part of the policy response to the global slowdown…”

The Survey conveys the finance ministry’s concerns about the fiscal situation. Drawing attention to the views of the Thirteenth Finance Commission, the Survey underlines the importance of reducing the fiscal deficit and the overall debt of the government.

While expressing optimism on India’s growth prospects, the Survey is categorical that growth is only a “necessary, not sufficient” condition for poverty eradication.

Setting out what the Survey terms as “the micro-foundations of inclusive growth” it says the key challenge before the country is to make the government do more but interfere less.

“An enabling state” says the Survey, “takes the view that, when in doubt, do not interfere. … the default option of an enabling state is to allow rather than stop, to permit instead of prevent.”

This altered conception of the state, says the Survey, can have dramatic effect on the functioning of an economy, in general by promoting greater efficiency and higher productivity. In an aside, the Survey is critical of the ban on futures trading, stating “the Government should, ideally, desist from imposing an outright ban on futures trade and, instead, provide it with a regulatory structure to promote transparency and to discourage collusion.”