<b>A K Bhattacharya:</b> The new order

Demonetisation is a strong govt action, whose disruptive impact on economy can hardly be disputed

Amid the hurly-burly of the current debate over how demonetisation has affected economic growth, it is not often recognised that at least for some months now India has been experiencing economic policy changes of a different kind. These are not as tectonic in effect as those that were introduced in the wake of the twin-crisis of 1991 that arose out of fiscal indiscipline and unsustainable balance of payments. But there should be little doubt that the impact of these changes will be significant and felt in the coming months on economic governance both at the Centre and states.

If 1991 saw the overhaul of industrial and trade policies, the changes now being witnessed will reconfigure the terms on which the government will be required to frame economic policies. In that respect, these changes will also have a fundamental impact on people and what they could expect from the political establishment by way of policies and schemes. The political power of the elected representatives is being defined increasingly by a set of rules and often delegated to newly created institutions and procedures of decision-making.

It is ironic that such changes are taking place at a time when the government is trying to reassert its suzerainty over framing economic policies and the people in general seem to be endorsing the rise of a strong government that such actions indicate. Demonetisation of November 8 is one such instance of a strong government action, whose disruptive impact on the economy can hardly be disputed. But if the general trend of the political discourse in recent campaigns during the Assembly elections in five states is any indication, demonetisation as an issue does not seem to have figured as prominently as many political pundits had expected.

Juxtapose this with the latest trust survey conducted by Edelman, the message of a popular endorsement of a strong government capable of strong actions cannot be ignored. The Edelman survey shows that the largest increase in the people’s trust last year was with respect to the government, ahead of the rise in trust in non-government organisations, businesses and the media.  Remember that the Edelman survey covered the period when the demonetisation decision had just been taken and the pain people suffered later had not been fully experienced by then.

Yet, what is happening in the Indian government’s economic policy space indicates an opposite trend. In several steps initiated in the last few months, the role of the political establishment or the power of elected representatives occupying executive positions in the government has been significantly modified, and even diluted, as far as some key macroeconomic policy decisions are concerned.

For instance, successive Finance Commissions have redefined the fiscal space for the Union government, mandatorily increasing the states’ share in central tax revenues and setting new standards to be followed for allocation of resources or for fiscal prudence particularly with regard to states. These are recommendations that can be ignored by neither the states nor the Centre. The freedom of the governments at the Centre and in states is now further constrained.

But the higher allocation of central revenues to states has also meant that the Centre has put in place a new allocation formula for funding the various centrally sponsored schemes. Thus, what was earlier a financial allocation for certain schemes and projects, depending on the specific likes or dislikes of a finance minister or the political party in power at the Centre, is now guided by a well-defined resources allocation formula. This is a welcome change, but it certainly erodes the hitherto untrammelled power of the finance minister or the political establishment at the Centre.

Take the highly emotive and politically sensitive issue of inflation. Elections have been won or lost in the past on the question of inflation. Every government strives towards reducing the inflation rate, if not eliminating price rise altogether. Now, the political establishment has set under law what the acceptable range of inflation would be for a period of five years. Such legally bound inflation targeting will certainly provide comfort to the government as long as inflation stays within the mandated range. But there is no denying that inflation as a political issue will also cease to be a free-for-all for politicians in any electoral battle.

Fixing monetary policy targets through a committee process is also suggestive of a similar change in this governance structure. Gone are the days when the governor of the Reserve Bank of India (RBI) would have the final authority, and responsibility, to take the final call on the interest rate regime in the country. That system also allowed the government to try and influence the RBI governor to follow a monetary policy to its liking. On most occasions, the finance minister of the day would be able to influence the course of monetary policy direction and other financial sector policies framed by the central bank. An RBI governor not paying heed to such suggestions would usually not last very long in Mint Road, where headquarters of the RBI are situated. With the monetary policy committee system in place, both the RBI governor and the finance minister have a reduced role in influencing the monetary policy trajectory. If they wish to influence the policy direction, they have to bring around all the members of the committee, a task that is more difficult.

At the central government level, the setting up of the Goods and Services Tax (GST) Council will mean reduced powers of tax rate fixation by the finance ministers in states and the Centre. All decisions on raising or reducing tax rates would be taken at the GST Council and not independently by these finance ministers as has been happening so far. Even with regard to fixation of the fiscal deficit targets by the Centre, there is a distinct possibility that the Union finance minister would come under greater scrutiny by a new oversight body to be called the Fiscal Council.

Taken together, all these changes suggest a new environment of policymaking where the power of the politician is getting more defined and subjected to pre-determined guidelines. How long this lasts and how soon the politicians find out new loopholes would determine the success or failure of the new regime.