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The economic survey in its opening section has observed certain uderlying issues and lessons to be learnt from them in the working of India's politico economy. These can be outlined as follows;
First, India has created one of the most effective institutional mechanisms for cooperative federalism, the GST Council. Cooperative federalism is of course not a substitute for states’ own efforts at furthering economic and social development. But it is a critical complement, needed to tackle a wide array of difficult structural reforms that involve the states. For example, the “cooperative federalism technology” of the GST Council could be used to create a common agricultural market, integrate fragmented and inefficient electricity markets, solve interstate water disputes, implement direct benefit transfers (DBT), make access to social benefits portable across states, and combat air pollution. Second, the 2015-16 Survey highlighted in Chapter 2 that facilitating “exit” has been one of India’s most intractable challenges, evoking the generalization that over the last 50 years India had gone from “socialism with limited entry to marketism without exit.” The IBC resolution process could prove a valuable technology for tackling this long-standing problem in the Indian corporate sector. The recently proposed Financial Resolution and Deposit Insurance (FRDI) bill would do the same for financial firms. The IBC aims to solve these problems through the expedient of transparently auctioning off stressed firms to the highest bidders, excluding those which are toxically blemished. This procedure is still a work in progress: ensuring that timetables are respected and the bidding outcomes are accepted by all parties in the early cases is critical for establishing its credibility. Third, a major plank of government policy has been to rationalize government resources, redirecting them away from subsidies towards public provision of essential private goods and services at low prices, especially to the poor. Government data suggests that progress has been made in providing bank accounts, cooking gas, housing, power, and toilets (amongst others), holding out the prospect that the lives of the poor and marginalized will improve in meaningful ways. Fourth, recent macroeconomic developments are a reminder that the battle for macro-economic stability is never won, that even major victories (such as those post-2014) are always provisional, and that vigilance is always needed. India has two underlying macroeconomic vulnerabilities, its fiscal and current accounts, both of which tend to deteriorate when oil prices rise. Overcoming the fiscal vulnerability requires breaking the inertia of the tax-GDP ratio. It is striking that the center’s tax-GDP ratio is no higher than it was in the 1980s, despite average economic growth of 6.5 percent, the most rapid in India’s history. The Indian economy’s competitiveness has had to contend with the real effective exchange appreciating about 21 percent since January 2014. Policymakers have struggled to come to grips with the international trilemma, whereby an independent monetary policy and an exchange rate objective cannot co-exist with an open capital account. The issue is that both competitive exchange rates and open capital accounts are helpful for growth. Changes in price competitiveness can make a major difference to export performance as highlighted in the government’s export package for clothing. At the same time, open capital accounts attract foreign saving, providing additional funds for investment, which can help growth. So how can policymakers choose between them? A fifth lesson is this: while there are significant social and economic benefits to attacking corruption and weak governance, addressing those pathologies entails challenges. In the case of the GST and demonetization, informal cash-intensive sectors of the economy were impacted. In the case of the TBS, the decision to ban promoters of firms with non-performing loans from the IBC auctions may have been necessary to minimize moral hazard going forward; otherwise firms would have an incentive to default on their loans, then offer to repay them at a discount. But it carried the possibility of fewer bidders and lower prices in the auctions of insolvent firms. In the case of spectrum, coal, and renewables, auctions may have led to a winners’ curse, whereby firms overbid for assets, leading to adverse consequences in each of the sectors; but they created transparency and avoided rent-seeking with enormous benefits, actual and perceptional. The lesson is that policy design must minimize these costs wherever possible. More specifically, there should be: greater reliance on using incentives and carrots than on sticks; greater focus on addressing the flow problem (the policy environment that incentivizes rent-seeking) than the stock problem; and more recourse to calibrated rather than blunt instruments (such as bans, quantitative restrictions, stock limits, and closing down of markets, including futures markets). The sixth lesson relates to the ongoing international and national debate on the role of markets and states, private capital and public institutions. All over the world, there is a reassessment of the respective roles of the two with a clear tilt toward greater state involvement. The new international case is based on the need to redistribute to check growing inequality and cushion against the impact of globalization. It is also based on the need to regulate, for example, the financial sector to minimize risks and the technology sector to check growing market power and its misuse as a communications medium. But India is in a grey zone of uncertainty on the role of states and markets. Limitations on state capacity (center and states) affect the delivery of essential services such as health and education. At the same time, the introduction of technology and the JAM (Jan Dhan—Aadhaar—Mobile) architecture, now enhanced by the Unified Payments Interface (UPI), holds the potential for significant improvements in such capacity. The ambivalence relating to the private sector relates to the experience with Indian capital. The private sector has always had to struggle with the stigma that came with being midwifed in the era of the license-quota-control Raj. Some of this stigma was washed away during the IT boom that started in the 1990s, because the sector had developed on intrinsic competitive merit rather than proximity to government, had adopted exemplary governance standards, listed on international stock exchanges, and thrived in the global market place. All these developments improved the credentials of Indian capital. But then stigmatization was reinforced in the mid-late 2000s, because of the intense rent-seeking and corruption associated with the allocation of spectrum, coal, land, and environmental permits. The infrastructure boom of that period bequeathed the TBS problem of today. As a result, the public concluded that promoters had little skin in the game, that India had “capitalism without equity,” and that instead of limited liability there was very little liability, all further exacerbated the negative perception of Indian capital. Now, even the IT sector is confronting governance challenges, as its model of providing low-cost programming for foreign clients comes under threat from rapid technological change. So, one might say that India had moved from “crony socialism to stigmatized capitalism.” It is that zeitgeist (or Maahaul) of stigmatized capitalism—an accumulated legacy inherited by the government—that made policy reforms so difficult and makes the recent progress in addressing the Twin Balance Sheet challenge noteworthy. Finally, last year’s Survey (Volume 1, Chapter 2) identified the unfinished agenda in terms of three meta-challenges: • addressing inefficient re-distribution; • accelerating the limited progress in delivery of essential public services, especially health and education; and • correcting the ambivalence toward property rights, the private sector, and price incentives.
NEW ISSUES The first new issue—yet in some ways the oldest issue—is agriculture. Successful economic and social transformation has always happened against the background of rising agricultural productivity. In the last four years, the level of real agricultural GDP and real agriculture revenues has remained constant, owing in part to weak monsoons in two of those years. And the analysis suggests that climate change—whose imprint on Indian agriculture is already visible—might reduce farm incomes by up to 20-25 percent in the medium term. The government’s laudable objective of addressing agricultural stress and doubling farmers’ incomes consequently requires radical follow-up action, including decisive efforts to bring science and technology to farmers, replacing untargeted subsidies (power and fertiliser) by direct income support, and dramatically extending irrigation but via efficient drip and sprinkler technologies. The other issue is the challenge of employment. The lack of consistent, comprehensive, and current data impedes a serious assessment. Even so, it is clear that providing India’s young and burgeoning labor force with good, high productivity jobs will remain a pressing medium-term challenge. An effective response will encompass multiple levers and strategies, above all creating a climate for rapid economic growth on the strength of the only two truly sustainable engines—private investment and exports.
By: Abhishek Sharma ProfileResourcesReport error
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