India’s economic growth over successive quarters of the last financial year, 2011-12, makes for scary reading. In the first quarter, growth in gross domestic product (GDP) was reasonably robust, at eight per cent. A harsh slowdown was visible in the second quarter, when GDP growth was 6.7 per cent; but the government insisted that better times were just around the corner, and the second-quarter results were below trend. Instead, the third-quarter GDP growth was 6.1 per cent. Many in the government insisted that this was the economy “bottoming out”, that the same policy environment that had created eight-plus per cent growth was still in place. Now that fourth-quarter growth is known to have been 5.3 per cent, that argument has been shown up. Clearly, no merely cosmetic changes will be enough to arrest this precipitous slide. Several major reforms – such as foreign direct investment (FDI) in retail – are essential. But even more fundamental are changes at the highest level to how this government makes economic decisions — for it is this process that has been revealed as wanting. Here are three such vital changes.
First, a large section of economic decision-making should be depoliticised. In particular, those decisions that are related to factors beyond any government’s control – such as world fuel or food prices – should be taken out of direct administrative purview. If oil marketing companies can indeed set petrol prices freely now, then that is a good first step, which should be followed up with similar moves in respect of the prices of diesel and cooking gas. The principle also needs to be extended to other forms of subsidies, to electricity pricing, and to decisions on agricultural exports and imports. It is clear that if short-term politics is allowed to influence decisions on such matters, the government merely postpones unpopularity, stalls reforms and creates a bigger, long-term problem for the economy. It makes little political or economic sense, therefore, to continue with such systems of control.
The second important change is to how policy is made at the ministerial and Cabinet level. That individual ministries have considerable power in this administration is known. However, the power of the Cabinet has largely been usurped by issue-based groups of ministers (GoMs). This experiment appears to have failed. GoMs meet too rarely; consensus is no easier to achieve than in full Cabinet; and efficient ministers are overworked by being put on too many of these groups. Instead of a GoM system, perhaps the Cabinet Committee on Economic Affairs needs to be restored to prominence. When it met last week on the same day the disastrous GDP numbers were released, it reportedly took only one decision of significance — to permit the export of skimmed milk powder. It is time the core group of economic ministers, with the prime minister at its helm, was charged with the responsibility of monitoring the economy and devising steps the government needed to take.
The final necessary change is to how the Centre engages the states. A continuous, structured engagement should be put in place, so that states are not surprised by, for example, attempts to better regulate the real estate sector. Much essential reform requires state consent, like FDI in retail; but much opposition from state governments comes from either ignorance or concern that the Centre does not respect their rights. An ongoing process of consultation will help. Once that is in place, the Centre will be correct to move on matters like the goods and services tax (GST) even if not all states are on board. If the United Progressive Alliance makes these alterations to its functioning, India has a chance of recovering growth momentum. If not, there is every likelihood the deceleration will continue unabated.