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| Subir Gokarn: The luxury of time |
| Subir Gokarn / New Delhi Dec 01, 2008, 00:07 IST |
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Economic and security conditions call for a speeding up of the electoral schedule.
One (and perhaps its only) drawback of democracy is the binding constraint imposed by the electoral cycle. Either by design or political compulsion, governments have less and less room to manoeuvre as elections approach. Unfortunately, crises do not recognise such constraints and sometimes erupt in a situation when a government is at the lowest ebb in its empowerment to deal with them. The outgoing US administration is in this situation in trying to repair the damage to its financial system and get the economy out of recession.
From the economic policy perspective, so is the Indian government. While other countries in the region, China being the most prominent, have initiated a series of fiscal measures to provide momentum to their slowing economies, India can only do similar things after the new government presents the next budget, which is likely to be only in July. The electoral schedule will not have it any other way. The economy’s performance is, therefore, dependent until then on the single engine of monetary policy, which is fortunately driven by somewhat more technical criteria.
If this were not constraining enough, the terror attack on Mumbai has emphasised the virtually revolutionary changes that will need to be made to the institutional framework for national security. Much of the analysis of the events focussed on capacity limitations and co-ordination failures, to which the solution lies in both more resources and a re-engineering of various mechanisms, at the central, state and collaborative levels. The first involves budgetary allocations, which are then bound by the electoral schedule, while the second will require significant political negotiations and consensus-building, which a government in its last few months in office simply cannot do.
The combined impact of the economic and security shocks on the long-term prospects of the economy can be potentially devastating. The immediate consequences apart, there is a significant risk of the loss of confidence in government to manage the overall environment. Both foreign and domestic investors will be deterred by this. Mitigation requires quick and simultaneous responses and actions on a variety of fronts.
The economic agenda needs to focus on a number of vulnerabilities that have been exposed by the ongoing situation. One, the ambitious plans for investment in infrastructure through public-private partnerships, in which significant investments by private, particularly foreign, sources were envisaged, need to be re-examined. Global financial conditions are simply not conducive to large capital flows into long-gestation projects still subject to policy and regulatory risk. The government must now think of a larger and more elaborate role for itself in maintaining fund flows into infrastructure, in the absence of which, the foundations of the India growth story will become shakier and shakier. In a recent piece (Intermediation in Infrastructure, November 3), I argued that privatisation would provide a way to achieve this. Of course, privatisation is something that an outgoing government simply cannot think of doing.
A second factor that has emerged as a significant constraint on the government’s capacity to respond to an economic slowdown is the burden of subsidies and the irresistible temptation that governments have to use them. One reason why China was able to announce such a huge fiscal stimulus package with some degree of credibility is that its fiscal position under normal circumstances is rather healthy. Its budgets are typically balanced or show surpluses. Credibility being a critical consideration in these circumstances, India’s ability take any initiatives on the fiscal front is seriously hampered by its uncertain progression towards the Fiscal Responsibility and Budget Management (FRBM) milestones of a zero revenue deficit and a cap on the fiscal deficit. Creating the fiscal capacity to both sustain infrastructure investment and boost other spending to counteract a business cycle downturn again requires significant political management
A third issue that requires attention is the rising levels of vulnerability that various stakeholders — labour, small and medium enterprises and so on — have to global upheavals. The benefits of greater opportunities and competitive pressure come with heightened risks. There are both financial and human dimensions to these risks and the benefits of globalisation would be significantly enhanced if mechanisms that enabled various stakeholders to mitigate risks at relatively low cost were put in place. Unemployment insurance is one such and it is high time that policy attention was focussed on it, along with mechanisms to help other stakeholders.
One could go on and on but, hopefully, the point has been made. Similar considerations also apply to the revamping of the security mechanisms. Multiple channels of communication and co-ordination are obviously needed to provide credible security. These will involve several central agencies, several state-level agencies and interactions between the two levels and, possibly, with local-level agencies as well. The objective here, as in the economic policy space, is to inspire confidence amongst all stakeholders that the system can and will deal with a threat of any conceivable magnitude. The effort that it will take can only be made by a government with high credibility and a long horizon.
The point that I draw from these arguments is that the combined burden of the economic and security environment does not give the country the luxury of time. A government with a fresh mandate and, therefore, the room to act quickly and comprehensively in dealing with both sets of issues is a must. There are any number of blueprints on economic issues, which have been subject to technical scrutiny. I would presume that there are comparable ones on the security front too. These will give the new government a head start in addressing its priorities.
What remains, of course, is the new government. Under the current electoral schedule, we can only expect it to be in place in May 2009 and beginning to act by July. The question is: given the circumstances, can we afford this luxury of time?
In the US, there have been many voices in support of an accelerated transition to the Obama presidency, something which is technically difficult, if not impossible, as it would require a constitutional amendment. Fortunately for us, we are not bound by that particular constraint. The incumbent government can dissolve Parliament and declare elections any time it wants. Amidst the simultaneous threats on the economic and security fronts, it would be an act of great statesmanship on the part of the UPA government to do this as soon as possible.
The author is Chief Economist, Standard & Poor’s Asia-Pacific. Views are personal SUBIR GOKARN
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