Abheek Barua: Wanted - a model

The Budget speech should outline a consistent policy world view

I do not wish to (once again!) discuss the merits or demerits of the Gujarat model. What I would, however, like to underscore is the fact that this rather copious discussion on its success or failure has brought the somewhat passe word and idea of a "model" back centre stage. I would argue that while the various bits of somewhat hackneyed advice on how to tackle the fiscal deficit that invariably precedes the Budget are all very fine, it is perhaps time to ask the finance minister to articulate an economic "model" that India needs to follow to get back its growth mojo.

The word "model" might be anathema to those free-marketers who believe that less government, more governance and the invisible hand of the market should be good enough to do the trick. For others (especially those who grew up in the 1960s and 1970s) the word "model" has a close association with the word "plan" and might bring back unpleasant memories of hundreds of policy wonks sitting together in front of their massive mainframe consumers and with the magic swish of a Fortran (or was it COBOL?) code, allocating billions of rupees to heavy industry and reducing investments in food production.

I cannot disagree with the hard fact that our experiment with a somewhat sloppy version of free-market policy did deliver a period of high growth in the middle of the last decade. However, that was, for one thing, abetted heavily by unprecedented global growth. Besides, while it gave us high headline growth in gross domestic product, or GDP, it failed to live up to its promise on key imperatives such as employment creation. This led to problems such as rising inequality, which the government tried to hastily address through entitlement schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act, or MGNREGA.

Some of my friends argue that this itself, de facto, constituted a model - high growth followed by redistribution. It is also possible to argue that this "accidental" model wasn't quite the unmitigated disaster it has been made out to be. Rural affluence has certainly gone up, and there are enough empirical studies to show that the MGNREGA did bring rural poverty down even in states where it was not administered effectively. However, this strategy seems to have been weighed down by its own inconsistencies - resulting in low growth and even lower rates of job creation over the past few years. Anecdotal accounts suggest that much of the MGNREGA, for instance, takes the Keynesian prescription of digging holes to fill them up a tad too seriously. The scheme has hardly created any productive assets.

One of the principal objectives of a "model" that is fully thought through is that it resolves (by imposing its own judgment) on the invariable conflicts that arise with the ebb and flow of the economy. A precondition for this "conflict resolution" is the clear identification of objectives and their prioritisation. Let's take an example.

The massive shift in the terms of trade (the relative prices of agriculture and industry) in favour of agriculture from 2004 onwards and the subsequent introduction of the MGNREGA worked against industry. Wages spiralled and workers in many cases (construction projects, for example) were just not available. Was this desirable even if it led to rural affluence? If indeed ramping up employment in manufacturing remains on top of our "must do" list, there are limits to be set vis-à-vis the rural economy. I think the need to control minimum support prices, or MSPs, for foodgrain or to reduce fertiliser subsidies deserves to be viewed through the prism of this larger model than from a narrow fiscal perspective.

If large-scale manufacturing is the answer to our employment woes (I am not unnecessarily fetishising manufacturing; the model itself should decide if it is), then we need to get our manufacturing strategy ducks in a row. Some questions invariably arise. How big a role, for instance, should exports play? Remember exports were a key contributor to the mid-2000s industrial upswing. If selling abroad is the answer, the next step should be to figure out how to achieve this. Should we resurrect the idea of special economic zones (SEZ), and make sure this time that they are not just thinly disguised real estate ventures? Given the scarcity of resources, such as power, should we actually give exporters priority when it comes to their supply?

One could think foreign policy dimensions as well, and mesh economic and external policy in this model. Given China's problems of wage escalation, its stated policy to supply local rather than external markets and its rising tensions with the West and neighbours, such as Japan, is it the right time to push our case to become an alternative global manufacturing hub? If so, should we send the right signals to United States industry by, say, toning down our aggression on the ongoing spat over pharmaceutical pricing and patent laws?

The kind of model I am referring to is not the complex mathematical construct that most people tend to associate with economists. It is certainly not the kind of computational (and utterly ineffective) juggernaut that the Mahalanobis generation swore by. It is in a sense a world view that any policymaker should have - and the key feature of this world view is that its different facets are consistent with each other. It does not involve micromanagement of the economy, but simply ensures that the pulls and pressures of various sectors or stakeholders in the economy are in balance. Call it a CEO approach or what you will, but it is imperative that the government has this embedded in its collective psyche. One hopes that the Budget speech will articulate some aspects of this and not reduce itself to a laundry list of tax and spend items.

The writer is with HDFC Bank.
These views are personal