The sharp differences of opinion between the Planning Commission and the finance ministry on the approach to the Eleventh Five-Year Plan, which have been playing out in the media over the last few days, may well indicate that economic policy formulation in this government is now well and truly gridlocked. The rather strongly worded letter from Mr Chidambaram to Mr Ahluwalia raises five major issues of contention. While not disagreeing with the significance of issues relating to agricultural productivity and the need for increasing public expenditure on social services, the finance ministry differs on the nature of the problem and believes that institutional reform must precede increases in funding. The ministry also rejects the Commission's concern that a widening current account deficit may constrain growth, arguing that its estimate of the deficit is based on an excessively pessimistic view of service exports. But it is the Commission's view that the constraints imposed by the Fiscal Responsibility and Budget Management (FRBM) Act must be loosened in order to achieve the growth target of 8.5 per cent per year during the Plan period, which has evoked the strongest response. The finance ministry, strongly supported by the Reserve Bank of India, believes that not only would this constitute a great loss of credibility for the government, it would also sow the seeds of macroeconomic instability. | |
| While such differences of opinion may be welcomed on the grounds that they lead to better and more robust decisions, playing them out in the public domain can create confusion about the government's stance on economic policy. A more constructive way to conduct the debate, which is what it really is, rather than a disagreement, is to focus on the key assumptions that each institution is making about binding constraints in the economy over a five-year horizon. For instance, it seems clear that the Commission does not expect revenue collections to increase significantly; certainly not by enough to accommodate the higher levels of social sector expenditures. Does the ministry accept this as a valid assumption and, if so, what can it do to ratchet up revenue collections? On the other hand, the Commission believes that government departments and agencies can be re-oriented rather quickly to raise their standards of delivery and accountability. What is the basis for this perception? Or, is the government system as a whole akin to a "leaking water supply pipe", as Mr Chidambaram put it, not to be trusted with more resources? In which case, can alternative mechanisms be created? The entire exchange is silent on the significance of capital inflow and its role in mitigating the potential hindrance caused by a current account deficit. Does neither of them believe that the second-fastest growing economy in the world will not continue to attract significant volumes of foreign investment? |
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| It must be presumed that, at the end of the day, both protagonists want the same thing: high growth, enhanced and more effective resource flows to the social and rural sectors, and macro-economic stability. If they can agree on which constraints are binding and which are quickly amenable to policy interventions, they will be well on their way to identifying a mutually acceptable roadmap that reconciles the potential contradictions between these objectives. |
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