Business Standard

<b>Shankar Acharya:</b> Politics, priorities and policies

If the government pursues three politically inspired goals - more jobs, less inflation and better public services - it will also likely have made good economic policy


Shankar Acharya
It is all too easy for any government, especially a new Union government, to get caught up in the daily firefighting of the myriad issues that arise in Parliament, the media, foreign affairs, politics and administration. As Harold Macmillan, a justly famed British prime minister of the late 1950s and early 1960s, reportedly replied when asked what were the dominant policy themes of his prime minister-ship, "Events, dear boy, events!" In order to avoid this predicament in India's economic realm, it is important for the new Modi government to keep asking itself the question: what are the key economic policy goals the government has to pursue effectively to enhance its chances of re-election four and a half years from now? Based on past experience in India and other democracies, the answer seems pretty clear: more jobs, less inflation and better public services. Interestingly, if this troika of politically inspired goals is successfully pursued, it is also likely to have satisfied most of the canons of good economic policy. Let me say a few words on the latter two goals, before turning to first objective of job growth.

The rise in consumer prices at around 10 per cent a year over the six years (2008-2013) was a major factor behind the United Progressive Alliance (UPA) government's dismal electoral performance in the national elections of April-May 2014. The rate of increase has abated in the current year (down to 5.5 per cent by October), thanks to a combination of policies, a fortuitous decline in international commodity prices and the persistence of weak economic activity. International commodity prices of oil, some metals and agricultural products are expected to stay soft for a year or two and are unlikely to repeat the "super-cycle" of the past decade. The revival of domestic economic activity is likely to be gradual and should not spark another inflationary bout provided our monetary and fiscal policies are kept prudent, increases in minimum support prices for agriculture are held moderate (as in the past year), excess public food stocking is avoided and infrastructural bottlenecks are increasingly relieved. With these policies, and some good luck, inflation should not be a "killer" in the next election.

Publicly provided goods and services
The truth is that in our federal polity the bulk of public services are provided by state and local governments. This is true of basic law and order, local roads, property records and transactions, water, sanitation and waste disposal (where available!), electricity distribution, primary and secondary education and health, and so on. The big exceptions, where the central government plays a major role, include national highways, railways, tertiary education and health, and, of course, the major subsidy-intensive schemes relating to public foodgrain distribution, fuel subsidies, fertiliser subsidies and rural employment guarantee.

In the coming years, the new government will have to work hard to revive the flagging national highways programme, vastly improve railway freight and passenger services and railway safety, as well as the quality and viability of tertiary education and health. Each of these is a major area requiring serious institutional and regulatory reform. But perhaps the biggest potential for reaping the economic and political dividends of good policy lies in reforming the mostly failing systems of major subsidies for foodgrain, fuel and fertilisers. The rapid expansion of the Aadhaar footprint and the growing, countrywide penetration of bank accounts (recently accelerated by the Jan Dhan programme) offers the scope for transforming these hugely costly, badly targeted, leaky and corruption-ridden major subsidy schemes into much superior direct cash transfer systems. The experiment has already begun with cooking gas cylinders. Hopefully, it will spread to kerosene, foodgrain and fertilisers soon. There will be sector-specific challenges in each, but surely worth overcoming.

Jobs! Jobs! Jobs! This, the biggest politico-economic challenge for the Modi government, is also the area in which timely, reliable data are scarcest. The latest National Sample Survey (68th round) for employment is for 2011-12. It shows that India's labour force was nearly 500 million in January 2012, of which somewhere between two to six per cent were unemployed (depending on definition). Over half this labour force was self-employed (exceeding 40 per cent even in urban areas), less than a fifth (and less than a tenth in rural areas) was regular wage/salary employees and 30 per cent was casual labour. Although open unemployment was low, so were incomes, with regular wage employees averaging just under Rs 400 a day and casual labour getting Rs 170 in urban areas and Rs 140 in rural areas (with females typically earning more than 30 per cent less than males). Since economic growth in the past three years has been slow and industrial production stagnant, the rates of unemployment and underemployment are almost certainly higher today, with little or no improvement in wage rates. Demographic projections indicate that there are about 10 million new job seekers each year in a context of slow employment growth and extreme scarcity of well-paid, regular jobs. The critical importance of rapid job growth is obvious.

Asian and global development experience underlines the essential role of high economic growth and especially rapid expansion of labour-intensive manufacturing and construction sectors in generating jobs. "Make in India" is certainly the right motto. But to convert slogan to reality we need:
  • Significant amendments to the new land acquisition Act;
  • Urgent broadening and deepening of the recent Rajasthan labour law reforms to the national level;
    (these two key reforms entail reversal of hugely anti-development and anti-employment bequests of the Gandhi ladies, Indira and Sonia)
  • More effective and market-responsive programmes for skill development;
  • Fixing the big infrastructure bottlenecks, especially in energy and transport;
  • Speedy roll-out of the goods and services tax, to integrate India's market;
  • Substantially greater transparency and stability in the tax and regulatory environment;
  • Major improvements in the governance and performance of public sector banks (why not privatise a few?);
  • And a well-managed, competitive exchange rate of the rupee.

Without rapid progress on this agenda, it is difficult to see how job growth can come anywhere near the requirements of the nation's aspiring job seekers and this government's natural desire to get re-elected in 2019. To the extent political strength cannot be marshalled for effective reforms, to that extent the ruling party's chances of success in the hustings in future will decline.

The writer is honorary professor at ICRIER and former chief economic adviser to the government. These views are his own
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of or the Business Standard newspaper

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First Published: Dec 10 2014 | 9:50 PM IST

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