Shankar Acharya: Priorities for the new government

The current circumstances call for wise, coherent and strong responses on political, economic and security-related dimensions

In less than a month a new government should be in place in India. It will assume office under difficult conditions, both on the domestic and international fronts. At home, buffeted by the global economic crisis, the economy’s growth has slowed substantially to an annual rate less than 6 per cent (compared to almost 9 per cent in the years 2003-2008), employment growth is sluggish, insurgent challenges in the Naxal belt and the North-East continue strong, the quality of general governance has declined over the years to a new low and economic disparities between states, urban-rural communities and formal-informal sectors have grown uncomfortably stark. Abroad, India’s security environment seems clearly worse than a year ago, with the seemingly inexorable rise of Taliban-jihadi forces in Pakistan, an apparent cooling in the Indo-US “strategic relationship” under the three-month old Obama administration (no visits to India by either Obama or Hillary Clinton, though they have been to Europe, China, Japan, Korea, Indonesia and Latin America) and some signs of an emerging US-China diarchy in global affairs. These challenging circumstances call for wise, coherent and strong responses on all the inter-related dimensions of state policy: political, economic and security-related. They would test the mettle of even a well-established government. For a new government the challenge will be that much greater.

 

What should be some of the key priorities of the new government? I leave issues of security, foreign policy and governance to those much better qualified to sketch these agendas and limit myself to indicating a few of the immediate economic tasks. Almost every sector of the Indian economy cries out for major policy initiatives. It’s tempting to simply repeat the long lists of policy recommendations in the Eleventh Plan. Here I select a few issues.

First, the new government will have to quickly frame a full budget of 2009/10. With the combined fiscal deficit having more than doubled during 2008/9 to set a new record of 11 per cent of GDP (about 8 per cent at the Centre, including off-budget items), the new government will need to take a stand on the appropriate level of central government fiscal deficit in 2009/10. The Interim Budget pegged it at 5.5 per cent of GDP but then the finance minister promptly undermined that target by extending the earlier 4 per cent point temporary excise tax concession and announcing a further 2 per cent cut. So, on unchanged policy (not counting fresh populist programmes), the centre’s fiscal deficit is likely to be 6.5 per cent of GDP and the combined deficit perhaps 10 per cent of GDP. It is possible to make the case that this order of deficit is desirable in 2009/10 to combat the contractionary impulses emanating from the global recession. Against that has to be set the disruptive potential of managing a bloated net government borrowing programme (centre and states) of close to Rs 500,000 crore and the possible cost of crowding out a revival of private investment in the second half of the fiscal year. My suggestion would be to peg the centre’s (genuine!) fiscal deficit at 5.5 per cent of GDP along with some upward adjustment of the general Cenvat rate from the current 8 per cent to 10 or 12 per cent, as a down payment on a renewed commitment to fiscal consolidation in the medium term.

Furthermore, instead of relying solely on “fiscal stimulus” to sustain growth in a global recession, the new government should also deploy a “reform stimulus” to revive investment intentions. Of course, given the probability of another unwieldy coalition, the reform package would need to be as ideologically neutral as possible. Three key elements may be considered, none of them novel. First, the government should recommit to the goal of implementing the integrated Goods and Services Tax (GST) by the earlier announced date of April 2010. This measure, which has had the support of both NDA and UPA coalitions, would constitute a major reform of indirect taxes in India, with widespread productivity-boosting benefits, if done well.

Second, as recommended by earlier high-level technical committees (headed by Rangarajan and Chaturvedi, respectively) world oil prices at about $50/bbl point to a golden opportunity to shift to a market-based system for pricing the key distillates of petrol and diesel with, perhaps, tapering subsidies for kerosene and LPG. Aside from moving away from a very costly system of subsidies for (mainly) the well-off, this would also signal India’s seriousness in pricing carbon appropriately in a globally warming planet.

Third, while the pursuit of the objective of financial liberalisation may understandably raise hackles in today’s world, the goal of greater financial inclusion surely retains much appeal. In India, the public sector banks remain at the forefront of extending organised and sustainable credit to borrowers in under-served areas. Yet they are increasingly constrained by the shortage of capital and the legal requirement of maintaining government ownership at a minimum of 51 per cent. To facilitate their expansion through accessing fresh capital from the market, the legal amendment proposed in 2000 to drop the minimum government ownership down to 33 per cent needs to be revived by the new government.

If India is to fulfil her potential for social and economic development, education and skill-development has to improve hugely. Today, there is no shortage of demand for education. The difficulties and bottlenecks are almost all on the side of supply, at all levels ranging from primary to higher education. In many areas the old delivery systems have become dysfunctional. Massive reform is urgently required. Yet this is the sector which, arguably, has benefited least from sustained policy reform. There has been no lack of ideas and proposals from the Knowledge Commission, the Planning Commission, high-level committees and serious NGOs like Pratham. If the new government made policy reforms in education its key medium-term priority, the social and economic benefits could be massive…and the political dividends very worthwhile.

India lags behind almost all significant developing countries in the transition from the traditional-rural-agricultural low productivity paradigm to a modern-urban-industrial/services high productivity one. Many things need to work better, from land and labour markets to major infrastructure services such as electricity, roads, water, sanitation and so forth. A key area of relative neglect has been an integrated and balanced view of urban development, ranging from municipal finance/governance to efficient planning and provision of urban infrastructure. Here too ideas have not been lacking. But the political will and commitment to wide-ranging reform has. The new government could break new ground and festering bottlenecks to development by focusing on this long-neglected policy issue.

The author is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. Views expressed are personal