For an economic turnaround
Jaitley may get leeway to choose between prudence and populism
The pre-budget Economic Survey of the last full-budget of the Modi Government is, true to its customary elegance and gravitas, focused on long-term issues that have a decisive bearing on the Indian economy and the demographic dividend it is putatively enriched with to make high growth a distinct dream, if not a reality!
The Survey, authored by the scholastic Chief Economic Advisor in the Ministry of Finance, Dr. Arvind Subramanian, is right in claiming that it strives to "combine rigor with readability, a challenge that increases in the same proportion as attention spans shrink (from absorbing op-eds to scrolling down tweets)". To growth-obsessed observers, the Survey said at the outset that with the dissipating effects of earlier policy actions and the export uplift from the global recovery, the economy began to accelerate in the second half of the year which might allow real GDP growth to reach 6.75 per cent for the year as a whole, rising to 7-7.5 per cent in 2018-19, the final year of the NDA dispensation.
Even this meant there can be no slackness on policy vigilance, the Survey cautions, "if high international oil prices or elevated stock prices correct sharply, provoking a sudden stall in capital flows." As such, the agenda for the next year consequently remains "full": stabilising the Goods and Services Tax (GST), completing the twin balance sheet (TBS) actions, privatising Air India and staving off threats to macroeconomic stability". It sought the Government to stabilise GST implementation to eliminate uncertainty for exporters, facilitate easier compliance and expand the tax base.
The Survey said that the TBS actions, noteworthy for cracking the long-standing "exit" problem, need complementary reforms to shrink unviable banks and allow greater private sector participation, the crucial solutions of which continue to evade response as they are held hostage to the holy cows of the vast swathe of bank employees, who wield a disproportionate clout even in the days when organized unions have been a thing of the past in any other sector!
Going forward, it said, that over the medium-term, three areas of policy focus stand out, the Survey said, noting that these include employment — finding good jobs for the young and burgeoning workforce, especially for women; education — creating an educated and healthy labour force; and agriculture-raising farm productivity while strengthening agricultural resilience. All these suggestions are easier said than implemented, given the apathy of the authorities in focusing on the fundamental problems of basic education, primary health and in addressing the agonising concerns of the age-old vocation for far too long, presumably prodded by their political masters who have a vested interest in keeping the extant population as they are, mired in misery, poverty, lack of numeracy and poor health. Welfare measures to salve their conscience would do for the political class than any concrete action to make people understand the quality of life that makes a lot of difference to living well, instead of merely surviving on a pittance.
The Survey is candid enough to concede that in the first half of current fiscal India's economy temporarily "decoupled"— decelerating as the rest of the world accelerated and the reason lay in the series of actions and developments that buffeted the economy; "demonetisation, teething difficulties in the new GST, high and rising real interest rates, an intensifying overhang from the TBS challenge, and sharp falls in certain food prices that impacted agricultural income". It is salutary to get apprised of the developments by an official document even though the event managers for most of the problems kept themselves in a denial mode, offering the hope that acche din would herald once the bitter medicine is swallowed. However, the Survey was quick to note that in the second half of the year, the economy witnessed robust signs of revival with improvement in the "the economic growth as the shocks began to fade, corrective actions were taken and the synchronous global economic recovery boosted exports".
Even these solid improvements, the Survey noted, were tinged with anxieties pertaining to macroeconomic stability. Fiscal deficits, the current account and inflation were all higher than expected, albeit not threateningly so, reflecting in part higher global oil prices — the country's historic macroeconomic vulnerability. In this context, it noted that while in the last three fiscal years, the country encountered a positive term of trade shock, in the first three-quarters of 2017-18, oil prices have been about 16 per cent greater in dollar terms than in the previous year. It is estimated that a $10 per barrel increase in the price of oil reduces growth by 0.2-0.3 percentage points, increases wholesale price inflation by about 1.7 percentage points and worsens the current account deficit (CAD) by about 9-10 billion US dollars.
For getting over the fiscal vulnerability, the Survey calls for breaking the inertia of the tax-GDP ratio. It is striking that the Centre's tax-GDP ratio is no higher than it was in the 1980s, despite an average economic growth of 6.6 per cent, the most rapid in India's annals, the Survey bemoans, adding that the GST could help break this fiscal stasis. Again, overcoming the fiscal vulnerability also demands halting the steady conversion of contingent liabilities into actual ones (typically through the assumption of state distribution (power) discom debts and public sector bank recapitalisation), which had impeded progress in debt reduction even in the face of solid growth and apparently favourable debt dynamics. The Survey reckons that contingent liabilities have added about 5 percentage points of GDP to total government debt since 2000-01. The Survey pertinently asks not only the Centre but also the States to address this challenge.
Even as hitting the fiscal deficit target as part of the fiscal consolidation process is being doubted, the Survey is of the view that "a pause in general government fiscal consolidation relative to 2016-17 cannot be ruled out". Besides, the measured deficit for 2017-18 would include Rs 80,000 crore (0.5 per cent of GDP) in capital provided to public sector banks. But the Survey opines that this will not affect aggregate demand, as reflected in the international accounting practice, which deems such operation as financing rather than expenditure.
Refreshingly, the Survey has flagged off new areas for further actions that include transforming science and technology through higher allocations for research and development and stating that the ease of doing business' next frontier is timely justice by de-clogging the justice system with tax-related altercations mostly made by the tax authorities. It wisely noted that the outlook for 2018-19 would be determined by economic policy in the run-up to the next national election — leaving Jaitley the leeway to choose between populism and prudence dictated by down-to-earth realities staring at the domestic economy. What Jaitley plumps for will be known on February 1 when he rises to present his crucial final full-fledged Union Budget before the NDA seeks a fresh mandate in May 2019.
(Views expressed are personal)