Eco Survey's ghost writers highlight UPA failures, set tough reforms agenda for Modi

The Economic Survey 2013-14, the first one to be presented by the Modi government today (9 June), marks itself out from earlier ones on two fronts: one, it is the first recent survey that has been prepared without a resident Chief Economic Advisor in the finance ministry. Last year’s survey was prepared by Raghuram Rajan, now Reserve Bank Governor. The absence of a CEA has not in any way diminished either the descriptions or the prescriptions suggested by the survey’s ghost authors on how to fix the economy.

Second, it appears that large chunks of the survey reflect the views and beliefs of key members of the National Institute of Public Finance and Policy (NIPFP), a former member of which is currently the Principal Economic Advisor, Ila Patnaik. While NIPFP works closely with all finance ministers, one cannot rule out the possibility that significant comments and approaches in this survey were intellectually outsourced to NIPFP economists such as Ajay Shah.

The language of the survey, which surely has been vetted by Finance Minister Arun Jaitley, reflects these influences. In a few hours from now, when Jaitley presents his first budget (at 11 am on 10 July), we will know if he has taken any of the advice seriously or not.

The good news is that this year (2014-15) will see the economy lift itself out of the sub-5 percent trap that UPA-2 had dragged it into, but the survey’s invisible writers suggest that GDP growth might only hit the lower band of the 5.4-5.9 percent range that has been projected, thanks to the possibility of a weak monsoons year.

This is because despite valiant efforts by P Chidambaram & Co to get the economy out of the ditch in the last 16 months of its tenure, the economy is structurally constrained in many ways - and the last 10 years of UPA rule did little to fix these fundamental issues. If anything, it may have made things worse. This, of course, is my conclusion, for the survey itself does not take partisan potshots.

The structural constraints listed by the survey, in its own language, were the following (with my comments in italics):

#1: Difficulties in taking quick decisions on project proposals have affected the ease of doing business. This has resulted in considerable project delays and insufficient complementary investments. (This is UPA’s famed policy paralysis, compounded by court restrictions on mining, et al, which dented business confidence and reduced investments. This paralysis appears to be ending with the entry of Modi Sarkar.)

#2: Ill-targeted subsidies cramp the fiscal space for public investment and distort allocation of resources. (The UPA failed to cut fuel, food and fertiliser subsidies, with only diesel being dealt with at the fag end of its second term. But Rs 8,00,000 crore of fuel subsidies in 10 years was clearly ill-targeted, and so is the Food Security Act, which wants to give subsidised rice, wheat and coarse grains to two-thirds of the population. Nothing can be more ill-targeted than this. While the fuel subsidies can - and are - be fixed, the food and fertiliser subsidies will be tough to handle even for a Modi sarkar in the short-run.)

#3: Low manufacturing base, especially of capital goods, and low value addition in manufacturing. Manufacturing growth and exports could be facilitated with simplified procedures, easy credit, and reduced transaction cost. (The UPA’s National Manufacturing Policy remained a dead letter, and the legislation of the Land Acquisition Act will cramp manufacturing further. The Modi government is considering changes in such growth-retarding laws, but a lot depends on how quickly and how well this is done.)

#4: Presence of a large informal sector and inadequate labour absorption in the formal sector. Absence of required skills is considered an important reason. (The UPA tenure has been a big stretch of jobless growth. While the NDA’s tenure from 1999-04 created around 60 million jobs - an increase of 15 percent from 398 million to 458 million employed - the next seven years of UPA created all of 3.3 percent more jobs - raising the total employed from 458 million to 473 million. This was caused by unreformed labour laws, among other things, which the Modi government is considering changing, and also because of the sharp rise in rural wages, which constrained employment growth in a booming rural sector. The Modi government will also have to speed up the skill-building programme to equip people for jobs. Industry has employed more capital than labour, and the slowdown in construction has worsened job creation.)

#5: Sustaining high economic growth is difficult without robust agricultural growth. Low agricultural productivity is hampering this. (The one area in which the UPA has had a big impact - largely positive - is agriculture, aided by fairly good agro-climatic conditions. The sharp increases in minimum support prices in the final years of UPA-1, and large investments in rural roads and the NREGA jobs scheme also created new purchasing power in rural areas. Poverty is down. But more investments need to be made in rural infrastructure, including by redirecting NREGA spends towards more asset-creation. Irrigation capacities also need to be augmented and mechanisation boosted.)

#6: Structural factors engendering continued high food inflation need to be tackled. Issues related to significant presence of intermediaries in the different tiers of marketing, shortage of storage and processing infrastructure, inter-state movement of agricultural produce, etc. need to be addressed. (The UPA opened up multi-brand retail to start this process, but the political opposition to it was high. But the more structural issues relate to reforming the Agricultural Produce Marketing Committee laws which forbid farmers from selling their produce directly to consumers or other buyers. This makes the supply chain inefficient with middlemen cornering most of the gains. The high levels of food inflation have forced government to start loosening APMC rigidities but a national market for food is some distance away. Vested interests and state governments also stand in the way.)

The invisible hand is most visible in the second chapter of the Economic Survey 2013-14 titled Issues and Priorities.

This chapter summarises what should be the government’s key focus areas succinctly: “Reviving investment, essential for growth of jobs and income, requires a three-pronged approach that works through improving India’s long-term growth prospects. First, the government must ensure low inflation by putting in place a framework for monetary policy, fiscal consolidation, and food market reforms. Second, it must put public finances on a sustainable path through tax and expenditure reform. Tax reform requires a GST, DTC, and more predictable tax administration. Expenditure reforms must focus on public goods, new designs for subsidy programmes, and mechanisms for accountability. India requires the legal and regulatory frameworks for a market economy. This requires repealing the old legacy laws and creating state capacity to address market failures.” (Read the full reform agenda here )

Many of these ideas are straight out of the NIPFP book. Ajay Shah was a key member of the Financial Sector Legislative Reforms Committee (FSLRC) that called for a strong framework of monetary policy, and a firm believer in fiscal rectitude and tough monetary policies focused only on inflation. The emphasis on “public goods” is not about food subsidies (which are “private” goods), but about truly public goods like law and order, a good criminal justice system, etc. New designs for subsidy programmes could include a direct cash transfer regime which the UPA ran away from towards the end of its tenure, fearing voter angst.

It’s not that previous Economic Surveys did not emphasise these aspects, but the messaging is more direct and clear. The invisible hand that guided this Survey surely knows what is needed.