Column: India needs a new economic policy

Written by Meghnad Desai | Updated: Jun 30 2014, 07:36am hrs
There is no doubt that the Budget on July 10 will be hemmed in by the urgent tasks of cleaning up the fiscal mess left behind in the Vote-on-Account. India needs honesty in public finances. It should study the examples of the US Congressional Budget Office and the UK Office of Budget Responsibility (OBR). These bodies make sure that the numbers used in the Budget are not window-dressed to suit the incumbent government. The UK adopted this practice in 2010 and the experiment has been quite successful. The OBR vets the numbers released in the Budget. It also forecasts and offers a corrective to what the Treasury may have assumed in its projections.

There is a rumour that some people in the ministry of finance bureaucracy are uneasy about cleaning up the Budget numbers. They fear that to reveal the true extent of the deficit for the previous financial year and to re-estimate the most likely figure for FY15 may affect Indias credit rating. This is to think that the markets and the rating agencies are stupid and cannot see through some pretty obvious fudging. Indeed, it is the unreliability of Budget numbers that will harm Indias credit rating more than true accounting.

That said, we know this Budget will be just a coping exercise; almost like fixing a leak in the boat at high seas. Insufficient funds have been budgeted for the expenditure programmes initiated by the previous government. To keep the deficit under control, there will have to be urgent disinvestment. The lack of money should also be used to allow a rethink about the scale of some of the subsidies. Most subsidies in India are regressive and they should be pruned, if they cannot be immediately abolished. In this respect, the ministry of finance should encourage a detailed academic exercise on the distributional impact of each budget. Prof Sir Tony Atkinson began this exercise in the UK way back in the Seventies with his TAXMOD programme. Now the official publication by the UK Office of National Statistics regularly publishes the income distribution by deciles both before and after the impact of the Budget has been taken into account. In India, we need a continuous analysis of the redistributive effects of each subsidy and also the loss incurred by the fisc due to each subsidy.

But what about the longer economic vision By the next Budget, in February 2015, there will no longer be any excuse that the previous government left a mess behind. There will have to be delivery of results and a strategy for the next four years. Perhaps the FM will give us a clue of what the BJP/NDA governments long run economic strategy is. The government has a mandate which allows it to launch a radical new approach in the economic policy. A New Economic Policy (NEP) is badly needed. The bold initiative launched in 1991 has now run its course. It changed many things but the approach was reluctant and given the first chance with a large Congress presence in the 2009 Parliament, old socialist tendencies reasserted themselves and ground the economic growth to a halt. Inflation was used as a deliberate weapon for redistributing income as between urban and rural areas with damaging effects on the economy and, alas, no dividends at the ballot box in 2014.

Liberal reform needs to be openly owned and pushed by the government. It owes no debts to Fabian socialism. It can be robustly market-oriented and rigorous in making sure that any subsidies are genuinely progressive. Indeed, it should start a programme of direct cash transfer to improve the efficiency of the anti-poverty policies.

It should divest a lot of the PSUs since even by the old Fabian logic of commanding heights, India has far too many PSUs. They are an invitation to corruption as we know from Coalgate and the NPAs of many PSU banks. The nationalisation of banks in 1969 was an avowedly political move as Indira Gandhi herself said. The rather feeble excuse that the move would make banking available to rural areas has been proved false since even after forty five years the problem of financial inclusion remains. It would be quite bold for the government to lay down a path for full privatisation of most of the banks it owns. If that is too risky, it should at least follow the Nayak reports recommendations and reduce its equity to under 40%. PSU banks need a lot of restructuring and when they need money to meet the Basel III requirements, the government should not have to raise it all on the public debt account. Let the markets put up the money.

The Indian economy should look drastically different and better by the time the PM goes back to the country in 2019. Best to start now.

The author is a prominent economist and Labour peer