While the government has a to-do list, the real challenge is how to start tick-marking the components in terms of getting things done. Broadly, the government is talking of poverty reduction and social welfare; investment in agriculture; speeding up infrastructure investment; controlling inflation; improving services, especially for the poor and in rural areas; e-governance; better Centre-state relationship and checking corruption. These do sound like statements which every government would like to follow. What is required is definite action points from the government for moving closer to accomplishing these goals.
There are three action areas involved here. The first relates to certain affirmative action by the government through higher spending, which will kick-start the growth process. The question is whether or not the government has the money to do this. The fiscal balance appears to be quite tenuous today with little room to increase spending. The government has to take a call on whether or not it should increase the fiscal deficit and earmark this increase for specific infra projects which will help revive the economy. Alternatively, tough decisions have to be taken to lower subsidies and the two areas that come to mind are fuel and fertilisers which can bring in some savings to the government that can be channelled for infra projects. But surely the government has to evaluate the growth target for the year to figure out the impact on tax revenue too, as this can upset the fiscal arithmetic as it did in the last two years.
There are, however, some pressure points, such as poverty reduction, that can act as impediments for the government. There will be pressure to expedite the implementation of the Food Security Act to ensure that the poor get foodgrains through whichever system deemed as best: PDS or cash transfers. There has been talk of investment in agriculture and rural infrastructure. Can things be done differently given that there may not be enough money to be spent on improving farm activity by way of higher allocation of funds Similarly, for all the social services that have been spoken of, i.e., health, education, sanitation, water supply, etc, there is the Gujarat model of sustained improvement which can be referenced. However, would it be possible to replicate this paradigm across the country considering that such goals are ultimately the objectives of the state governments, which have to work towards their accomplishment
Second, there are issues where the government has to act and get things done, which has been the forte of Modi, as has been witnessed in Gujarat. Here, one can see major strides being made in the areas of reduction of corruption, bringing in e-governance, better decision-making channels which is already evident in the appointment of common ministers for multiple ministries, etc. On the two issues mentioned earlier, PDS and farm output, the government could focus on restructuring the schemes. MGNREGA will most certainly be redesigned and made more focused on asset creation while food subsidies could be better targeted by cutting down leakages. It can also be diverted to sprucing up irrigation works at a time when the monsoon may not be normal.
An interesting point raised by the President, which has also been spoken of by Modi during the polls, is the concept of strengthening Centre-state relationship. He has spoken of the future growth of the country being the result of a fruitful partnership between the Centre and the states, which is what it should be for all the issues to be taken up on the socio-economic front. Also, a contentious subject like the GST will need the buy-in of individual state governments and this is why better federalism is called for.
Third, the government has spoken of controlling inflation which has been the Achilles heel of the economy for the last three years. Inflation on the food side has been sharp and given that it has been due to supply-side issues, there is little scope here for direct policy action in the short run. Any policy has to be in the medium run and has to be taken along with the states. This is so because farming is more in their realm, especially when we talk of amending the APMC laws.
Quite coincidentally, the Indian Met has brought out its latest forecasts and is talking of 93% median rainfall for the entire country. This is quite disturbing and throws another spanner in the growth revival that is being talked about. High food inflation has, in the past, lowered the disposable income of households which, in turn, has affected demand for non-food items that has led to stagnation in industrial growth. Quite clearly, this link needs to be severed, but the government may not be able to do much except prepare to import any product where there is perceived shortage as shown by the commodity futures market, to the extent that they are traded.
The agenda for the government has been set and the level of enthusiasm and energy in all the ministries is palpable. For sure there will be several announcements made by the government with the Budget being the most crucial one. There is a lot confidence that things will start to happen and this is buttressed by the new-found interest in the stock market and the flow of foreign funds. RBIs action through its monetary policy has quelled any speculation on the difference of opinion between it and the government, which is reassuring.
The only joker in the pack is a possible high inflation due to the unfavourable monsoon predicted this year. The important difference, however, is that we are aware of this possibility, unlike last year when high food inflation coexisted with peak production levels of several commodities. Hopefully, a plan will be in place to counter this possibility.
The author is chief economist, CARE Ratings. Views are personal