What the next government needs to do

Updated: Feb 13 2014, 07:56am hrs
At last, both Rahul Gandhi and Narendra Modi have outlined, the former in his first-ever full television interview, and the latter in an election speech in Delhi, some of their ideas on economic and social policies. Gandhi says India can become a superpower by empowering youth, bringing them into political governance, involving and liberating women, increasing employment, expanding the manufacturing sector so that it rivals China, ensuring democratic decentralisation, moving away from dynastic successions, and introducing the systems and processes to achieve all this.

Modi, in an election speech in Delhi, stated his important objectives. He has, in his earlier speeches, given development the highest priority, and his actions in Gujarat show that he is more interested in urban development than rural, and in manufacturing than agriculture. Indeed, his focus on rural population is mainly to make their migration to urban areas more comfortable and rewarding, not centred on improving the state of agriculture (poor productivity, government interference in marketing, price policies that distort the product mix from what the market wants, better farming methods, drive to expand infrastructure of canals, water storage, cold stores, warehouses, reduce the role of the middleman, etc). He will doubtless continue the earlier NDA government policies of privatisation and disinvestment of public enterprises, removing administered prices for petroleum products, focus on infrastructure (roads and power), and limited social programmes, especially in the education sector (Sarva Shiksha Abhiyan), and a massive programme for skills development.

The UPA, in its ten years of office, has had major economic and social achievements. Growth, on average, has been at record levels. The poor have benefited from many social programmes as indicated by the improvements in Indias human development indicators. UPA-1 had five years of macroeconomic balance and growth and withstood the global financial crisis in its last year. Growth enabled higher tax revenues net of states shares (as percentage to GDP in 2007-08, 8.18; in 2010-11, 7.70 and in 2012-13, 7.59). Buoyant tax revenues allowed social expenditures to rise sharply (major subsidiesfood, fertilisers and petroleum productsfigure at R67,498 crore in 2007-08, R1,35,508 crore in 2010-11 and R2,16,297 in 2012-13; as percentage of GDP these stood at 1.35, 2.21 and 1.87). This was not the only non-asset producing expenditure. Farmer debt write-offs by UPA-1 was around R80,000 crore. The UPA has additionally spent massively on the rural employment guarantee, rural health mission, the Food Security Act, which will now be implemented faster, and the NDAs continuing programmes like the Sarva Shiksha Abhiyan. As a consequence, fiscal deficits (Centre plus states) to GDP rose from 4.09% in 2007-08 to 7.88% in 2010-11, and to 8.09% in 2012-13. Average inflation measured in the wholesale index in the respective years was 4.8 %, 8.6% and 9.0%. Food prices within the inflation mix have risen much faster (double digits for almost three years). Savings have declined, and domestic and foreign investment has been weak. Erratic FII caused volatility in the stock markets and the rupee's foreign exchange value. For a government led by the reformer of the 90s, the UPA neglected macroeconomic stability for a poorly defined inclusive growth with massive expenditures on social schemes. They were also poorly implemented. Almost half the expenditures were wasted or stolen.

High inflation has corroded buying power of the urban poor and the middle-classes and is now hurting the rural poor. They were benefited for some time by the employment guarantee scheme while rising support prices for grains, sugar, cotton, made surplus producers better-off. But industry suffered poor growth because of rising wage costs, high interest rates, the falling rupee leading to higher import costs, etc. The non-transparent ways of leasing of natural resources and infrastructure as well as social expenditures vastly increased corruption. Even innovative means to bring private investments into infrastructure, have led to over R5,00,000 crore of stranded investments in power, coal mines, roads, metro-rail projects, etc, caused by delays in government clearances for land acquisition, environment and forests. Coal and gas not delivered to expectation have been disastrous for the economy.

Whoever comes to power must quickly introduce significant measures to curb black money, bring overseas illegal holdings back, bring in systems and processes to reduce corruption and investigate and punish the corrupt.

The UPA did not recognise and deal with these issues. Modi and the BJP have not, so far, displayed their framework of systems and policies to tackle these. They must show the determination to rationalise subsidies and social expenditures. They have said nothing about the vital need for drastic administrative reforms and improving mechanisms for ensuring individual accountability.

If Modi were to lead the next government, he must work on improving Aadhaar-based delivery and quickly introducing adequate number of micro-bank branches so that benefits can be transferred without officials procuring and delivering them. He needs to ensure accountability of all concerned government departments for time-bound clearances. Private investment in agricultural infrastructure has to be stimulated since government is unable to do it. Agricultural marketing and price policies for agricultural products must change. Modi must accelerate clearances for GM crops. Farm labour shortages in many states are attributable to the MGNREGA. Some linkage between farm labour and MGNREGA is required.

Another pertinent question is whether Modi will be willing to close the routes for investments from Mauritiuswhich are free of capital gains tax, participatory notes, etcwhich enable politicians and others to launder illegal earnings Improved implementation, better systems, and individual accountability, with severe penalties for malfeasance, could reduce such practices.

The BJP and Modi must not allow the Luddites in the RSS to use the swadeshi slogan to discourage FDI. FDI and foreign trade (imports as well as exports) must be encouraged.

In public finance, an NDA government must revamp direct and indirect taxation, and speedily introduce the GST as well as the Direct Tax Code. Administrative methods for tighter monitoring and evaluation are a dire need.

Modi has talked about improving the urban experience for rural folk, implying an acceptance of a shift of people from agriculture to other occupations, mostly in urban India. He has talked of investing in urban infrastructureroads, public transport, housing, health and educationfor both old and new migrant populations in cities and towns. We must aim at universal education, more schools, colleges and technical institutions, better teachers and other facilities; encourage private schools, colleges and universities; give education and subsistence allowances for all poor students (eliminating the intermediaries who now cheat them; no restrictions by community, caste or gender, must be permitted). Modi flaunts the Gujarat model of institutions and budgeting for many things. This model has to be be vastly-expanded in scope if it is to have an impact nationally.

India is much more complex than Gujarat. Modi has yet to show that he understands and can deal with this complexity. Neither he nor his party has yet announced a framework of policies and programmes that are credible. Like Rahul Gandhi, they have also listed some things while ignoring many. Neither has said how they will implement them.

SL Rao

The author is former director general, NCAER, and was the first chairman of CERC