Column: India needs a new economic policy

Jun 30 2014, 02:06 IST
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SummaryMake economic policies market-oriented. Start with junking subsidies and PSU divestment

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 Indiaís 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 Indiaís 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

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