Column : Rock and a hard place

Written by Bibek Debroy | Updated: Mar 5 2009, 06:42am hrs
Will growth be down to 5% or 4% for first half of 2009-10 Q3 GDP growth in 2008-09 was 5.3%. However, this was driven by the Pay Commission. Witness a sharp increase in this segment of service sector growth. Since this is one-shot increase, it wont continue. If one takes this away, Q3 growth was probably 4.5%, if not lower. True, agriculture performed especially badly and that might not continue, since a higher base in 2008-09 contributed to that decline. True also that with the rupee depreciating, exports might perk up. However, investments show no decline in Q3 and such a decline is possible. Without dissecting Q3 too much, it is perhaps fair to say that the first half of 2009-10 will see growth in a band between 4% and 5%. The oft-quoted ICRIER study for the first half said 3.9% and 3.9% seems much worse than 4%. Regardless of possible recovery in second half of 2009-10, this is thus the legacy the incoming government will inherit. The government can plausibly argue that nothing need be done. With a timelag, monetary policy and the fiscal packages will show results. Though there is rationale in this , it is unlikely to have many takers.

Nevertheless, there are expectations hinging on 7% growth. Employment doesnt depend on overall growth alone, but also its sectoral composition. In the aggregate though, a decline from 9% to 5% implies 10 million fewer jobs created per year, applying the Rangarajan elasticities and adverse employment impacts will be concentrated in export and visible service sectors. Therefore, because of social tensions, the do-nothing option isnt feasible. Unfortunately, there is no leeway on fiscal policy. A 5.5% fiscal deficit/GDP ratio in 2009-10 is impossible, because revenue and growth are over-estimated and expenditure under-estimated. The UPA may blame the external sector crisis for the fiscal mess, but the three fiscal packages didnt amount to more than 1.5% of GDP. The fiscal massacre happened before. Once indirect taxes have been lowered, it will be impossible to jack them up by 2010. Hence, GST (goods and service tax) is postponed indefinitely. Bank deposits in 2009-10 will be around Rs 7,00,000 crore and of this, Rs 3,00,000 crore will be sucked away by government borrowing. Plus, high rates on small savings and provident fund wont allow interest rates to drop. The point is that government will try to control the issue of bonds and we have seen this already happen in 2008-09. Whether this is done by altering the use of market stabilisation scheme or automatic monetisation of deficit, effectively, consensus on fiscal reform of the 1990s disappears.

It will be impossible for the new government to get tax and fiscal reform back on track. For the first three years, it will probably not even try. Other than rupee depreciation, government cant do much about exports. Malign external environment is a given. One should attempt to trigger endogenous sources of growth and that underlines rural reforms. It is because rice and wheat-producing irrigated areas have done well that our growth impact of slowdown hasnt been more. But dryland agriculture (60% of area) is in a mess, notwithstanding UPAs commitment to agriculture. Ideally, the new government should implement the rural reform agenda UPA didnt bother about. But there are two problems. First, even if such reforms are implemented, they dont deliver overnight. Second, many such reforms are state subjects. How does one incentivise states Other than rural reforms, the new government should focus on adminstrative delivery, a subset of what is often called governance. Again, this is something UPA should have focused on, since it set up Adminstrative Reforms Commission and dramatically expanded public expenditure, though collapsed delivery systems simply couldnt handle this. Witness what has happened to the road programme, not just NHDP, but PMGSY too. Or for that matter, Bharat Nirman. Paradoxically, NREGA has performed well in BJP-ruled States, barring Andhra. One would have expected Left Allies of UPA to support transparency. But RTI performs worst in West Bengal and Kerala.

Like rural reforms, adminstrative delivery is also largely function of what states do (or dont) and UPA didnt get beyond blaming states for non-delivery. It never resolved the incentivisation issue. Caught between a rock and the hard sea, new government had better learn to swim and it has a peg in report of 13th Finance Commission, due in October. Three channels of central sector & centrally sponsored schemes, Planning Commission and Finance Commission arent needed. They clutter things up and reduce accountability for States. Constitutionally, only the Finance Commission belongs and its mandate shouldnt have been diluted, as has progressively been done since second half of 1960s. There is also complete confusion between revenue/capital, plan/non-plan and development/non-development expenditure. Fund devolution is also intra-State and best way to ensure State Finance Commissions are taken seriously is to give greater powers to the Central one. Incentivisation will occur only then. Rather oddly, central sector and centrally sponsored schemes were originally started because it was thought states would be more accountable through these channels. Nothing of the sort has happened, except that states cant provide matching grants. To be more explicit, if we do this, we no longer need the Planning Commission. There is no market failure in its research and data and the Centre-Ssate part will be taken over by a rejuvenated Finance Commission. Scrapping the Planning Commission will send a powerful message of reform too.

The author is a noted economist