When the government first came in, possibly in response to the policy paralysis of the previous regime and the increasing number of stuck projects, it conveyed the impression that India’s problems were best fixed by practitioners rather than by academic advisors.
When the government first came in, possibly in response to the policy paralysis of the previous regime and the increasing number of stuck projects, it conveyed the impression that India’s problems were best fixed by practitioners rather than by academic advisors. So, when Amartya Sen criticized demonetisation, prime minister Narendra Modi was quick to reply that what India needed was hard work, not Harvard; even the Planning Commission was sought to be recast with more of a focus on action as opposed to plain advice. While there is no denying the value of eliminating the countless bottlenecks that plague every aspect of life in India, binary solutions never work, especially in economies that are as complex as India. Given this, the prime minister has done well to reconstitute the Prime Minister’s Economic Advisory Council (PMEAC) that the UPA had started. Certainly, the Chief Economic Advisor is, in a sense, the government’s top economist, but he really reports to the finance minister – for the prime minister to really buy into a plan or initiate his own, the PMEAC is welcome; it has no one from Harvard, but two people from Cambridge and one from Princeton.
Apart from advice on economic policy matters, under the UPA, the PMEAC was even tasked with providing policy solutions to issues that spanned across ministries and even state governments. In the case of sugarcane, for instance, India was stuck in a never-ending cycle of farmer arrears and agitations due to the penchant of states to set very high mandatory purchase prices for cane. The PMEAC then came up with a formula whereby mills paid farmers a share of their revenues instead of a fixed cane-price. And when the government was reluctant to raise natural gas prices since this affected electricity and fertilizer costs, it was the PMEAC that came up with a phased solution. Since both solutions made sense, the NDA adopted them – albeit with a two-year delay, gas prices were hiked and, when Yogi Adityanath became CM of UP, he was asked to move towards the PMEAC formulation. It is not that the CEA has not worked on similar solutions – the apparel package Arvind Subramanian designed was aimed at addressing critical labour policy bottlenecks – but he is more focused on finance ministry problems.
Apart from the current slowdown which requires a policy response both the CEA and the PMEAC will be working on, there are larger economic issues that need resolution. While many economists have flagged the exchange rate as a vital concern, the PMEAC will have to take a call on whether the overall impact – it keeps inflation under check and helps Indian corporates with large overseas debt – is worth it and, if it is, the finance ministry will have to keep aside money to pay the interest costs. Similarly, whether it was demonetisation or GST, both force the informal sector to move into the formal economy with its attendant costs of taxation and higher labour and other costs – since this can/has wiped out the competitive advantage of large swathes of industry, the PMEAC could be tasked with coming up with possible solutions. With both the CEA and some members of the PMEAC rooting for sharper rate cuts, for the RBI, this will probably mean a two-pronged attack on it.