An economic strategy for India; here is what government must look into

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Updated: December 24, 2018 7:21 AM

The need is to fix stressed sectors quickly—these are agriculture, infrastructure (including power), exports and banking.

economy, demonetisation, pm narendra modi, narendra modiAnother theme of the report is the need to fix stressed sectors quickly—these are agriculture, infrastructure (including power), exports and banking.

The title of this column is the title of a concise but comprehensive report by 13 economists, which was released earlier this month. They include luminaries such as former RBI Governor Raghuram Rajan and IMF chief economist Gita Gopinath, but also other prominent academics and private sector economists. All of them are experts. They have also written individual sector or issue reports, on which the main report builds. All of this is available free on the internet, but this column will offer some highlights and comments.

The report begins by noting that India’s economy has performed well in absolute and relative terms, for the last quarter century. But then it opines that India can and must do better. That is the motivation for this outline of a strategy: what should be done? This column, in summarising some of the report’s answers, will also offer some thoughts on how components of the strategy might be implemented, and what the difficulties might be, along with a few differences of opinion and emphasis.

A couple of central motivators for the report’s approach are the need to create more “good” jobs more rapidly than India has managed so far, and the need to deal with burgeoning environmental problems that could destroy everything that India has achieved in terms of improving the average well-being of its citizens. These are well-known issues, but can never be emphasized enough. Failures of successive governments on both fronts are a rebuke to India’s leaders and elites, and a reminder of the gaps in India’s economic progress.

Macroeconomic stability is discussed at length as a prerequisite for sustainable, inclusive growth. India’s track record here has been quite good, and has been improving. Institutions for managing the national public finances have been improving, as have those for managing the financial sector. But the mess in the banking sector, which has extended to non-bank financial companies, and the government’s ham-handed attempt to intimidate the RBI are examples of why one cannot take macroeconomic stability for granted.

The report rightly highlights a worsening of public finances at the state level, but I am not sure that its invocation of “cooperative federalism” has substance or clarity, and the idea of using Finance Commission awards to reward good behaviour is an old one that had limited success. My own analysis suggests that giving the states more fiscal autonomy, making their budget constraints certain and clear, and pushing them to do better in the basics of public finance accounting, will achieve better outcomes.

Another theme of the report is the need to fix stressed sectors quickly—these are agriculture, infrastructure (including power), exports and banking. For agriculture, the recommended reforms and goals include innovations in production methods, marketing and access to markets, and better functioning land markets. Of course, what would really help is boosting industrial growth and employment, which would get more people out of rural areas and off of farms. This is something that could have been emphasized more. Also, agriculture and its ancillary activities are becoming major sources of potentially irreversible environmental damage, so that link needs to be recognized more clearly in economic strategizing. The list of infrastructure reforms is also reasonable, including cleaning up the backlog of stalled projects, improving land allocation mechanisms, “revitalizing” public-private partnerships, and creating Special Economic Zones.

But the real questions here have to do with expertise and management of large projects, so that outcomes are of good quality at reasonable cost: large sums of money can be siphoned off in such cases, and that has to be controlled. One could have wished for a clearer picture of what the obstacles have been so far, and how to overcome them. Clearly, nothing can really be done without restoring some degree of health to India’s financial sector. There are excellent recommendations for that goal, but also perhaps not enough about the need to improve the functioning of banks, including insulation from political pressure and greater managerial competence. As well, the need to deepen the financial sector and expand household financial savings could have been highlighted.

There are excellent recommendations on making India’s public education system more effective, so that students actually learn what they have the potential for. The recommendations for healthcare include detailed suggestions for training, practice (such as checklists) and awareness through edutainment: these are the kinds of micro-level changes needed in areas such as banking and teaching. The report has innovative suggestions on tweaking labour market regulations and training mechanisms to improve efficiency and skill acquisition, without eroding worker protections, and for ways to increase women’s participation in the labour force. There are important recommendations for revamping environmental regulation institutions, and for reducing distortions that exacerbate environmental degradation. The recommendations for improving social protection schemes are more familiar, though no less desirable.

What is missing most, perhaps, is a clear sense of how to fix India’s moribund industrial dynamics. The discussion of exports notes problems of inefficient scale, low productivity, bureaucratic impediments, and so on. But these are long-standing issues. Arvind Panagariya, not one of the 13 authors, has continued to emphasise the need to expand labour intensive manufacturing in India. Whether or not this translates into “export-led” growth does not matter. The rise of services and the difficulty of global trade conditions also do not nullify this need for creating more dynamic, employment-generating firms in India. What is stopping it? Some answers in my next column.

The author is Professor of Economics, University of California, Santa Cruz

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