Time to Fix Ailing Economy

Published: 23rd May 2014 06:00 AM  |   Last Updated: 23rd May 2014 12:35 AM   |  A+A-

The new government, with a robust mandate, is soon expected to assume office. The PM-elect has observed that aspirations of nearly 125 crore people depend on their elected representatives and are contained within the elected representatives in the Lok Sabha. It is after more than a decade that Indians have discovered a PM who can articulate, impromptu, their concerns, pains and dreams. The hopes of Indians have increased and so has the responsibility of the party assuming power.

The Indian economy has been ailing from numerous problems for some time now—low economic growth, weakening financial system, volatile capital flows, infrastructure constraints, rising prices, especially consumer price index, rising income inequality, high unemployment rates, energy constraints, stubborn poverty, uncertainty in exchange rates, rising budget deficits and governance deficit to enumerate a few.

The challenges are many and well-known and therefore, once intentions are clear, fixing them should not take too long. Still, to achieve immediate results, the government should prioritise and address the problems in a sequential manner. However, immediate attention would be required for some key problems like low economic growth, low levels of investment, low industrial production and rising prices. To address the existing problems and more, especially emerging in the current global situation, revisiting some policy stances, especially fiscal and industrial would be required. As high income growth benefits the whole economy, participation from the private sector in nation building to achieve faster growth should be encouraged.

The Union Budget, a policy document which needs to be prepared soon, should clearly establish the government’s resolve to address the deteriorating fiscal situation. This would involve laying down the time plan for adopting goods and services tax and approving new direct tax code to improve tax collections. The Fiscal Responsibility Act has been in cold storage for some time, which will have to be revived to establish the credibility of India and convince market analysts of the sincere intentions of the policy makers. Also, the policy stance on and beneficiaries of subsidy on food, fuel, LPG and fertilisers need to be reviewed. In this context, the Food Security Act and the crop coverage under minimum support prices need to be revisited. The government policy should stress genuine hunger, malnutrition and undernourishment, a focus on which has been lacking in recent years and was misplaced on providing food to 80 crore people, when only about 2 crore people, according to NSSO studies, do not have resources for two meals a day. To address the issue of prices of fruits, vegetables, onions and potatoes, egg, fish, meat, etc. the need is to identify bottlenecks in the economy. Also, the government needs to allocate resources for contingencies like the expected El Nino’s impact on agriculture.

The geopolitical situation in the neighbourhood and recent accidents in the Indian Navy necessitate reassessing defence requirements and need for enhanced budgetary allocations for defence. In view of the rising deficits, fiscal space is restricted and therefore this would be a good time to attempt a zero-based budgeting exercise. India would be able to play a more constructive role in the neighbourhood only when its defence forces are strong. In fact, economic strength follows military strength as evidenced by history.

To immediately increase employment and industrial production, micro, small and medium enterprises (MSMEs) need to be encouraged as they provide largest employment after agriculture. As MSMEs are a very heterogeneous group, sub-sectors need to be identified and encouraged through tax concessions, tax holidays and subsidies. Some of these MSMEs could be tourism, medical services, education and vocational training, hospitality, restaurants, village and cottage industries, etc. Large-scale industries are generally capital intensive and take longer to yield production due to longer gestation period.

To enhance welfare, address social problems and provide relief to the population reeling under rising price levels; along with midday meals, the government could consider providing breakfast meals to schoolchildren and universal old age pension for senior citizens above 65, numbering about 11 crore. Public-private partnership (PPP) should be encouraged and along with the government initiatives, the private sector should be able to contribute funds under provisions of corporate social responsibility (CSR). The provision of CSR combined with strengthening local administration under the aegis of municipal and panchayati raj institutions could be used for enhancing welfare measures across the country.

To address the larger issue of health and efficiency of manpower, the need is to stress better sanitation facilities. In India, 65 per cent of the population in rural areas (compared to 30 per cent in Least Developed Countries) and 12 per cent in urban area (6 per cent in LDCs) resort to open defecation (OD). And still worst, according to WHO, India is not making significant strides in reducing OD which has a direct link with diarrhoea and child mortality. Improved sanitation has a positive impact on child mortality rate, as it directly helps control diarrhoea. To stress importance of hygiene, the public distribution system (PDS) or midday meal scheme could be used for distribution of soaps to inculcate in children the habit of washing hands before meals. Similarly, the government should consider provision of distributing mosquito nets to those vulnerable to diseases like malaria through PDS to enhance health consciousness. The manifesto of the party that will rule now has mentioned Swach Bharat. The financial resources for construction of sanitation projects can also be shared under the PPP model covering CSR provisions.

To kick-start economic growth, the government could consider offering interest rate subsidy to the economy’s growth sectors, illustratively, housing and automobile loans. Similarly, it could encourage tapping of rural markets and provide incentives to industries and businesses that expand in the rural sector. If the new government is seeking to raise the growth level to 8 per cent and above, besides economic and fiscal measures, it would be necessary to have widespread consultations by setting up appropriate time-bound policy-oriented committees for higher involvement and better communication of its serious intention to address stubborn challenges. These measures, mainly fiscal, are important for increasing growth in the economy in the immediate future.

The author is RBI Chair professor, IIM Bangalore, and former senior economist, IMF.

Email: charansingh@iimb.ernet.in

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