Sunday, June 22, 2014

Economic Growth and the New Government

with Prof Charan Singh, IIMB


The new government has recently assumed office. The country is waiting with hope for new policy direction to revive the economy, especially given the disastrous growth record in the last two years (4.6% average).  To revive the sagging growth in the economy the need is to correct the mistakes of the previous government and re-establish confidence. In addition, it is a good opportunity to undertake fundamental economic policy and institutional reforms, in the first two years. Therefore, it is a good time to reflect on the vision for the economy and suggest agenda for reforms that the next government can consider. The government needs to sweep out the Fabian Socialist (or Nehru-Indira) Model of development that ensured that the License-Permit-Quota Raj seeped into every nook and corner of the Indian economy. This Statist model is unsuited to a young, proud, modern India that wants “equality of opportunity” and “equal treatment” from the Government it elects and the bureaucracy of “public servants” instead of humiliation, harassment and worse from a “Mai-Baap” Sarkar. And this is possible because of the thumping majority that BJP has received at the elections.

1990s and 2010s

There is a lesson to be learnt from the experience of the 1990s. The unshackling of the Indian economy during the mid- 1980s and early 1990s raised its real growth rate to 3.6 per cent points above the average growth of the world economy during 1992 to 2010 but since then the real growth differential has collapsed to less than 1.2 per cent point. The drop in the growth differential can be attributed to three domestic causes: First, an overemphasis on entitlements vis-a-vis empowerment; Second, deteriorating governance (including corruption allegations); and finally, failure to introduce policy, regulatory and institutional reforms, essential for sustaining growth and employment at its full potential. The fundamental objective of any Indian government must be to close the welfare gap of the Indian people with the rest of the World and provide employment opportunities through faster economic growth.

Employment Opportunities

  To take advantage of the demographic dividend, generate employment, and enhance public welfare, the government has to ensure that the economy revives to grow at its long term growth potential of 8 percent (or 6.5 percent per capita) per annum.  To help recovery, a reversal of the governance failures and regressive tax changes during 2010-13 could help. A return to the general philosophy of modernizing the tax system by reducing the plethora of State and  Central taxes to a few and simplifying these by reducing exemptions/ deductions and reducing marginal rates, is imperative. This also requires introduction of a GST or National VAT and approval of a new tax code.
 To revive growth, it is necessary that the government is able to establish credibility of its intentions. Therefore, it would be important to improve governance in terms of speed of decision making and ensuring implementation of those decisions. In view of the widespread allegations, a quick cleanup of the toxic residue left by the alleged scams would also help revive confidence in the government. Institutional reforms in political systems, police and judiciary would help to address the issue of pervasive, systemic corruption and restore good governance on a sustainable basis.


A review and revisit to a few controversial legal documents would also address the resentment of the larger public towards government’s policy making. Illustratively, some of these are - (a) Right to Education Act - proposed hike in salary structure of teachers so that thousands of charitable schools (NPO/NGOs) are not overwhelmed with losses; (b) Right to Food Act – the focus should be addressing the needs of genuinely hungry population and wasted/ stunted/malnourished children under 5 years of; (c) Land Acquisition Relief and Rehabilitation Act - laudable objective of fairness in compulsory acquisition of land has been converted into an expansive ecological and social agenda; and (d) Environment Protection Act which has become a bottleneck to investment because of its sweeping authority and expansive mandate. Similarly, need is to revise the Agricultural Produce Marketing Act and Essential Commodities Act which now serve to swell middlemen’s profits instead of helping farmers as originally anticipated.
Now that election is over, there is an urgent need is to rein in deficits, both fiscal and current account, and encourage domestic savings, and review fuel and food subsidies. Fiscal discipline would allow the RBI to ease monetary policy and stimulate investment and consumer durable demand without fear of increasing non-performing assets or inflation.

PSUs and Productivity

As empirical evidence suggests from cross-country experience, to stimulate productivity, there is also a need introduce competition in public sector monopolies.  The government could examine converting railways, ports and airports into publicly owned Ltd companies and set up professional independent regulatory structure to oversee their performance. Similarly, sale or disinvestment in competitive public sector units in industry and finance (e.g. steel, airlines, hotels, machinery; banks, insurance) could also be considered.  
To sustain higher growth, and facilitate trade and commerce, it is important to have good infrastructure both in rural and urban areas. Therefore, high quality national road network and encouragement to e-commerce would be the most cost effective stimulator of economic development. Finally, to ensure healthy population, and reduce disease, malnutrition and child mortality, sanitation projects need to be emphasized.


A slew of fundamental reforms exploiting the inherent demand within India, especially rural, can sustain Indian GDP growth at over 8 percent for the next few decades despite global slowdown. It is not necessary to accomplish all the listed reforms but it would be essential to outline the broad direction of reforms and establish credibility in implementing them.
A version of this article appeared in the Indian Express of Friday June 20, 2014, under the banner, "Now, rewrite the script. .

[i] For further details see, Arvind Virmani, “National Agenda For Growth and Welfare” Policy Paper No WsPp1/2014, January 2014. .

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