Growth and Jobs
Q1: The survey pegs GDP growth at
7-7.75 per cent for the coming year, which is broadly in the range of 7.6 per
cent expected in the current financial year. Do you think the Survey is
conservative this time, after overestimating growth in the past many years?
A1: The mid-term review late in 2015, put the estimate of
growth rate for 2015-16 at 7 to 7.5%. This means that the Economic Survey predicts
a rise of 0.25% points at the top end. My own forecast of growth is an
acceleration of about 0.2% points in 2016-17 over the growth rate that we get
for full year 2015-16 (which is projected by CSO at 7.6%).
Q2: Do you agree with the survey
observation that -- "India being in the midway through its demographic
dividend is providing an economic growth in terms of the working age share of
the population. Hence to exploit this dividend and meet the growing aspiration
of those entering the labor force, India’s Economy needs to create enough “good
jobs”- jobs that are safe and pay well, and encourage firms and workers to
improve skills and productivity. It may be noted that of the 10.5 million new
jobs creative between 1989 and 2010, only 3.7 million-about 35 percent – were
in the formal sector. In this period total establishments were increased by 4.2
million. However jobs informal sector have come down possibly due to increased
use of contract labour. Thus, the challenge of creating the good jobs of India
could be seen as a challenge of creating more formal sector jobs which also
guarantee workers protection."
A2: We have long known that formal sector jobs are on average
of higher quality than informal employment. Many of us have also argued that
many labour policies that restrict flexibility of labor in the formal sector,
including to reduce workers when there is no product demand actually end up
reducing the generation of new formal sector jobs. The survey updates us on
this issue.
Fiscal Deficit, Subsidies
Q3: The survey finds that meeting fiscal
deficit target of 3.5 per cent would be challenging due to OROP and
VII th pay commission recommendations. It suggests the time is right for a
review of medium term fiscal frame work. It adds that there are new
developments in, and approaches to, medium term fiscal frameworks around the
world from which India can usefully learn. Your take on the issue and on
whether the Budget should defer fiscal consolidation plan for another year?
A3: The formal FRBM technically expired in 2008, but has been
informally maintained since then. A comprehensive review, updation and legal
reiteration of the framework is overdue. In my view the first best policy would
be to stick to fiscal targets for 2016-17 and reduce monetary policy (Repo )
rates by 75 BPS. As the latter is unlikely to happen given the the financial
markets focus on nominal (instead of real) rates, the second best policy may be
to postpone FD targets, while holding on to Revenue Deficit targets
Q4: The survey says Rs 100,000 crore subsidies are
going to the better-off merely on account of 6 commodities like gold, LPG,
Kerosene, Electricity, railway fares, aviation and turbine fuel (ATF) plus the
Small Savings Scheme. This represents substantial leakage from the Government’s
kitty, and an opportunity foregone to help the truly deserving. Do you
agree? What reforms would you suggest?
A4: As I haven't done my own estimate, I have nothing to add
to the economic survey's estimate. Some of us have been arguing for decades
that subsidies should be targeted on the poor and deserving and channeled in a
way that minimizes misdirection to the better off, bureaucratic expenditures
& corruption. This was my reason for suggesting a UID based multi
application smart card that would bring all subsidies under one roof(so to
say).[i]
I have also subsequently suggested allowing a mobile based cash payment system,
that connects the cell number to the UID. A DBT system using bank accounts is
an alternative which has been adopted and also serve the same purpose given
spread of bank accounts to rural areas. JAM is an attempt to incorporate
Mobiles into the system
Q5: The survey emphasizes that the Government
budgeted Rs. 73,000 crore- about 0.5 per cent of GDP- on fertilizer subsidies
in 2015-16. Nearly 70 per cent of this amount was allocated to urea, the most commonly
used fertilizer, making it the largest subsidy after food. Distortions in urea
are the result of multiple regulations. These distortions feed upon each other,
and together create an environment that leads to a series of adverse
outcomes. Your views?
A5: I have myself served on several committees that
recommended reform of the Urea production and
subsidy system. Unfortunately the vested interests are too strong to be
easily disrupted. In the past, the share of the subsidy going to producers (vs
farmers) has fluctuated between 100% to 0%. The current period when the prices
of oil refinery products used in Urea production are low, provides a good
opportunity for complete decontrol combined with targeted subsidy through bank
accounts, mobiles or a Kisan credit card.
Social Security
Q6: The survey also says introduction of DBT in
LPG and MGNREGS have proved that use of JAM can considerably reduce leakages,
reduce idle funds, lower corruption and improve ease of doing business with the
government. Despite huge improvements in financial inclusion due to Jan Dhan,
JAM Preparedness indicators suggest that there is still long way to go. Your
take?
A6: The key common element is the use of the UID/Adhar number
and a payment channel that is accessible to beneficiaries. The opening of bank
accounts for the poor has definitely facilitated the use of bank accounts for
making direct payments. I have long argued that the use of mobile accounts as a
way of transferring funds would be a better channel because its reach among the
poor is much deeper. However, forcing the administrators to open accounts for
the poor before making payment can accelerate the spread of accounts.
Q7: The survey says providing food security
entails making food available at affordable prices at all times, without
interruptions. In order to provide food security, in the current agriculture
scenario, India has to focus on supplies which are timely and uninterrupted and
affordable for the poor. Your views on that?
A7: I first analysed this issue in a 2002 paper &
suggested a three tier approach depending on the degree of competitive
availability of food supply shops.[ii]
In urban areas where there competitive food supply is available, we should
switch completely to some form of food credit cards. In remote or hilly areas
where there may not be many suppliers we should continue with the full PDS
system. In the other in between areas a combination of food stamps/food credit
card and competing PDS outlets could be used.
Q8: There are some new chapters in the Survey such
as Mother and Child. What do you think of those?
A8: In 2007 paper on Child Nutrition I argued that Sewage,
Sanitation and Public toilets were the most important cause of this problem in
India.[iii] I am therefore very happy that this problem
is receiving attention. However, I think
more research needs to be done to determine what are the other critical
elements of the problems and consequently the most effective solutions
Trade & Tariffs
Q9: The survey suggests that India should resist
calls to seek recourse in the protectionist measures, especially in relation to
items that could undermine the competitiveness of downstream firms and
industries. It also suggests that India should strengthen procedures that allow
WTO-consistent and hence legitimate actions against dumping (anti-dumping),
subsidization (countervailing duties), and surges in imports (safeguard
measures) to be taken expeditiously and effectively. Your take?
A9: I agree completely with this suggestion with one caveat.
China is a non-market economy which is exporting deflation through its State
owned and Party sponsered enterprises. So in the short term (say during 2016)
other temporary protective measures may be justified.
Q10 It also says higher tariff is
coming in the way of benefits from FTAs. Do you agree?
A10: What the CEA said was that the imports of India (& its
FTA partners) have increased in proportion to the reduction in tariffs
resulting from the FTA. So for example India's imports from ASEAN have gone up
more that than vice versa, because India with higher tariffs, reduced them more
in per cent points.
---------------------------------
A version of this appeared in the Business Standard of
Saturday 27th March, under the banner, "Vested Interests too strong to
Reform Urea Subsidy" http://www.business-standard.com/budget/article/vested-interests-too-strong-to-reform-urea-subsidy-arvind-virmani-116022700010_1.html
.
