Economy

[email protected]: Steering the economic ship through choppy waters

TINA EDWIN | Updated on January 27, 2018 Published on May 18, 2016

Prime Minister Narendra Modi and Finance Minister Arun Jaitley: so far, so good REUTERS

Modi1.1.   -  Tina Edwin

A providential drop in global oil prices has helped thus far, but the Modi-led NDA government needs to be more responsive to rural distress

When Reserve Bank of India Governor Raghuram Rajan recently likened India to a one-eyed king in the land of blind, he whipped up a storm in the tea-cups of Prime Minister Narendra Modi and his Ministers. What they failed to read, however, was the context in which the statement was made.

There is no denying that India is currently the world’s fastest-expanding economy, but global headwinds are unfavourable. Growth in many of India’s biggest trading partners is slow, and there are limitations to achieving higher levels of growth, particularly through exports. That’s an admission that Finance Minister Arun Jaitley himself has repeatedly made.

The 7.6 per cent economic expansion recorded in 2015-16 is no mean achievement. The government can take credit for the improved business sentiment and the revived foreign investor interest in India. Yet, it is not enough.

A job well done

Measures taken to make India more ‘business-friendly’ have already started paying off; foreign investors are not just looking at acquiring existing businesses, but also at setting up new projects. This is illustrated by the emergence of India as the top destination for greenfield FDI in 2015, ahead of China and the US, according to a study by fDi Intelligence, a unit of The Financial Times, last month.

The government can also take some credit for containing inflationary pressures. Food price inflation has cooled, as have prices of many items such as pulses – from the peaks reached in mid-2015 – despite two successive failed monsoon.

There is greater coordination between the RBI and the government and that has dampened inflationary expectations in the economy, notes DK Joshi, chief economist at rating agency Crisil.

The government’s success in cooling inflation, shrinking its subsidy bill and maintaining its twin deficits was aided by external factors – primarily the sharp fall in oil prices. India’s crude oil imports costs fell more than 60 per cent from its peak in June 2014. That shrank India’s oil import bill by 54 per cent between 2013-14 and 2015-16, and the total import bill by 16 per cent.

In fact, the fall in global petroleum crude and product prices provided the government with a windfall; with every significant fall in prices, the government increased the basic excise duty on petrol and diesel.

While it denied consumers the full benefit of the plunging global prices for petroleum products, it bumped up excise collections in 2014-15 and 2015-16. The total excise duty collection rose an estimated 51 per cent in 2015-16, and enabled the Centre to meet the committed fiscal deficit target even at a time when nominal GDP grew slower than real GDP due to deflationary trends in some sectors.

Advancing subsidy reforms

The government also used the drop in oil prices to carry forward the deregulation of diesel prices, and to reorient the subsidy regime on liquefied petroleum gas (LPG).

Encouraging well-off consumers to forgo the subsidy on LPG counts as one of the major achievements of the Modi government. Over one crore consumers responded to the ‘Give It Up’ campaign. The money thus saved is being used to provide LPG connections to poor women who have until now been using firewood and other bio-mass fuel for cooking.

The NDA government has by and large carried forward the reforms process started by the previous governments – with some changes. Although it is not a votary of rights-based entitlement schemes, it has embraced some of the UPA government programmes such as Aadhaar and, rather belatedly, the MNREGA rural employment scheme. In the case of Aadhaar, it speeded up the issue of the unique ID to over 100 crore individuals when it realised its effectiveness in implementing direct benefits transfer (DBT) programmes and thus target subsidies to reduce leakages.

What sets it apart from the UPA government is effective and aggressive execution. The rollout of the Jan Dhan Scheme and the higher enrolment of Aadhaar are examples of the NDA’s execution abilities. Service delivery will count as one of the biggest successes of the government, says NR Bhanumurthy, professor, National Institute of Public Finance and Policy.

Slow response to rural distress

While the government focussed on food inflation and other problems, it failed to recognise and respond to the rural distress caused by poor monsoons. Instead, it blamed the State governments. Over a third of the country’s population, particularly in Maharashtra, Andhra Pradesh, northern Karnataka and the Bundelkhand region of Uttar Pradesh, is badly affected. The government appeared slow to embrace MNREGA, evidently because it was a signature programmes of the UPA.

The tax regime

The government’s approach towards budgeting and resource-raising has not differed much from the UPA’s. However, the share of indirect taxes in the tax pie has increased – mostly because of levies on petrol and diesel. Indirect taxes are distortionary in nature, and dependence on it needs to be reserved, feels Joshi. Ideally, direct taxes should be a larger contributor of taxes than indirect taxes, which is a levy on consumption that hurts the poor more than the well-off. Likewise, the resort to cesses and surcharge on taxes goes against the spirit of cooperative federalism, but reflects the absence of options.

Bringing down institutions

The Planning Commission, dismissed by Modi as a relic of the Nehru-Gandhi era of economic policy formulation, was scrapped, but without an alternative mechanism. That is now being remedied with a provision for 15-year plans. The government seems to have come a full circle and learnt to appreciate the utility of many of the existing institutions, schemes and programmes that it had airily dismissed. What it perhaps needs to do is tweak them and continue to work on effective execution.

Published on May 18, 2016
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