As I see it the well-integrated components of the current macroeconomic policy strategy include prioritising investment while continuing essential support for the vulnerable and taking only small steps on the path of fiscal consolidation. Better composition of government expenditure and other supply-side action enables excellent monetary-fiscal coordination to restrain inflation yet support growth.
Better corporate governance and regulation underlies use of a strengthened financial sector to deliver stimulus. Temporary and well-targeted regulatory relief and incentives aim to encourage exports without inducing strategic distortions.
Long-term reform recent Budgets have introduced to strengthen institutions and incentives help sustainably implement the strategy. Policy certainty aids long-term decisions.
Such reform is admirable and unusual since elected governments are normally focused on short-run re-election maximising strategies. But pay-offs are visible already.
Buoyant revenues will support fiscal consolidation on the announced path. Consolidation will aid in moderating demand and the current account deficit (CAD). The latter is a major current risk for the Indian economy. It will also strengthen market confidence in the Indian economy and lower the risk premium that keeps spreads high and raises the cost of government and private borrowing.
This consolidation will not be at the cost of growth if well-targeted fiscal expenditure acts to build capacity, to lower the cost of living and to support the poor. The Indian post-pandemic strategy of interventions in the food economy and countercyclical crude oil excise that reduced the costs of essentials, while raising the share of infrastructure investment has worked well.
As Ayushman Bharat, and other medical insurance, expands, more transparency on hospital charges negotiated by different insurance agencies could mitigate arbitrary inflation in charges. The latter severely impacts households. Or else a hospital regulator could be set up. All price regulators need to internalise the inflation targeting regimes so that price increases awarded are commensurate with the target.
The deficit continues to be positive, supporting essential expenditures and sustaining demand. Healthy growth will reduce deficit ratios. Since much of the deficit goes back to financial institutions as interest payment, however, its impact on demand depends on credit creation. There are signs credit is picking up. Since the CAD also equals financial savings minus investment, incentives for savings will moderate the CAD as well as support credit growth.
Revenue buoyancy can be further enhanced with the intensive use of data to move the economy towards an ideal of low taxes on a large base, supported by tax simplification and rationalisation.
Recent central Budgets made major contributions to transparency, with clarifications on off-balance-sheet items. Second and third tier governments also need to improve transparency, quality and composition of expenditure.
Health, nutrition, sanitation, environment, infrastructure are state subjects that have been neglected for too long. For this it is necessary to build capacity and put in better systems, especially at the third tier of urban and rural local government.
It is often said that land and labour laws are not the major constraints in the entry and expansion of new firms. Rather it is municipal corruption.
Imposing conditionality to improve the quality of lower level expenditure runs into problems of monitoring. The Finance Commission does some conditional allocation but cannot follow-up since it has a limited term. Governments also change, and if the Centre follows up on this, it gets political flak.
For better targeting and to reduce corruption at the second and third tier of government it is essential to simplify laws and improve measurement. Management information systems would allow a shift from monitoring inputs that leads to strategic behaviour towards allocating responsibility for outcomes, measured as variance from budgeted amounts, right down the hierarchy, together with continuous feedback and adjustment as required.
In our current climate of competitive freebies, better measurement and transparency will enable the imposition of PAYGO rules, so that a new scheme can be announced only if the funding for it is shown.
Budget process rules also improve outcomes. If the total expenditure is set by an independent entity this prevents competitive inflation in spending. Adding-up components inflates expenditure. The one who has proposal rights over expenditure should not be directly gaining from it. One who cuts a cake should not distribute it.
There is a move to set up NITI clones at the state level. This would be excellent for capacity building and convergence, building on digitisation, but may require a central coordinating institute. This would not be a fiscal council, but rather a budget data and standards institute.
Since mitigating climate change is a global imperative, rules or incentives can be designed to encourage it. Technology-based methods to share infrastructure can economise on resources. Smart infrastructure should have minimal impact on the environment.
A recent EU mandate for a uniform charger port for all gadgets, if implemented here, would steeply reduce the number of chargers a household has. AC temperatures of 24 degrees C are the best for human health as well as save energy. This could be made the norm in public places.
India’s low external debt has helped lower external risks in these volatile times. Any expansion must continue to be cautious.
The writer is Emeritus professor, IGIDR