Ashima Goyal

Going beyond poll economics

ASHIMA GOYAL | Updated on October 16, 2013

Why cavil at the land acquisition Bill?

Populism will not be enough in the new political economy. Complementary improvements in governance can win elections.

The Indian economy is today suffering the side-effects of a high-risk development policy followed in recent times — one that has essentially relied on volatile capital inflows to finance consumption and inclusion while neglecting growth.

This strategy is high-risk because ultimately it is only growth that can attract capital on a sustainable basis. Focusing excessively on financing deficits arising from such policies while neglecting growth-promoting domestic reforms is risky at best and disastrous when the global markets are fragile as they are now.

So embarking on some of these desirable reforms is the sustainable way forward. Short-term measures to alleviate the current account deficit (CAD) or reduce pressures on the rupee are all, at best, stop-gaps.

Two key neglected domestic areas are agricultural supply response and government functioning.

POTENTIAL IN LEGISLATION

Of course, in a democracy where we are going into an election year, only re-election friendly reforms are likely to be undertaken.

Our Parliament has recently been hyper-active in passing bills. The National Food Security legislation is one of them. But is this going to have largely negative results as much of media analysis seems to suggest?

The government is today the largest hoarder of foodgrains in the country, which has contributed no less to high food inflation, apart from distorting markets and production incentives of farmers. It has also found it difficult to dispose of these massive stocks. To the extent, the new law helps transfer grains to consumers, the stocks should reduce in the short-run.

But in the longer run, equilibrium stocks could be lower if clauses enabling diverse ways of achieving food security incorporated in the legislation are activated. In the process, the public distribution system in terms of dedicated ration shops can be limited to remote areas, which cannot be catered to by regular market channels efficiently.

Then the existing physical procurement system can be transformed mainly into a minimum support price programme.

As regards consumers, cash transfers would allow purchase of needed nutrition – especially in the form of vegetables and protein-rich foods — in line with changing dietary habits. And with marketing reforms, farmers too will be motivated to adjust supply accordingly. Only then will inclusive schemes be able to transfer real purchasing power to the poor by simultaneously lowering inflation, thus achieving their true purpose.

Similarly, take the other apparently populist legislation pertaining to land acquisition. True, it imposes costs, but can actually benefit industry if more clarity reduces delays. By early 2010, it was clear that the government apparatus was simply not geared to handle the scale of the permissions required for an economy moving to a high growth trajectory. Dated legislations, including on land, made issues more complex than they needed to be.

Better governance is the key accompaniment that can convert the above new laws from negative to being positive for the larger economy.

Thus, the food security law can actually facilitate less onerous and more efficient government intervention in agriculture. The land acquisition law, complemented with moves towards greater transparency in land records and reduced discretion in land transfers, will make it much easier to do business.

Leasing land could be an alternative to avoiding upfront costs, while also presenting the States greater degrees of freedom in managing potential conflicts among various stakeholders. The Cabinet Committee on Investment could, likewise, identify other causes of project delays such as overlaps and lack of coordination between various central and state departments. This could be the basis for initiating appropriate governance restructuring for more permanent systemic change.

ELECTION WINNERS

India’s fundamental strengths are its demographic profile — people concentrated in the productive age-groups — and a diversified consumption base.

But these strengths are wasted if our youth cannot find gainful jobs. It is often said that politicians won’t bother about governance unless there are vote-banks large enough to get them re-elected. If 67 per cent poor are incentive enough to push for food subsidy, just as 50 per cent in rural areas or 25 per cent scheduled castes/tribes are for other schemes, the middle class is too small a vote bank to drive policy.

But tech-driven awareness has made the poor also think middle class and aspire to be like them. Near-universal enrolment in schools suggests that all Indians want good jobs for their children. So, growth and good governance are important for even the poor and weaker sections. The persistent poor do require support, but what they really seek today is the prospect of a better life. State governments delivering on these aspirations have been voted back in – a relatively recent trend.

In other words, populism will not be enough in the new political economy. Complementary improvements in governance can well be election winners. Rather than compete on polarised policies, parties should compete on effective delivery of a similar policy set. This approach will also go some way in resolving resolve the current fearful PIAE (postpone investment ahead of election) syndrome.

GLOBAL POLICY

The other set of fundamental reforms required are in the international sphere.

Emerging markets (EM), including India, are now at the receiving end of monetary policies designed by advanced economies (AEs) to revive their own fortunes. The G-20 and the International Monetary Fund need to evolve some means to make AEs recognise the systemic spillovers they create for others. For example, unconditional liquidity that is calibrated to withdrawal (‘tapering’) of the current quantitative easing (QE) policies can be made available to affected countries suffering collateral market disruption.

But dominant financial voices have been denying any AE responsibility for loss of EM asset and currency values on account of QE tapering. They argue that the EMs, in fact, gained from the QE-induced capital flows in the first place. These allowed India, for example, to finance its large CADs. So if QE by AEs helped the EMs in the past, they cannot complain today against their tapering.

But the fact is QE-induced capital movements have followed a risk-on risk-off pattern depending on global fragilities, independent of India’s domestic cycle or needs. These have made it more difficult to fight persistent inflation resulting from capital outflows-induced depreciation.

The QE policies earlier were also responsible for widening the CAD by pushing up prices of all asset classes, including commodities imported by India. This increase in the CAD clearly had little to do with excess demand, as India simultaneously registered decline in growth rates. True, to the extent QE made financing of CADs easier, it also led to complacency among policymakers here. The dangerous dependence on the drug of foreign capital flows led them to neglect the essential domestic structural reforms required to keep the money here.

If AE policy makers and global institutions refuse to accept their responsibility for the volatility that their policies have created, it is time the EMs think of creating alternative institutions that make them less hostage to monetary policy decided in AEs, improve their bargaining power and contribute to overall global financial stability.

These arrangements could include trade and currency swaps between Asian and Middle-Eastern countries.

(The author is Professor of Economics, IGIDR, Mumbai.)

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Published on October 16, 2013
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