We will have a good idea by the end of this week about which combination is best placed to form the next government in New Delhi.
Before all attention is fixed on the tasks confronting the new group that will win power, it is perhaps a good idea to take a look back at the record of the Manmohan Singh government.
This column has often been critical of the way the outgoing government handled the economy. There is the public finance mess it leaves behind despite having the good luck of being in charge during a global economic boom that helped it get record tax collections. There is the complete abandonment of economic reforms. There are the scandalous twists and turns in critical policy areas such as telecom. There was the attempt to browbeat the Reserve Bank of India, or what its former governor Y.V. Reddy, in a recent interview with this newspaper, called “creative tension” between the government and the central bank. And there is the excruciatingly slow progress in infrastructure sectors such as roads and power.
Defenders of the Manmohan Singh government could quite reasonably say that its achievements were of a different nature. High growth and low inflation helped push back poverty. The flagship National Rural Employment Guarantee Scheme (NREGS) gave hope to the rural poor and provided them with rudimentary social security. Other programmes such as Bharat Nirman and the Jawaharlal Nehru National Urban Renewal Mission laid the foundations of a new deal for India’s villages and towns. There were higher budgetary allocations to education and health. And, of course, there was the nuclear deal with the US.
How does one then make sense of the legacy of the outgoing government? I think one option is to depend on the three-way classification given to us by the great public finance theorist Richard Musgrave in his 1959 book, The Theory of Public Finance.
Musgrave focused on the “what” and “how” of fiscal policy—the objectives of the budget, and how it is administered. True, looking at just fiscal policy does not tell us the entire story of what the Manmohan Singh government did and did not do. But I believe that Musgrave’s classification offers some interesting pointers to assess the record of this government, compare it with its predecessor led by Atal Bihari Vajpayee, and provide some clues on what the next government should do.
Musgrave said that there are three broad parameters to assess fiscal policy. First, there is the allocation function, which deals with the provision of public goods and services as well as policies to counter externalities such as pollution and climate change. Second, there is the distribution function, which deals with taxes and transfer payments to achieve a more fair distribution of wealth and income in any society. Third, there is the stabilization function, which entails maintaining aggregate demand at levels that lead to high growth, low jobs but modest inflation.
These three parameters could be tweaked for the current discussion: improvement in physical and social infrastructure (public goods), anti-poverty programmes (distribution) and bringing down the fiscal deficit and public debt (stabilization).
My own view is that the Manmohan Singh government failed miserably in killing the deficit dragon when it had the chance to do so, has a mixed record in improving India’s tattered physical and social infrastructure, and may perhaps have done best in achieving certain distributional goals, even though non-merit subsidies of fuel and fertilizer were not touched (though there is enough of a case to say that NREGS could have been replaced with a scheme for conditional cash transfers to the poor).
In contrast, the Vajpayee government did far more on the deficit front, including doing most of the initial work on introducing a value-added tax that would lead to a goods and services tax as well as pushing through the Fiscal Responsibility and Budget Management Act. Its work on infrastructure, too, was exemplary, as is evident from the national highways programme, the new legislation on the power sector and schemes such as the Sarva Shiksha Abhiyan. But it may have failed on the distribution front—at least that is the common reason given for its unexpected defeat in the 2004 elections.
Like all neat classifications, the three-way one I have borrowed from Musgrave ignores many overlaps. But it is still a useful exercise to understand what a government has been up to, especially if you assume that economic growth itself is partly due to policies of previous governments as well as overall global growth.
And what of the next government? Which of the three tasks should it focus on in the first few months? I have no doubt that fiscal discipline is the main problem that should be attacked right away. How politically feasible it will be will of course depend on how stable the next ruling coalition is.
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