Last month’s release of the report of the 13th Finance Commission (TFC), the Economic Survey of India and the Union Budget did not disappoint those looking for positive signals for the Indian economy. The three documents together display the impressive intellectual talent at work in economic policymaking.
The TFC report does not break major new ground, but is characterized by an elegance and simplicity of approach to the country’s public finances that can only be good. The recommended increase in the states’ share of the tax pool is justified in terms of the greater buoyancy of Central taxes. At the same time, both the Centre and the states are admonished to improve their finances: the states by borrowing less, and the Centre by managing its expenditure better— cutting subsidies, improving targeting and restructuring the numerous Centrally sponsored schemes. The movement to a goods and services tax (GST) is supported, and the recommendation is again geared towards simplicity, with a uniform rate, a clear split between the Centre and the states, and creation of a fund to get buy-in from the states for the transition. A clear new plan for fiscal consolidation is also laid out.
The Economic Survey presents a large quantity of information in an accessible format, and includes the usual tables, charts and lists of actions taken and policies recommended. But what sets it apart is its second chapter, which provides some sophisticated but clearly exposited perspectives on economic reform. The conceptual framework for the appropriate role of government is laid out first: The government is not too big, it is just spread too thin, trying to do too many things, and often doing the wrong things. The objective of inclusive growth is operationalized in a simple way, with respect to how much different income groups benefit from growth. Then examples are given of how to improve the efficiency and effectiveness of specific policies. A coupon scheme to provide subsidies is described, and why it will work better, from the point of view of normal human behaviour, is clearly explained. This is an important step forward in Indian policy documents, which often neglect the “incentive compatibility” of proposed policies. There is a proposal for improving the management of food buffer stocks, so that prices can actually be brought down by releasing stocks, something that did not happen initially in the battle against food inflation.
The innovative Chapter 2 also begins to make a balanced case for labour market reform, without polemics, and suggests a process of discussion that could lead to positive legislative changes. The discussion of the unnecessary costs of doing business in India is connected to an estimate of the benefits, so that a reasoned motivation for change is established. The report even ventures into issues of social norms and their impact on development, making the case for understanding the broader social dynamics of long-run change. The back-and-forth between abstract concepts, on the one hand, and concrete realities—from specific cases to aggregate facts and figures—on the other, makes this chapter a milestone in official documents on Indian economic policy.
The third leg of the triple play was the Union Budget. The Budget has a scope much broader and requires details much richer than either of the other two documents, but it also has a tone that emerges from the welter of individual proposals. This Budget clearly succeeded in achieving a complex balancing act between encouraging growth and working towards fiscal rectitude, while offering a number of possibilities for improvement, through changes in the tax code, regulatory reform and expenditure priorities. No budget is perfect, and no budget satisfies everyone. In this case, one might have wished for more emphasis on generating employment by encouraging small and medium enterprises (see my 22 February column, “Budgeting for growth”), and more incentives for private sector investment (the current fragility of which is highlighted in the Economic Survey), but the finance minister may have done what he could, and there is the promise of more improvements to come.
Ultimately, the success of the Budget will boil down to expenditure implementation, and that will require absorbing some of the lessons and conceptual innovations outlined in the Economic Survey. On the revenue side, enormous progress has been made, leading now towards GST and a new direct tax code. For an “enabling” government to emerge, there will still need to be changes in the philosophy and implementation of spending, and of how to regulate the market and private sector organizations. The Budget is not necessarily the place to tackle that agenda. However, I have a sense that this agenda is now going to move forward, because the Economic Survey begins to show the way to changing the functioning of government without sidelining it, and without sacrificing the goal of inclusiveness while pursuing high growth. A few years ago, the Prime Minister had spoken of a new social contract. Now is the time.
Nirvikar Singh is a professor of economics at the University of California, Santa Cruz. Your comments are welcome at email@example.com