Last week, there was an editorial in the Business Standard that commented on the wide variations in the estimates of gross domestic product (GDP) growth for the year. All these estimates came from eminent economists, and the figures vary from 5.5% to 7.75%—in terms of value, close to a quarter of $1 trillion. The newspapers of 1 January were full of articles that pointed out the greatness that awaits India in the coming decade—analysis, comment and expectations that per capita GDP would double in the coming decade. The most important common feature in several of the articles was that they were high on hopes and expectations, and fairly low on analysis and data—a worrisome trend. It is true that people like to read good news about the economy and bad news about their neighbours, but this 1 January was a new high.
And that brings me to the core of my thoughts today, the recommendations of the 13th Finance Commission (TFC). In my last column, I had questioned the arguments of the draft study report put out by TFC on the goods and services tax (GST), and suggested that instead of resolving conflicts, it is adding to them. Subsequently, the Prime Minister’s economic advisory council has come up with views on GST that are quite different, and the reader is quite confused about where all this is leading—in fact, there are indications that the April deadline for introducing GST may not be met.
First, the TFC report (though it is not yet in the public domain) apparently does not indicate any rates for GST— that is, it is moving away from its own earlier study paper, within two weeks. We are clearly suffering from an overload of economic analysis, with a lot of alternatives thrown up, and no solutions. Unless, of course, there is a deeper agenda in all this—any GST implementation would require service tax to cover all goods and services, and such legislation could be brought into the budget. In the time until GST is rolled out, this would bring additional revenues for the Union government, to offset some load of the fiscal deficit.
Second, the core of the report app-ears to be a recommendation to return to fiscal consolidation. In interviews, TFC chairman Vijay Kelkar has said, “If you remember, the last finance commission suggested a path. It worked beautifully for first four years, but then, because of a crisis, deviation has to take place where you take fiscal stimulus and other counter-settling measures. So, now, the President has asked us to suggest new road map for fiscal conso-lidation for Centre and the states. She has also asked us to evaluate—if you remember, the 12th Finance Com-mission recommended a debt conso-lidation and relief facility. So they asked us to review the working of it and take into account our recommendations.”
Thus, there is recognition that the earlier finance commission had recommended the right path and that we have deviated from it, and hence we are in this fiscal mess. If we had continued to do as we had done in the first four years, and not clothed subsidies and agricultural loan write-offs as fiscal stimulus for political reasons, we would have been able to use the fiscal stimulus for infrastructure, as China has done, for more rail links and roads, and in a couple of years would have a strong infrastructure built up—an opportunity missed. And so we are revisiting the same ground again.
Third, TFC has been asked to comment on areas that are normally outside its purview—allocations of gross budgetary support for Plan expenditure, as well as the environmental impact of development expenditures. It is difficult to anticipate how these recommendations would be implemented, especially when there is little consensus within the government on how this should happen. The Planning Commission is not a constitutional body—it was set up by a simple government order in the 1950s, and it is quite surprising that TFC should have been asked to comment on how it should function or allocate resources. On environmental issues, we have just seen the lack of consensus in government—the TFC report is unlikely to resolve the contentious issues here. At the same time, TFC has made wholesome recommendations on allocations of revenues to the states, which deserve to be implemented.
Perhaps the problem is that instead of focusing on its role of allocation of revenues between the states and the Centre, it has been given too many tasks, and this brings me back to the initial argument, that the government would like to outsource its problems to experts to solve and then to pick and choose what it would like to implement.
I feel a little sorry for TFC, for there is no way its recommendations can all be implemented, and equally sorry that despite having the best economic brains to advise on policy, the implementation and governance is becoming more and more ad hoc.
It is little wonder, therefore, that flights of fancy in writing about GDP growth are so easy in this atmosphere.
S. Narayan, a senior research fellow at the Institute of South Asian Studies, Singapore, is a former finance secretary. We welcome your comments at firstname.lastname@example.org