Till about July, when the first indications of the gathering tsunami on Wall Street were becoming apparent, it was fashionable to be dismissive of the role of governments. In the hubris of the stupendous growth unleashed by the market economy, it was vehemently argued, even in India, that the government should retreat to a lesser role. Some even argued that India, despite the fact that trade accounted for nearly one-third of its national income, was decoupled and hence insulated from a global meltdown.
Seven months later, little is heard of either argument. In fact, it has now gone to the other extreme: the state should take complete charge and nationalize the ailing American corporate behemoths. Just as the unravelling of the Iraq war marked the end of the neo-conservatives, the current global economic crisis is marking the end of neo-liberals. It is almost as if Keynesian economics, fashioned after John Maynard Keynes who propounded a key role for the state in stimulating demand, is back in fashion.
In India the global crisis has sent the government-should-stay-away lobby into hiding and also to the junking of “decoupled” theories. In any case, even after liberalization progressively accelerated in the last three decades, the role of the state has never really diminished. Can it really?
Not in a nation where nearly 62 years after independence the level of literacy is at 60%, nearly 50% of the children aged below five still suffer from malnutrition, regional inequalities are staggering and where the organized private sector cannot absorb the emerging labour force. Unfortunately, the continuation of a dominant role for the state brings with it the attendant problem of red tape and adhoc policies, something that was described by Prime Minister Manmohan Singh as crony capitalism.
This may well be due to the fact that the turn of every decade, excepting for the millennium, since 1979-80 has brought with it an economic crisis; prior to that it was government policy to ensure that the public sector remained the commanding heights of the economy. And every time, the state has stepped in with a bailout. It was natural to expect that would be the case this time, too.
However, on this occasion the magnitude of the impact could be manifold for the simple reason that there are many, many more stakeholders. Many of those who rode the new economy or flowered in its ecosystem are facing job losses and wage cuts.
Given the manner in which the Centre-state fiscal relations are structured, the Union Budget will be the key to any intervention by the government. The impending general election, due before May, though has severely cramped policy planners and all eyes are inevitably on the full-fledged budget, that will follow after the next regime takes charge at the Centre around June. By then the economic situation is expected to worsen.
Clearly, the Union Budget will have to do much more. The challenges go well beyond mitigating the fallout from the ongoing recession in the US, Europe and Japan. Not only will it have to undertake immediate measures to salvage the economy in the short run, but also initiate steps for the medium to long term.
First off, it has to live out the fiscal legacy that will be bequeathed by the Congress-led United Progressive Alliance (UPA). For four years, the UPA did not take advantage of the unprecedented buoyancy in tax revenues, as the economy averaged nearly 9% annual growth, to clean its books.
So when the bad times are here, the government’s accumulated debt has become a burden and has severely restricted its ability to pump up demand in the economy through additional spending.
The fiscal space has got squeezed further as tax revenues too have taken a beating with the economy losing its momentum. It contracted, at an accelerating pace, by 13% in October, 15% in November and 25% in December over the previous 12 months.
Secondly, it has to prepare the ground for two important tax reform initiatives—transition to a uniform goods and services tax (GST) and an income-tax code. While the former will for the first time ever unify the country as one economic entity—since it will do away with the varying tax rates across states—the latter will simplify and replace the Income-tax Act, 1961. GST has a deadline of April 2010.
Thirdly, it will have to move swiftly to address the problem of growing unemployment and regional and income inequalities. The economic boom was led largely by the growth in the sunrise service sectors such as hospitality, civil aviation and information technology. It is only natural that these sectors have been the worst hit by the downturn. Since there are no numbers to capture the impact in the unorganized sector, one can only hazard that it would be much worse. Unchecked it could well turn into a nasty social problem.
As Joseph Stiglitz, the Nobel prize winning economist, remarked in an interview to Mint on 23 December, “Let’s try to design policies that create more equality and that will not only be consistent with principles of social justice, but will actually stimulate the economy.” Which would be a V2 version of Keynes.
Clearly, the key person in the next Union cabinet, after the Prime Minister, will be the finance minister. The question is whether it will be a politician or a technocrat.
Anil Padmanabhan is the Delhi bureau chief of Mint and will write every week on the intersection of politics and economics. Comments are welcome at firstname.lastname@example.org