Thursday, March 15, 2012

Chapter 2 of Economic Survey 2011-12

Economic Survey 2011-12 which finance minister Pranab Mukherjee placed in parliament on Thursday says that India will grow at the rate of 6.9 per cent in 2011-12, 7.6 per cent in 2012-13 and 8.6 per cent in 2013-14. It looks an optimistic projection because no concrete reasons are given as to why this growth will take place at this rate. The projection is based on expectations which could turn out to be true. And it will not be because there is something uncannily accurate about the projection. A more ordinary word for projection would be 'hope'.
Economic Survey prepared by the economic advisory council of the ministry of finance headed by Cornell professor Kaushik Basu has the Basu touch, especially in Chapter 2. It is lucid, it has a touch of lightness in its use of the English language, and more dangerously it is cunningly persuasive. Basu preaches economic reforms rather gingerly but without any self-doubt or self-criticism.
The argument is put forward that the policies and decisions taken by the finance ministry and by the Reserve Bank of India worked and did not work. While RBI's hike in interest rates dampened economic productivity -- it is hinted that the bad performance in manufacturing could be due to non-availability of credit -- but it has helped in curbing inflation which was important. Similarly, government spending leading to fiscal deficit is seen as a problem but it is acknowledged that governmental spending creating fiscal deficit is good but it needs to be kept on a leash. Of the fiscal deficit route, Chapter 2 says: "While an expanded deficit can boost consumption and economic growth, this is a medicine akin to antibiotics. It is very effective if properly used and in effective doses, but can cause harm if used over a prolonged period."
In 2.14, there is a smooth transition in argument from fiscal consolidation and increasing gross tax-GDP ratio to over 13 per cent by the end of the 12th Five Year Plan in 2016-17 from 10.5 per cent (Budget Estimates) in 2011-12, the next point is made in the same paragraph: "The government has taken the position that in a nation with widespread poverty and malnutrition, the state has to take direct responsibility for eradicating the worst forms of such deprivation. It is worth reminding ourselves that, while growth is extremely important, its value is as an instrument for human development, for eradicating poverty. We take the view, in the spirit of what Mahatma Gandhi had urged us, that, in the end, a society ought to be judged by how its poorest segment fares."
In the next section, 2.15 the important observation is made: "This critical task of inclusion cannot be left to the free market. The untrammelled laws of the market play an important role in growth and efficiency, but they do not have a natural propensity to reach out to the poor and the vulnerable." But the argument is put forward that the best way to deliver the benefits of progressive legislation and programmes and policies is to trust the market mechanism. It runs thus: " is important to remember that in devising the mechanisms for delivering these benefits, we have to utilise the forces of the market, not ignore them...To try to deliver all these benefits by using the machinery of the state and the bureaucracy will be to create untenably large transactions costs and corruption."
And in 2.16 the point is made that the most effective way of delivering the food subsidy is through cash transfers. The argument runs: "In the case of food subsidy, for instance, the view that the government takes is that it wants a law that ensures that basic needs of food are met for the entire population, with direct government intervention and subsidization in the case of the poor and the vulnerable. However, instead of having the government acquire all the food and then giving the subsidized food to designated stores to be handed over to the people, the aim is to gradually move to a system where the subsidy is directly handed over directly to the poor, so that they can use this to buy the food from the market."
In the course of the argument, Basu cites Polish poet and Nobel prize winner Wladislaw Symborzska and Oscar Wilde. It is this literary flair that makes his economic arguments such sweet pills.
Of course, Basu does not tackle the important question whether there is something terribly wrong with a market economy and whether this is not the inevitable inference to be drawn from the global recession in the United States and then in the Eurozone countries, though the aetiology in the two regions is different in particulars. He argues for economic reforms, that is market-oriented policies for India, which are perhaps what India needs at the moment, but he does now show the intellectual flair to argue that market economies are inherently flawed. It would have needed some courage to do so.

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