Sunday, July 27, 2014

Chapter II of Economic Survey 2014-15 waffles on reasons of downturn

The BJP when in opposition and the so-called independent economists have squarely blamed corruption and policy paralysis of UPA2 government of prime minister Manmohan Singh for India's economic woes. Finance ministers Pranab Mukherjee and P.Chdiambaram had emphasised the external environment as one of the reasons for the downturn in the economy. Of course, persistent inflation, especially food inflation, seemed to baffle the governments, the politicians on all sides -- though the BJP had made full use of it to castigate the Singh government -- and even the economists. Part of the blame was laid at the restrictions placed on movement of food grains, fruits and vegetables across the states as one of the reasons. In some quarters there has been acknowledgement that food, fruits, vegetables inflation is seasonal fluctuation, beyond the control of governments.
The BJP, now in government, is unable to make up its mind whether Indian economy can get back to the high growth trajectory without the world economy moving out of the trough. This confusion is also reflected in Chapter II of the Economic Survey for 2014-15.

The paragraphs that make one laugh are 2.9 and 2.10.

"2.9 Theoretically, there are fundamental differences between the legal and regulatory framework of a command-and-control economy and a market economy. In a market economy, the economy thrives because the state interferes only when there is 'market failure', i.e. monopoly power, asymmetric information or externalities. As a consequence, laws permit all activities, unless the state specifically restricts them in the context of market failure. The restrictions need to be part of a know and predictable regulatory regime unlike now where a lot of restrictions -- well intentioned as they are -- are not part of a stable framework."

Perhaps, what is intended but what is unstated is that if I want to start a steel plant I should have the right to do so, and I should be able to go and buy the coal and iron ore mines from whoever owns it -- and of course, the state should not be owning the mines -- and produce steel and sell it, either in the domestic or in foreign markets. If I want to start a power plant, I should be able to do so, buy the coal, or the coal mine, generate power and sell it wherever I want to. There should be legal framework only to buy land and mines and not seek clearances, forest, environmental or anything else. It is a lovely free market scenario. But the authors are extremely timid in stating their position because they say the state can interfere in the context of "market failure". Of course, they shy away from describing or defining market failure. The market failure clause is making a case for interference, for restrictions, for clearances of whatever kind and bringing them all through the backdoor. In 1948, at the time of the nationalisation of coal mines in Britain, R.H.Twaned had argued the socialist case that mines, or what lies beneath the earth, cannot be privet property but they should belong to the whole of society. The converse argument has to be made now, but you need both intellectual courage and clarity to work through the argument and all its implications. Creating a single-window clearance system is not really free market. You are then acknowledging all the restrictions and the needed clearances but you are arguing for a quicker clearance process. This is one aspect.

The other confusion among the authors of the Economic Survey is about the role of global recession in India's downturn. Read 2.10:

"The global economic downturn and structural weaknesses in the domestic economy has had an adverse impact on investment. Issues such as getting permissions for land use, raw materials, power, water and other inputs and also issues such as long term finance, as the financial sector is still not deep and developed, need attentions. The inflexibility of labour markets have prevented high job creation. The interventions existing in food markets also contribute to higher food inflation."

This paragraph seems to have been written by high school kids or sophomores. They do not pause to explain the impact of global downturn. The second sentence hangs loose. The third and fourth sentences are non sequiturs.

Then they make few more incoherent statements:

"2.13 Post 2008, the economy witnesses a worsening of the economic outlook and a downswing in the investment cycle."Expansionary fiscal and monetary policies pulled up gross domestic product (GDP) growtn in 2010-11 and 2011-12. However, the consequent increase in fiscal deficit and sustained high inflation led to a reversal of the expansionary stance of macroeconomic policy. In May 2013, the external environment worsened, leading to a sudden rupee depreciation and an interest hike in the first half of 2012-13."

It is not spelt out even at this stage why investments came down, and what was the flow of foreign funds was like. They do not talk whether there has been a domestic capital flight.

Then they turn to business cycle and the fall in exports, again without discussing the global economic environment. And it is mentioned in the following paragraph:

"2.14 In recent years, the Indian economy has suffered from a decline in business cycle conditions...In 2006-07 India witnessed growth 22.51 per cent in exports, supported by strong economic conditions worldwide."

There is again a faint acknowledgment of global conditions:

"2.15 Difficulties in obtaining clearances and raw material supplies and of financing brought numerous investment projects to a halt. Demand conditions were also hampered by global conditions."

There comes at last the confession of the real problem, of the stimulus given to industry!

"2.18 With the benefit of hindsight, it appears that the fiscal and monetary stimulus provided by the government in 2011-12 proved to be excessive and fostered high inflation. Post-crisis fiscal stimulus raised aggregate economic activities above their long term trends since the first quarter of 2010 and led to higher inflation. This outweighed the negative effect on exports from declining global demand and real exchange rate appreciation. The net effect of the stimulus was high enough to sustain a positive output gap till the beginning of 2012."

So, there are problems with state intervention in times of market failure, something which the Economic Survey cannot discuss. It falls beyond their purview.

Again, the links with the global economic blues are mentioned:

"2.19 During the high growth years of 2004-07, a large number of projects had been initiated, assisted by high credit growth. Investment activity started facing difficulties in the global crisis. They were exacerbated by domestic factors."

BJP and the independent economists should now eat their words.


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