Tuesday, January 30, 2018

Economic Survey 2017-18 avoids telling lies, and does not tell the truth

Chief Economic Adviser Arvind Subramaniam emerges as a market economist who knows the devil in the details



The first paragraph of the first chapter – State of the Economy: An Analytical Overview and Outlook for Policy – shows the dilemma of the author/authors of the Economic Survey. They are compelled to highlight what the government considers to be its great achievements, but at the same time facts demand that the problems and roadblocks had to be stated as well. One might call it intellectual honesty, but a more critical analysis would have offered a clearer picture. The first paragraph:

The past year has been marked by some major reforms. The transformational Goods and Services Tax (GST) was launched in July 2017. With a policy of such scale, scope and complexity, the transition unsurprisingly encountered challenges of policy, law and information technology systems, which especially affected the informal sector. Expeditious responses followed to rationalize and reduce rates and simplify compliance burdens.”

 There was a lack of understanding and preparation on the part of the government. It wanted to take the plunge in a spirit of bravado, and it created stresses and strains to everyone except itself. And constitutionally speaking, the GST Council, comprising the finance ministers of the states and the Union Territories (UTs) with the Union Finance Minister at its head and consensus as its mode of decision-making, turns out to be an administrative monstrosity, and it goes against the very principle of federalism. Prime Minister Narender Modi and Finance Minister Arun Jaitley use the euphemism of ‘cooperative federalism” to describe the short-circuiting of federalism. What the GST does is to take the away the powers of each state to tax according to its own economic viability. The government’s tendency to concentrate powers of administration is given a futuristic hint in Chapter IV with the title, “Reconciling Fiscal Federalism and Accountability: Is there a Low Equilibrium Trap”, where the financial viability of the rural local government (RLG) and the urban local government (ULG) is questioned, and especially the RLG, who depend on devolved tax revenues, and the question is asked whether state governments are doing enough on devolving the revenues, the demand which the states make on the centre. The Modi-led BJP government is looking for efficient ways of collecting the tax at one point and assuring that the revenues will be devolved each according to his need. This is fascism in governance.

There is further hint of what cooperative federalism could lead to with the caveat: “Cooperative federalism is of course not a substitute for states’ own efforts at furthering economic and social development.” The suggestion is that the “cooperative federalism technology” could be used by the GST Council to create a common agricultural market, amalgamate inefficient electricity markets, solve inter-state water disputes and also tackle air pollution. The monstrosity of cooperative federalism as frozen as in the GST Council unfolds.



The next interesting part comes in the third paragraph:

Macroeconomic developments in this year have been marked by swings. In the first year, India’s economic temporarily “decoupled” decelerating as the rest of the world  accelerated – even as it remained the second best performer amongst major countries, with strong macroecomomic fundamentals. The reason lay in the series of actions and developments that buffeted the economy: demonetization, teething difficulties in the new GST, high and rising real interest rates, an intensifying overhang from the increasing TBS [Twin Balance Sheet] challenge, and sharp falls in certain food prices that impacted agricultural incomes.”

In the second half there were “robust signs of revival” because “shocks began to fade” and “corrective actions” taken and “the synchronous global economic recovery boosted exports.” But that is not end of the story of premature and unthinking decisions taken and corrected. “Fiscal deficits, current account, and inflation were all higher than expected” and part of the blame was laid at the door of rising international oil prices ‘’India’s historic macroeconomic vulnerability.”

We now know as to why the growth rate for 2017-18 was pegged at a modest, sub-optimum 6.75 per cent, and very much less than the 7.3 per cent estimated by the International Fund (IMF). The projection of 7 to 7.5 per cent growth rate for 2018-19 is not sanguine. The situation has been aptly, if cleverly, described as “dualities of revival and risk”.

The other issue that comes for praise followed by a cautionary statutory warning is about shift from subsidies to “public provision of essential private goods and services at low prices, especially to the poor.” But this can be termed a success only if toilet building leads to toilet use, bank accounts lead to financial inclusion – the opening of bank accounts in itself is not sufficient –, cooking gas connection leads to gas offtake and village electrification leads to household connections. That is a tall order indeed. The government can claim that it has started the process and it will not be its fault if all of this does not lead to fruition. The truth that cannot be hidden is that transformation cannot be achieved through government fiat.

And there are some stark confessions about the limitations of government policy interventions. It is pointed out “that while there are significant social and economic benefits to attacking corruption and weak governance, addressing those pathologies entails challenges. In the vase of the GST and demonetization, informal cash-intensive sectors were impacted.”

And about the much-touted advantages of auctioning of natural resources, the Survey points out the embedded ambiguity: “In the case of spectrum coal and renewables, auctions may have led to a winners’ curse, whereby firms overbid for assets, leading to adverse consequences in each of the sectors; but they created transparency and avoided rent-seeking with enormous benefits, actual and perceptional.” The use of the word “perceptional” is very interesting. The “perceptional” benefit could be more than the “actual”.

The Survey tackles the moot question of how much a state can do things at a time when Prime Minister Modi believes that he will wrought magic in the country through governmental intervention. The Survey notes: “But Indian is in a grey zone of uncertainty on the role of states and markets. Limitations on state capacity (centre and states) affect the delivery of essential services such as health and education. At the same time, the introduction of technology and the JAM (Jan Dhan—Aadhaar--Mobile), now enhanced by the Unified Payments Interface (UIP) holds the potential for significant improvements in such capacity.” The words to be noted are “potential”, “significant improvement”.

And as to manufacturing in India, the problem it has not made the grade of international competitiveness which is reflected in the “declining manufacturing-export-GDP ratio and manufacturing trade balance”. This combined with “real effective exchange rate appreciating about 21 per cent since January 2014” has only added to the woes of manufacturers. The government is in a fix and it is not its fault. There are too many problems, and the achievements pale before the problems!








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