I have a new blogpost on CNN-IBN's India Blog site. The link is here. I am also copying the blogpost below:
Last week, the Indian government appointed Dr Raghuram
Rajan, a distinguished economist, as its chief economic adviser (CEA).
The CEA advises the government on possible policy options and
priorities. There are no executive responsibilities other than to
prepare the various economic reports that are presented to Parliament -
including the Economic Survey. In this context, it may be useful to look
at the policy preferences of the new CEA.
In
April, Rajan made a speech in New Delhi in the presence of the PM where
he signed off with "I have been frank as an academic, that is the only
value I bring". This suggests that perhaps he thought that his speech
would not be to the liking of his listeners. But was it really that
radical?
The speech (along with my
somewhat liberal translation for the non-economists) identifies some
issues with recent economic policy:
"Rent, patronage, or entitlement enhancing measures have sailed through."
"Private
consumption, especially in rural areas, is growing strongly on the back
of rising incomes, strong credit growth and continuing government
transfers and subsidies. The result: The gap between our spending and
our saving is making us dependent on short term foreign inflows to a
dangerously high extent."
My translation:
Policy
paralysis led to bureaucratic/political adhocism, encouraging
corruption. India's unwashed masses have been satisfied through
hand-outs in the form of subsidies for which there is no apparent way to
fund.
The Government has raised
minimum support prices for agri commodities at much higher rates than
the rate of inflation. Along with free hand-outs (referred above), and
forced lending to rural sector through compulsory priority sector
lending, we are consuming well over what we save. Soon we will need
China to fund us!
So far, I see no problems with the diagnosis. The problem starts now!
Rajan
says: "We need a common minimum programme across all sensible political
parties to ensure that we stabilise the economy and foreign investor
perceptions quickly."
Here we have
it. By implication, democracy in India is a problem. If you don't agree
with policy wonks of the government, you are not "sensible", and
foreign investors are more important than local.
In
reality, democracy is good for the economy as are policy disagreements.
Enough data exists to prove it. One example is that India's growth rate
has gone UP significantly in the period since we have had coalitions
ruling the country.
Additionally,
most large Indian houses have been investing overseas (perhaps in quanta
at least as large as inflows) over the past few years. That should
cause policy makers to pause and see why domestic industry does not see
the potential in India while we are supposed to invite foreigners.
Rajan
goes on to suggest that by 2000's, "powerful elements of the political
class which had never been fully convinced about giving up rents from
the License Raj ..., had by then formed an unholy coalition with
aggressive business people ..... The new post-License Raj equilibrium
became the Resource Raj."
The
statement is misleading seeming as it does to suggest that the unholy
politician/industry alliance is new. When did India ever have a strategy
to offer national resources in a transparent manner? It was always
through licensing which is by its nature open to corruption. Only
difference this time the scale of corruption is unprecedented under the
current dispensation.
So what is
the solution that Rajan prescribes? He says, "simply moving our millions
from low productivity agriculture to rural industry or services will
give us growth for years to come, provided we are willing to do the
minimum necessary to collect the low hanging fruit."
How
do we do this? "We need to liberalise sectors like education, retail
and the press, freeing entry and improving customer choice. We need to
transform more government-owned firms into well-managed publicly owned
firms which are free from political influence or government support. And
we need to evolve transparent means of pricing and allocating the
bountiful natural resources in our country."
Get
the connection? Huh? Well I don't too. How does letting foreign
investment in the press, retail or higher education (he speaks of higher
education, not primary, when he speaks of liberalisation somewhere
else in the speech) help in increasing rural industry or services?
Privatisation of government-owned companies has already been ruled out
of the policy tool box of the current government and is unlikely to find
its way back.
Unfortunately, the
rest of the prescriptions too don't offer anything new: increase fuel
prices (instead of curtailing wasteful government expenditure), find a
policy for allocation of natural resources (non contestable except that
no format has been suggested, so this is a motherhood statement and no
more) and look out for foreign investors (I fail to see why it is not
necessary to be kind to Indian investors as well).
So
far, what one sees of the new CEA seems to be only old wine in new
bottle. Worse, it does not seem to be based on fact or cogency of
argument. Hopefully the reality will be better for India's economic
future.
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