The honeymoon phase of the new government will soon be getting over. So far the most significant and composite policy pronouncement manifests only in its maiden budget. Evidently, this evoked mixed reactions. Many observers were seen to be more solicitous rather than genuine in their appreciation of its positive features. But many others argued forthrightly that the Modi government missed the opportunity of unveiling “big bang reforms” or overarching strategic vision. The budget has given an impression of little bit of everything and lots of nothing! What then should be the agenda for economic reforms for the government keeping in view the medium-term perspective of next three to five years? This question assumes importance because India cannot afford a prolonged phase of growth stagnation. Engines of economic resurgence have to be fired with greater intensity, and at multiple levels.
Prioritise the wish list and focus areas
From the budget as well as from various subsequent offbudget measures, some significant pointers are discernible of what the government ought to do to strategise its economic policy making. Indeed, there can be a formidable wish list of policy agenda, but it would be more appropriate and productive to prioritise and concentrate only on selected focus areas. First, the government has to deal with severely constrained fiscal space. Unless this fight against fiscal profligation is fought decisively, no transformational policy changes can be envisaged in the coming years. Second, recharging of PSU disinvestment programme, and in this area, the government will have to go beyond mere resource-raising exercise. Third, to rejuvenate public-private partnership (PPP) models for infrastructure development, and on which, the budget has so much to offer both in terms of physical targets and financial allocations.
Fourth, there is an urgency of revisiting the 12th Plan, and more importantly, to recast the Planning Commission’s role. Much water has flown since the economic reforms were launched over two decades ago in 1991. Further, after the global economic crisis of 2008, both domestic and global economic scenario has changed dramatically. Also, the major dictum of the BJP led NDA government is “minimum government and maximum governance”. All these developments warrant reorientation of the planning strategy. Last, extreme focus has to be given to policy implementation be it relating to states-wide acceptable framework for GST, FDI liberalisation in defence manufacturing, insurance, etc.; revival of manufacturing, urban development, strengthening of agricultural economy or setting up of a national market, private markets, etc., by initiating the APMC reforms in consultation with the state governments.
Expenditure Management Commission, a welcome initiative
The creation of fiscal space is possible either through expanding the revenue raising potential or by reducing and rationalising expenditure or by a combination of the two. We believe that, given the slow process of industrial recovery, there are short-term limitations on restoring revenue buoyancy in the economy. Hence, the setting up of Expenditure Management Commission (likely to be headed by former RBI Governor, Dr. Bimal Jalan, according to some paper reports) is a welcome initiative, and its recommendations will be eagerly awaited. According to the FM’s budget speech the Commission would be asked “to review the allocative and operational efficiencies of Government expenditure” and recommend essential reforms in the current financial year. Also, it can be expected to set the roadmap to “overhaul the subsidy regime, including food and petroleum subsidies and make it more targeted”.
What is worrisome in the prevailing structure of central government’s expenditure is the continuously rising burden of non-plan expenditure, especially, subsidies, interest payments, administrative expenditure and a host of social sector schemes, including flagship programmes. Over 30% of government’s total expenditure is currently financed from public borrowings (mostly fiscal deficit), which leads to progressive accumulation of public debt. Given the norms of fiscal responsibility legislation, wherein financing of aggregate expenditure through fiscal deficit has to be brought down to 3% of GDP by 2016- 17, the government must prepare a road map for rolling back non-plan expenditure independent of what the Commission per se can be expected to recommend.
In this context, we must also caution that the UPA II government had already set up the Seventh Pay Commission sometime in September last year. According to some expert calculations, its recommendations might impose a huge incremental salaries and pension burden of as much as rupees one lakh crore per annum. Therefore, the terms of reference of the Expenditure Commission must cover wider issues of administrative reforms, especially the rightsizing of the government accompanied by improvement in the quality of public expenditure. This alone would alleviate adverse implications of pay and pension hikes of the government employees going forward. Alongside, the Commission’s final report also incorporates key benchmarks of qualitative performance that must be assigned to various ministries/ departments. Like-wise, the prevailing outlay-outcome budgetary exercise calls for more rigour, sharpness and transparency than what is currently discernible.
Recharging of PSU disinvestment programme
The government’s efforts to accelerate PSU disinvestment programme need to go beyond realisation of financial target of Rs. 58,425 crores in 2014-15 (about Rs. 16,000 crores in the previous year). It must also strive towards progressively reducing the government’s role from various developmental activities, which can as well be performed by private sector – and that too, more efficiently and strategically. The Modi government must acknowledge that business of the government is to govern, and not to be in business. It must, therefore, articulate unequivocally its stance towards privatisation without being distracted by political expediency. For this purpose, it needs to bring about a decisive and significant shift in ownership and management of public sector businesses. Also, the government must show courage by phasing out the practice of perpetual budgetary support to loss-making PSUs, and wasting good money for non-viable, non-sustainable enterprises.
PPP models & infrastructure development
As mentioned earlier, a host of infrastructure development projects have been announced by the government be it in the sphere of energy (power, coal, renewable energy, gas pipeline expansion, etc.), new airports, road sector, urban renewal, urban transportation, urban metro, affordable housing, new models of urbanisation of rural areas or creation of 100 smart cities. Most of these areas lend themselves to effective PPP models, which the previous governments’ have sought push through for well over a past decade. The experience, however, has so far been mixed – some PPP projects have made good progress, but many others have achieved a limited success or languished for a variety of reasons.
Therefore, the next reforms agenda must correct various fault lines in the existing PPP guidelines and models – concerning procedural issues, contractual obligations, risk sharing principles, monitoring and dispute resolutions, etc. Further, like in the case of many mega projects – both manufacturing and infrastructure development –the government has to revisit in a holistic manner the daunting challenges of land acquisition (if need be, review and reframe the concerned new legislation), environmental clearances, Centre-States and Inter-States coordination issues, etc. Also, it is imperative to expand the long-term sources of funding for such long-gestation, capital-intensive sectors. And in this context, one would expect both the Finance Ministry and the RBI to put in operation the budgetary proposals, namely, exempting banks from CRR, SLR and Priority Sector Lending obligations for deployment of their funds to infrastructure projects. In substance, the whole package of measures must be evolved over the next few months to stimulate implementation of various pending and new PPP projects.
A word about Twelfth Plan
Yet another pending major policy initiative is to recast the Planning Commission. Indeed, its role needs to be redefined in the context of dramatic changes in the domestic economy in the post-reforms period, and also after the global economic crisis of 2008. Further, the Twelfth Plan is awaiting a midterm review, which effectively would involve comprehensive overhauling – witness the fact that it had envisaged annual average real GDP growth target of 8%, while the first three years are likely to yield not more than 5 to 5.2% growth rate. Many assumptions of macro parameters have gone completely awry – it had envisaged average investment ratio of 38.8% of GDP and fixed investment rate of 34.2%, but there has been a sharp collapse in the investment ratio in the economy over the last five years.
In summing up, the NDA government has many formidable challenges not only of combating the short-term problems of economic revival and inflation control, but progressing decisively with broad-based economic reforms, some of the key components of which have been outlined in this article. We are conscious of the fact that the Modi government has to expand the constituency of economic reforms to make impossible possible. And that is where his leadership will make distinction. Going forward, India aspires for not Gujarat model, but new unique and dynamic Indian model of development and governance!