Thursday, June 7, 2012

An economic blueprint for India

It isn't enough to just criticise. A critic must also state what is the alternative.There have been lots of criticism of India's economic performance in recent times and the government's seeming inability to do anything right, economically. The blogger has been one such critic too. But precious few have really laid down a comprehensive argument of what needs to be done , and equally how this can be done; for we cannot, and should not,  wish away political realities.

Government action should be for sustained long term economic development - not short term fixes. Improving "sentiments" , like trying to bolster the stock market, is a waste of time and should not be anywhere in government's priorities. Issues like FDI in retail, fiddling with tax laws, which are getting a disproportionate amount of airtime, are all side shows - they won't make or break India.

This blogger is no expert on anything. He is just a concerned citizen. So here's one citizen's blueprint of what can be done and how it can be done. This blog is not a research paper, so there are a few ideas but no space to present data and research to back this

Stimulate agricultural growth:  Right through the last two decades, agricultural growth has lagged way behind GDP growth. This is unsustainable in a country where the majority depends on agriculture and therefore do not see the country's growth as inclusive. Some thoughts
  • Significant investment in agricultural research and wholehearted acceptance of genetically modified crops . In doing so, insist on clear labelling of genetically modified crops and let the consumer choose - take on the environmental lobby and stand firm.
  • Large investment in the power and water sectors of infrastructure referred to in manufacturing is also important for agriculture. Remove the freebies like free power (what use is free power when rural India has 14 hour power cuts).
  • Revamp the APMC rules that distort trade and let the agricultural sector freely export - there is a massive opportunity to feed China.
  • `Drive cooperatisation of agriculture ( a al Amul model) and even allow corporotisation without allowing any of these entities to acquire land.

Arrest the fall in manufacturing :   India's growth story is stalling primarily due to the decline in manufacturing. In Jan-Mar 2012, Manufacturing actually declined by 0.2 %. Manufacturing growth is the only route to creating jobs for the large population of India. Here's what can be done to drive the manufacturing sector
  • Setting a land acquisition policy that is sensible (the current one is not). This is an incredibly difficult thing to do; no country, including China, has managed this and there is unfortunately  no easy way. The current attempt in India is a step backwards. We must learn from states like Gujarat which have managed this well.
  • Decide on mega projects that require high level government approval quickly. Today every large project is in complete paralysis as the government is terrified of doing anything for getting dragged into controversy and accusations of scams. You can't be accused of a scam if you do nothing !
  • Significantly step up investment in infrastructure. The government has actually done a great job in two sectors - roads and telecom (although the misguided courts are trying their best to reverse the gains in telecom). It has performed abysmally in Railways, Power, Water and Urban Development. These are the four sectors for concentration
  • Implement the Goods & Services Tax, Direct Taxes Code and the new Companies Bill.
  • Do nothing else and let both private and public sectors drive the growth 

Fiscal Responsibility : Both central and state governments have to adopt fiscal responsibility. Do the following
  •  Statutorily fix a ceiling (low) on deficits as a % of GDP . Neither the Centre nor the states can breach this under any circumstance.
  • Phase out subsidies slowly - it is impossible to phase them out in one shot, but over 5-10 years they can be phased out. In order of priority, they should be petroleum , fertilizer and then finally food. Some component of food subsidy can never be phased out and should always remain as an anti poverty safety net.
  • Reduce significantly doles such as the Rural Employment Guarantee Scheme
  • Increase tax revenue by broadbasing tax - remove the exemption for capital gains and agricultural income and go after taxing property transactions
Fight Inflation : Fighting inflation must assume almost religious proportions (a la Germany).
  • Make RBI truly an independent Central Bank and task it with monetary policy. The government must abdicate its right to tinker with monetary policy. In the current environment, RBI is completely right to keep interest rates high
  • Fiscal responsibility referred to above, will automatically reduce inflation
  • Fight inflation supply side; boosting GDP growth is a good way to fight inflation.
Inclusive Growth : Mere GDP growth, without benefiting most (all is impossible) is not sustainable in any society. Growth must touch a large proportion of the population.
  • That is why, agricultural growth is at the top of my list
  • Invest massively in education. Inequity must be tackled at the level of opportunity. It is NOT an objective to achieve equity of outcome.
  • We should establish a social security net. No Indian shall starve and nobody will go naked. No child will be unable to go to school. Everybody will get basic medical care (note the word basic). Anything more than this is an agenda item after 10 years.
That's it. Do nothing else. Results come from doing a few things very well rather than lots of things poorly. 

None of this is new, and I am not vain enough to believe that this is an earth shattering blueprint. Wiser minds exist in government who know all this and more. The problem is the political will for implementation. Politics and economics cannot be divorced. So how do we make all these things happen politically ?? That's for tomorrow's post.