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Domestic front: But India need to do much more. Especially after 1991, India has progressively distanced itself from statism and made considerable strides in improving the management of the economy. Yet a broader stock- taking suggests that India has to traverse a considerable distance to realize its ambitions on growth, employment and social justice. Broader societal shifts are required in ideas and narratives to address three major challenges—
(i) Inefficient redistribution: These structural challenges have their proximate policy counterparts. India’s has made extensive efforts at redistribution. The central government alone runs about 950 central sector and centrally sponsored schemes and sub-schemes which cost about 5 per cent of GDP. Clearly, there are rationales for many of them. But there may be intrinsic limitations in terms of the effectiveness of targeting. Through Aadhar, the government has made great progress in improving redistributive efficiency over the last few years (the pilots for Direct Benefit Transfers in fertilizer represent a very important new direction in this regard). At the same time, prices facing consumers in many sectors are yet to move closer toward market levels. Even on the GST, concerns about ensuring low tax rates for essentials, risks creating an unduly complicated structure with multiple and excessively high peak rates, thereby foregoing large services efficiency gains. The idea of universal basic income (UBI) may be tried by India, but with caution—it should not become another scheme with the similar demerits—trimming down the existing schemes will serve double purposes in this regard— making it fiscally sustainable and improving governance in redistribution.
(ii) State capacity: Delivery of essential services such as health and education, which are predominantly the preserve of state governments, remains impaired. Regulatory institutions are still finding their way. The deepest puzzle has been—while competitive federalism has been a powerful agent of change in relation to attracting investment and talent, it has been less evident in relation to essential service delivery. There
have, of course, been important exceptions, such as the improvement of the public distribution system (PDS) in Chhattisgarh, the incentivization of agriculture in Madhya Pradesh, reforms in the power sector in Gujarat which improved delivery and cost recovery, the efficiency of social programs in Tamil Nadu, and the recent use of technology to help make Haryana kerosene-free. But on health and education there are insufficient instances of good models that can travel widely within India and that are seen as attractive political opportunities. Competitive populism needs a counterpart in competitive service delivery.
(iii) Property rights: We find an ambivalence about protecting property rights and embracing the private sector—political dynamic have been lacking for decades. This is manifested in—
• the difficulties in advancing “strategic disinvestment”;
• the persistence of the “twin balance sheet” problem (over-indebtedness in the corporate and banking sectors which requires difficult decisions about burden-sharing and perhaps even forgiving some burden on the private sector);
• the legacy issues of “retroactive taxation”, which remain mired in litigation even though the government has made clear its intentions for the future;
• “agriculture”, where the protection of intellectual property rights, for example in seeds, remains a challenge;
• frequent recourse to ‘stock limits and controls’ on trade in agriculture, which draws upon the antiquated Essential Commodities Act, and creates uncertainty for farmers.
• reform in the ‘civil aviation sector’, which has been interventionist rather liberalizing;
• reforms in the ‘fertilizer sector’, where it is proving easier to rehabilitate unviable plants in the public sector rather than facilitate the exit the inefficient ones;
In each of the above-given examples, there may be valid reasons for the status quo but overall they indicate that the embrace of markets—even in the modest sense of avoiding intrusive intervention, protecting property rights,
disposing of unviable public sector assets and exiting from areas of comparative non-advantage, and allowing economic agents to face market prices—remains a work-in-progress.
External front: Even as the domestic agenda remains far from complete, the international order is changing—posing new challenges. The impact of Brexit and the US elections, though still uncertain, risk unleashing paradigmatic shifts in the direction of ‘isolationism’ and ‘nativism’. The post war consensus in favour of globalisation of goods, services and labour in particular, and market-based economic organization more broadly, is under threat across the advanced economies—in a sense a process of “de- globalisation” looks ensuing. For India that is a late “converger”—that is an economy whose standards of living are well below countries at the frontier— these events have immense consequences. Given that India’s growth ambitions of 8–10 per cent require export growth of about 15–20 per cent, any serious ‘retreat from openness’ on the part of India’s trading partners would jeopardize those ambitions.
To these structural domestic and external developments must be added the proximate macro-economic challenges. Since the decline in oil prices from their peak in June 2014 there has been a lift to incomes which combined with government actions imparted dynamism by increasing private consumption and facilitating public investment, shoring up an economy buffeted by the headwinds of weak external demand and poor agricultural production. In 2017–18, this source of short-term dynamism may be taken away as international oil prices are now on the rise. Moreover, private investment remains weak because of the ‘twin balance sheet’ (TBS) problem that has been the economy’s festering wound for several years now. Re-establishing private investment and exports as the predominant and durable sources of growth is the proximate macro-economic challenge.
Precisely speaking, the steady progress on structural reforms made in the last few years needs to be rapidly built upon, and the unfinished agenda completed. Especially, after demonetisation and given the ever-present late- term challenges, anxieties about the vision underlying economic policy and about the forgoing of opportunities created by the sweet spot need to be decisively dispelled.