In the mood for reform

Now the government must outline path of fiscal correction, put investment back on track

The UPA government announced a number of reform measures last week. The announcements indicate a willingness to take political risks to push the reform process. The measures are signals for investors, domestic as well as foreign, that the Indian government is willing to undertake reform. In all likelihood, India will now avoid a rating downgrade. Yet, the economy is still staring at a deceleration to 5 per cent GDP growth, lack of job growth and inflation. Now that the government has shown its mood for reform, it must push further, to put India back on a healthy growth path. The two priorities of the government today must be fiscal correction and putting investment back on track.

The time till the next general elections in 2014 should not be spent merely managing the political downside of the reform, but in building up an argument for it and promising high growth in the next term as well, if the UPA comes back to power. The UPA government must, first and foremost, outline its path of fiscal correction. Will the diesel price hike be followed up by more hikes, removal of subsidy and eventually a freeing up of diesel prices? The subsidy regime for food, fertiliser and fuel has thrown the Indian fisc into an unsustainable debt path. The present correction, owing to the oil price hike, will only mean a correction of about 0.2 per cent of GDP. The disinvestment announced could bring in another 0.2 per cent of GDP. This does not solve the fiscal problem. The deficit needs to come down by roughly 2.5 per cent of the GDP to be sustainable.

At the same time, large welfare programmes, such as the NREGA, and the proposed health expenditure, will need greater spending. Anyone looking at the rising subsidy bill, at the size of the welfare programmes, and contrasting it with the limited tax base, can only wonder why India will not have a fiscal crisis. A continuation of the present policies cannot but land the country into a huge problem. Either before a crisis or after it, there is little doubt that the current expenditure path has to change.

Will Congress rule push India into a fiscal crisis? If not, can the Congress articulate how that will not happen. Prime Minister Manmohan Singh is reported to have said that good economics is good politics. What is the prime minister's view of what is good economics on the Indian government's expenditure policy? While he has supported a concurrent evaluation of the NREGA programme, is the problem only with leakages, or can India sustain such a welfare programme even if there were no leakages? Even if every scheme works well on its own, will that put the fisc on a sustainable path? What are the projected expenses on the government's welfare schemes if the schemes work without leakages? By what per cent is the expenditure expected to reduce?

When the slogan of inclusive growth, or NREGA, was proposed, it was popularised as a promise that the poor will not be left out of the growth process. In other words, it was implicitly assumed that India would be growing fast and a section of the rural poor would be left out of the growth process. This was why the country needed NREGA. It would help in reducing social tensions caused by high growth in some sectors and slow growth in other sectors such as in rural hinterlands. Implicit was also the argument that NREGA will be paid for by the high tax collection that the fast growing sectors of the economy would yield. Growth was to be made inclusive through a redistribution of incomes. This was the scenario when India was growing at 10 per cent and leaving some people behind. It was a scenario that might stand the test of time if India continued to grow at a long-run steady state of 10 per cent growth. This plan did not appear to evaluate the fiscal path of such a programme when growth halved.

Today India is no longer on the high of a business cycle. What is the sustainability of a large population-wide employment guarantee programme funded out of a small tax base? If production and job growth decline, will the government be able to fund such a programme? The planning commission meeting on September 15 reportedly discussed a low growth scenario of about 5 per cent during the 12th plan period. While the details of the policy logjam have not been reported, it is likely that this relates to a situation of low investment and low growth. What is the path of fiscal expenditure and taxes, debt, deficits, borrowing and interest payments in that scenario?

The other immediate priority of the government is to put investment back on track. Finance Minister P. Chidambaram is reportedly leading an effort on clearing problems caused by three years of government inaction. While one element of the story is to speed up action on the part of ministries and departments, another part of what may be required are small but effective changes in policies.

Data indicates that, one, the announcements of government projects have fallen sharply, and, two, a large number of private infrastructure projects are stuck due to lack of government clearances. The first is reportedly being pushed by the finance minister. On the second, there needs to be more policy change.

Recently, a representation from the infrastructure sector has emphasised the role of the government versus private sector in obtaining clearances. They have argued that future infrastructure projects should be bid with all sovereign clearances packaged in. They have correctly argued that securing sovereign clearances cannot be left to the private sector, and state agencies should play their role as the first partner in the public-private partnership. This would mean that the way bids are structured and awarded would be refashioned. Presently, the concerned ministry, or bid sponsor, sees its role mainly as the licensor or concession awarder. The argument makes perfect sense. This kind of streamlining can be done by the government with immediate effect and can help push investment back on track.

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