Lame ducks & a rabbit trick
As election fevers grips us, economic concerns will be relegated to a lower priority. Serious policy-making is anyway stymied by the electoral code of conduct. Nonetheless, the meltdown continues, more jobs are being lost and the future looks uncertain. Stimuli I, II and III were all steps in the right direction but have failed to rekindle optimism. The global scenario continues to be worrisome and till the outlook improves, significant change cannot be expected. However, economic activity is a continuing process even when political initiatives are interrupted by electoral cycles. We must, therefore, focus on what can be done over the next three months.
First, issues of macroeconomic stability. These have been extensively analysed but suffice it to say that economic paradigms have changed unbelievably. Fiscal profligacy is not a dirty word anymore. The world suddenly believes that pampering enhanced public outlays, abdicating worries on the current account deficit or on inflationary expectations may be virtues, at least in the near term. Considering that external flows have dwindled and managing the rupee would need continued intervention by the Reserve Bank of India, depleting its reserves, encouraging external flows is a priority. If private flows are limited, seeking multilateral flows deserves a more proactive approach. Fiscal deficits are likely to remain well above 11 per cent even in the next fiscal year, given that any new government will initiate public expenditure programmes and the current sluggish commodity prices cannot be taken for granted.
The announced stimulus packages entail much larger borrowings, which can cramp resource availability to non-government sectors. This may necessitate a re-look at the adequacy of liquidity with lending entities. Banks must enhance lending at affordable costs. The autonomy of banks must be respected, but fiscal policies must match monetary policies; the need to reduce interest rates cannot be overstated. We need to reconcile multiple asymmetries in our macro-management.
Second, if the central government has adopted a major relaxation in its fiscal targets it must do so for the states as well. A relaxation of just 0.5 per cent for the states may be inadequate; a flexibility of at least 1 per cent would be appropriate. States have a quicker absorptive capacity and as long as fresh borrowings finance infrastructure and the social sectors, they will result in capital-creating assets with gainful long-term multiplier effects. As a further measure of encouragement to the states and without waiting for the recommendations of the 13th Finance Commission, an ad hoc debt rescheduling would also be useful. The finances of the states are again stressed by implementing the recommendations of the Sixth Pay Commission and significantly lower central tax devolution, given revenue shortfalls.
Third, a stimulus package is meaningful only if the money does not remain clogged up in the system. Unfortunately, of 909 infrastructure projects worth Rs 418,567 crore, 346 are running behind schedule. Of 516 central government projects costing over Rs 100 crore each, more than half have serious time and cost overruns. The National Highways Development Programme has a disastrous implementation record. Allocations for rural drinking water supply as well as the Jawaharlal Nehru Urban Renewal Mission have not been fully utilised. So the fastest way to make the stimulus work is to improve the absorptive capacity. The expenditure department in the Ministry of Finance must come up with a new set of procedures and disbursement rules for speeding up projects and encouraging faster disbursement.
Fourth, the stimulus packages have some sector initiatives to boost housing, automobiles, steel and cement. However, consumption weakness emanates not from mere affordability but future uncertainties as well. The sector-specific packages may need to be renewed in light of the changing domestic and global circumstances. We need a deeper exercise on what can be done to diversify the export basket and how quickly domestic consumption can be encouraged to absorb products and processes hitherto designed for exports.Finally, since the global outlook remains weak, we would have to increasingly rely on boosting domestic consumption. Monetary and fiscal policies must be combined with stalled structural reforms. Not all structural reforms are necessarily neo-liberal or entail market deregulation. For instance, crafting better land use policies, relocating economic activity by faster urbanisation and creating manufacturing hubs based on flexible laws, pursuing agricultural reforms, promoting environmentally friendly projects, improving the cost and quality of financial intermediation, faster dispute resolution and improving the regulatory environment are all necessary for reviving the growth momentum. These actions go beyond the term of this government. Serious preparatory work is, however, critical for any new government to act quickly.
We have been in denial for too long. We were slow to get off the ground and need to travel a longer distance faster. Governments that do not act in good times cannot pull rabbits out of their hat when times are bad.
N.K. Singh is a Rajya Sabha MP and former Member, Planning Commission.