Economic policy, beyond the elections

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It is unfortunate that debate even on economic issues such as GDP growth and measurement has become politicised, thanks to the election.

What one government can achieve depends on what past governments were able to do. For India a long view shows there was macroeconomic over-stimulus after the Global Financial Crisis and a policy over-reaction in the opposite direction after that. The financial regulatory regime showed a similar excessive pro-cyclical tightening after laxity during the infrastructure bubble.

Even with the latest round of revisions, growth of industry was 3 per cent lower in the period after 2011. This reduces job growth. So past governments have to share the blame for low employment growth.

Sharing responsibility

While it was necessary to correct inherited macroeconomic fragilities, including large balance of payment and fiscal deficits, over-strictness also creates stress. With low growth and high interest rates it is difficult for firms to service debt and NPAs increase.

It is true re-capitalisation of banks had to be delayed until the Bankruptcy Code was set in motion so that losses did not devolve only on the taxpayer. That promoters stood to lose assets created better incentives to repay banks. This was part of the over-reaction to the crony capitalism that had marked the last years of the UPA rule. It also became possible to tap into global initiatives for data sharing against asset stripping and tax evasion.

But after a long period of stagnation and regulatory tightening the financial sector is in a parlous state and requires counter-cyclical regulatory hand holding, without compromising incentives for good behaviour. It is not clear as yet if the financial sector has seen adequate fundamental improvements in corporate governance and intermediation to survive a series of shocks. The new government must move towards more balance as the outgoing government had already started doing.

Looking forward

After stagnation since 2011 private investment was showing some signs of revival in 2018 but has slowed again recently. Hopefully it will revive after the election results, but macroeconomic policy must support such a revival.

A similar brief revival after the 2014 elections was killed by the highest real interest rates India had ever seen as policy rates were not cut following the crash in oil prices. There is evidence of high interest sensitivity of demand for consumer durables, housing and investment. Savings tend to rise with investment and growth, while interest rates largely affect their allocation. India was pushed to becoming a consumption led society, with high net imports.

A monetary stimulus is only possible if supply-side policies continue to reduce costs and improve public services and capacity throughout the country. Building strength and independence is better than encouraging potential workers to try and qualify for doles. Well targeted and non-discretionary transfers must be restricted to the really distressed.

A bitter and negative election season can be left behind for a constructive and healing agenda. Motivated ideological advice either for more or for less market freedom together with redistribution will not suit the Indian context and potential. This requires a balanced focus on what is feasible given current trends along with openness to good ideas and debate wherever they come from. Diversity is creative.

Less commodity price volatility and inflationary pass through in the future will help. Institutions form the backbone of an economy and have to be respected and strengthened. But suspiciousness and motivated allegations can weaken them as much as government interference.

Suspicion versus interference

For example, consider our statistical agencies. Election season battles have undermined their credibility. In an economy that is doing much better compared to its past and transforming structurally, it becomes necessary to use better data bases and to move to international measurement concepts. This is exactly what the shift to the new GDP base has done.

Moving from a 4,000-firm sample to the MCA 21 database with lakhs of firms must be welcomed. Frequent revisions in the process of making backdated series available have been questioned.

But a back series based on new and better data has to be preferred to the econometric projection, first made available. Unorganised sector and trade estimates used to be based on projecting forward dated surveys with an index. Sales tax data, which since became available, was used in the revisions. It shows a credible fall in growth just after the global financial crisis while survey-based projections were higher. It also matches well with updated surveys.

Telecom growth used to be based on the number of subscribers, where there is known to be a lot of duplication. The backward revision used a more credible measure — minutes of usage — leading to an acceptable fall in tertiary sector growth rates.

Another example is the bitter controversy over employment data. Macroeconomists had long been asking for high frequency employment data. In its absence, India must be the only major country where policy rates are decided without looking at employment trends. There was resistance from development economists who did not want the 5-yearly NSS employment survey to be diluted.

The quarterly periodic labour force survey was finally started. But major changes take time to settle. It can be used only after it has been tested against a broad range of experts, suitably fine-tuned and a number of surveys are available for comparative purposes.

Two National Statistical Commission (NSC) members resigned because they had approved the survey yet it was not released. But the NSC was supposed to have seven members with the relevant range of expertise. It had only three, with no macroeconomist.

The profession must demand strengthening of the NSC. It is only because government data goes through a robust process that it is credible. There are many private measures of unemployment available, based on different concepts, but no consensus on the preferred measure.

The motivated political use of the leaked periodic survey, before it had been vetted sufficiently, justifies the delay in giving it the official certificate of approval. Estimates have been compared with the earlier 5-yearly surveys although the sample and questionnaire design are completely different.

Survey questions asked from the educated must distinguish between desk jobs they may aspire to and other jobs they may have. Unemployment based on aspirations may differ from that based on actual work done. As technology changes the structure of future labour markets aspirations will also adjust over time.

Health insurance and ease of living will encourage risk-taking and improve the quality of jobs even if the employer is not the government or a big corporate. Encouraging inclusive innovation from India’s restless educated young can help the country ride the technology wave to prosperity and equality.

The writer is Professor, IGIDR, and Member EAC-PM



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