By G. Srinivasan


In the post-demonetisation phase with domestic economy crawling at a dispiriting pace tepid pace presaging a fraught short-term future, the pre-budget Economic Survey makes bold to claim that India’s sweet spot economy is enduring not evanescent. It foresees real GDP growth for the next fiscal 2017-18 to be in the 6.75-7.50 per cent

In its 2016-17 Survey, tabled in Parliament by the Finance Minister Mr.Arun Jaitley, the Survey said this is feasible if action is taken on three important areas. First, there is a need for reducing “inefficient redistribution” as the existing one has not delivered services efficiently to people getting subsidies.

The lead author of the report, Dr. Arvind Subramanian later told media that the government had made great strides in improving redistributive efficiency over the last few years, notably by passing the Aadhaar law. However, it cannot also be gainsaid that prices for consumers in many sectors are yet to move closer towards market levels. He rightly expressed the reservations that even on the much-touted goods and services tax(GST) that would unify all extant indirect taxes into a single one, concerns about ensuring low tax rates for essentials risk creating an unduly complicated structure with multiple and excessively high peak rates. He said this would forego large services efficiency gains.

Second is the need for strengthening state capacity in delivering essential services such as health and education which are the preserve of state governments that still remains impaired. Here the Survey rightly bemoans that while competitive federalism has been a powerful agent of change in relation to attracting investment and talent, it has been less in evidence in relation to essential service delivery. Pertinently, the Survey pitches for “a counterpart to competitive populism in competitive service delivery” so that the beneficiary people would feel comforted from a welfare state.

Third is the continued ambivalence about protecting property rights and embracing the private sector in the economy. This the Survey pointed out is manifest in the constraints in advancing strategic disinvestment, the persistence of the twin balance sheet problem—the over-indebtedness in the corporate and banking sectors.  The Survey said this calls for “difficult decisions about burden-sharing and perhaps even forgiving some burden on the private sector.”  Whether the Finance Minister can digest this pabulum given the stressed fiscal position of the Centre is anybody’s guess?

By way of a litany of lists, the Survey points out the legacy issues of retroactive taxation,  the protection of intellectual property rights in agriculture particularly seeds that remains a huge challenge, frequent recourse to stock limits and controls on trade in agriculture which relies upon the antiquated Essential Commodities Act. While there might be valid reasons for the status quo in each of the cases cited, the Survey states they indicate the embrace of markets manifest in avoiding intrusive intervention, disposing of unviable public sector assets and exiting from areas of comparative non-advantage, remains a work-in-progress.

In effect, the Survey authors ask the authorities to show more guts and gumption to spur private sector activities by taking these issues head-on instead of moving in an incremental fashion Will the savvy lawyerly Finance Minister presenting his fourth budget bite the bullet to be market-friendly tomorrow by addressing the concerns of the private players? Given the record of his past budgets, he had shown a very cautious approach to any big bang policy measures and the Wednesday Budget being his penultimate, he has the last chance to be courageous to unleash animal spirit now. His 2018-19 budget will not offer him any daring proposals as the Modi Government would have to face the electorate in the May 2019 Elections!

Referring to the demonetisation of high value notes on November 8, 2016 that set the Indian economy on a new normal growth path, the Survey has put the binary query as to deify or demonize that step? It has come out with a suggestion that the demonetization step would prove a catalyst for long-run changes in behavior. But this requires steps to complement demonetization with other non-punitive, incentive-compatible measures that cut down the spurs for tax evasion. Stating demonetization was a powerful stick that now needs “carrots” as complements the Survey mentions a five-pronged strategy.

One is a GST with broad coverage to include activities that are sources of black money creation—land and other immovable property—should be implemented.  Second, individual income tax rates and real estate stamp duties could be reduced. Third, the income tax net could be widened gradually and consistent with constitutional arrangements, could progressively encompass all high incomes. Third, the time-table for reducing corporate tax to 25 per cent in another three years time could be accelerated and finally tax administration could be improved to reduce discretion and improve accountability.

No doubt, all the measures embedded in the five-pronged strategy, would give enormous relief to millions of people, provided the Finance Minister is able to implement at least a few of the ones set out in the Survey. But that would not only rob political class of its open connections but also cut into the immense executive powers of the bureaucracy, particularly the income tax department. Will Jaitley dare to take on the challenges so crisply put by the Survey now? If not now, there would be no other chance in the immediate future for the NDA to leave its footprints on the Indian economy in a decisive and path-breaking manner?

On the much-ballyhooed proposal of universal basic income (UBI), the Survey calls for serious consideration to this as a more effective way of achieving Mahatma Gandhi’s objectives of “wiping every tear from every eye”. On the issue of going in for a loose fiscal policy in the light of the need to bring about a rebound in demand, the Survey categorically maintains that the path of fiscal prudence embarked upon by this government in the last two years is critical in itself and would also be a model for the States.  Whether Jaitley will pay heed to this or take the politically right choice of pump-priming the economy would be known by tomorrow?

(IPA Service)

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