by Mr. TB KAPALI, Economic Consultant, Chennai
Treating policy
paralysis is all very well. But long-term growth needs institutional reform
The new government
bears the burden of expectations. It has to fix an economy saddled by
stagflation, policy paralysis and loss of investment appetite. What it should
really come to grips with is certain issues of institutional reform, without
which long-term growth will remain a mirage. What we will see instead is boom
and bust cycles.
So, what is the mess
that we find in front of us?
 |
| Mr. TB KAPALI, Economic Consultant, Chennai |
Decelerating output
growth marked by volatile investments and stubbornly high inflation in consumer
prices needs to be addressed..
Investment activity
is under strain as forecasts of real returns to projects are not being realised
due to generalised inflation. After a period of robust earnings growth in the
2000-07 period, real returns to investment projects are down because of
inflation.
The recent industrial
relations disputes in the manufacturing sector can also be understood in this
broader context, as labour input costs are under strong upward pressure.
The gridlock in the
policymaking environment had also contributed to dampening investment
confidence. The regulatory obstacles have resulted in key projects not going
onstream, thereby resulting in financial distress for borrowers. This has and
further compromised asset quality in lending institutions like banks. This
gridlock is highlighted as the single biggest impediment to the revival of
economic growth.
No simple remedies..
As a corollary,
people assume that with a new, (decisive) government in place, high economic
growth will automatically resume.
Such a simple
solution does not seem to exist. After two decades into “reforms”, it can now
be understood that the institutional foundation of economic policymaking in
India is quite weak.
This weak foundation
would come back to haunt India’s medium-term economic prospects even if some or
many of the “gridlocks” are opened in the next year or / so.
At the global level,
it does not seem like the world economy would turn around in a strikingly
strong manner in 2014-15 to provide a noticeable lift to emerging economies. In
this overall backdrop, there cannot be a stronger case for strengthening the
foundation of economic policymaking in India so as to insulate the domestic
economy from external developments.
Money Creation..
Many fundamental
questions have remained unanswered in the past two decades. The questions also
relate to the institutional arrangements which should govern policy-making in
the modern (global) economic environment.
Specifically, Indian
economic policymakers still do not appreciate that monetary policy and fiscal
policy are two distinct arms of economic policy. They should know that the
monetary policy making arm should be independent of the fiscal arm and have the
autonomy to work towards a clear economic objective.
Quite simply, the
rule governing institutional arrangements at the higher echelons of economic
policy making should be: the power to spend the money and the power to create
money should be housed in statutorily separate, independent institutions.
The power to spend
money rests with the Government and the party in power. The power to create
money rests with the Central bank in a modern, fiat-money system based economy.
Where these two
powers reside de jure in separate entities but are de facto exercised by a
single entity (government), it is a recipe for macro-economic instability - of
the kind India is experiencing now.
Unfortunately,
though, Indian governments treat the central bank as just an appendage to
finance the gaps in their spending budgets. They do not seem to recognise that
monetary policy is a powerful macro-economic tool that, if employed with
integrity to produce stable prices, can significantly advance the national
priorities of stable long-run economic growth and increasing levels of
employment.
Institutional
Issues..
At the institutional
level, India can be ranked among countries with primitive economic systems
marked by high budget spending, weak tax base/tax administration and the
resultant temptation to use the central bank as a printing press to fill the
budget gaps. Those are the hallmarks of an LDC - least developed country.
Is it not time India
graduated out of the LDC category?
Therefore, some key
questions that should find clearcut answers are:
How big should the
Government’s spending commitments (subsidies, deficits) be? What should be the
Government’s tax and revenue policy?
Do we have a national
policy on tariffs/user costs for key infrastructure such as power, roads,
water, transport fuels, gas?
How do we plug the
overall spending gaps in the national budget?
What is the role of
the RBI in that process?
Does the RBI have an
objective with respect to the macro-economy?
If India does not
answer these questions, we will have a repeat of what has happened in the past decade
— booming activity both in real and financial sectors for some time (as was the
case between 2001 and 2007 ) followed by a bust (between 2008 and now). That
is, recurring boom and bust scenarios.
It may not be
possible in today’s global economic environment for any country to completely
eliminate domestic economic cycles. But, it is still possible for strong
governmental leadership and disciplined economic policy to reduce the frequency
and amplitude of economic cycles.
India seems to be on
the cusp of such a combination of strong governmental leadership and
disciplined economic policy.
The writer TB
KAPALI is a Chennai-based Financial and Economic Consultant
tbkapali@gmail.com
No comments:
Post a Comment