Seductive sophistry

Print edition : March 26, 2010

A scene from Kuttanad in Kerala. Farmers, though confronted by a shortage of fertilizers, are doing their best to improve the yield. While the Economic Survey asserts that the fast-paced recovery of the economy underscores the effectiveness of the policy response of the government in the wake of the financial crisis, it is not able to ignore altogether the poor performance of the agricultural sector. The agricultural and allied sectors show a decline of 0.2 per cent.-H. VIBHU

IN recent years, the Economic Survey, tabled in Parliament during the Budget session before the presentation of the Union Budget, has come to be viewed as a foreteller of the governments economic policy initiatives. Last year, the Survey, presented at a time when neoliberalism had been greatly discredited by the global economic crisis, uncompromisingly advocated sweeping neoliberal reforms, including substantial disinvestment of the government stake in public sector enterprises (PSEs). Although the disinvestment of PSEs was not announced in the Union Budget for 2009-10, and the Budget Estimate was only Rs.1,120 crore under miscellaneous capital receipts, Budget 2010-2011 documents show that disinvestment of equity in PSEs fetched the government Rs.25,958 crore in 2009-10 as per the Revised Estimates, marginally exceeding the amount recommended in the Economic Survey of 2008-09! Commentators who thought that the Economic Survey was only doing kite-flying on economic reforms last year simply because the Budget, with its generous doses of political rhetoric, did not seem to speak the same language as the Survey, should think again. Given the obvious coincidence of views of the mandarins of the Finance Ministry and the government on economic policies, it is clearly necessary to take the Economic Survey seriously.

The Economic Survey for 2009-10 is a cleverly drafted document. It provides, as usual, a selective summary of the performance of the Indian economy and its various sectors as perceived by the Finance Ministry. The summary is useful, though the interpretation of the data presented in the Survey is not as unambiguous as the authors of the Survey would want us to believe. The first chapter gives an overview of the state of the Indian economy and prospects for the year ahead. It is understandably celebratory, reflecting as it does the views of the government of the day.

The Survey states that the Indian economy is likely to register a GDP growth rate of 7.2 per cent during 2009-10 and asserts that it may well be able to return to the growth path of 9 per cent per annum, with the rider that the necessary fiscal consolidation read reduction of fiscal deficit must occur for this to happen. The presumption that the Indian economy was on a growth path of 9 per cent per annum to which it can now return is unlikely to meet with universal agreement. At 1999-2000 prices, the GDP growth rates were respectively 4.4 per cent, 5.8 per cent, 3.8 per cent, 8.5 per cent and 7.5 per cent during the years 2000-01, 2001-02, 2002-03, 2003-04 and 2004-05.

The GDP growth rates exceeded 9 per cent only in the years 2005-06 to 2007-08, only to decline to 6.7 per cent in 2008-09. It is not unlikely, going by the recent figures for the third quarter, that the GDP growth rate for 2009-10 may fall short of 7 per cent. So, talk of 9 per cent growth rate seems a bit premature though the Survey confidently predicts a GDP growth rate of 8.5 +/- 0.25 per cent for 2010-11 and a growth rate exceeding 9 per cent for 2011-12. The Survey gets carried away by its own rhetoric when it asserts that ...it is entirely possible for India to move into the rarefied domain of double-digit growth and even attempt to don the mantle of the fastest-growing economy in the world within the next four years. Here is some feel-good rhetoric reminiscent of India Shining!

The numbers of GDP growth rate apart, it is yet to be established that such high growth rates translate into better levels of living for the mass of the Indian population. On the other hand, the assumption in the argument of the Survey that the return to 9 per cent growth is contingent on a rapid return to fiscal rectitude suggests that the neoliberal obsession with the fiscal deficit is alive and well in Indian government circles, despite the global rethinking on this theme. This should of course not surprise us, since this was also the tone of the Survey last year.

While the Survey asserts that the fast-paced recovery of the economy underscores the effectiveness of the policy response of the government in the wake of the financial crisis, it is not able to ignore altogether the poor performance of the agricultural sector. It notes that although the recovery of output seems broad-based, the agricultural and allied sectors show a decline of 0.2 per cent. This is a longer-term phenomenon as well. Agriculture and allied activities grew at merely 1.6 per cent in 2008-09. Between 2004-05 and 2009-10, the share of agriculture and allied sectors in GDP at factor cost has declined from 18.9 to 14.6 per cent, that of industry has stagnated at 28 per cent and the share of services has gone up from 53.2 per cent to 57.2 per cent. No corresponding shift in the labour force across sectors seems to have occurred, a fact that the Survey does not seem overly concerned about.

The Survey does refer to double digit food price inflation. It admits that the year-on-year inflation in the composite food index (with a weight of 25.4 per cent) at 19.8 per cent in December 2009 was significantly higher than 8.6 per cent last year. But it attributes the inflation mainly to supply-side bottlenecks, erratic and delayed monsoons and exacerbation of inflationary expectations following excessive hype about kharif crop failure. The role of speculative trade, including the impact of futures trade, is not seen as a factor behind the inflationary pressures.

It is interesting to learn from the discussion in the Survey on fiscal developments and public finance about the very large amounts of tax revenues forgone by the government on account of the tax concessions provided to industry in the name of economic stimulus. Tax revenue forgone on account of exemptions under corporate income tax amounted to more than Rs.1,31,000 crore between 2007 and 2009 while the corresponding figure in respect of exemptions under personal income tax was nearly Rs.68,000 crore. Corresponding figures for revenue forgone on account of exemptions under excise and customs duties taken together amounted to more than Rs.2,41,000 crore in 2007-08 and Rs.3,54,000 crore in 2008-09. During 2009-10, the tax revenues forgone on account of exemptions provided in last years Budget amount to (nearly) Rs.80,000 crore in respect of corporate income tax, Rs.41,000 crore in respect of personal income tax, and Rs.4,20,000 crore in respect of excise and customs duties taken together. It is also interesting to note that the Survey, while not batting an eyelid over these figures, repeatedly refers to heavy subsidies on food and fertilizers.

On the issue of inflation and prices, the Survey has a detailed discussion, at the end of which it recognises that India being a large country, any decision to import food items raises global prices which impacts on domestic prices as well. It admits that the food price inflation is likely to get transmitted to non-food items over time, thus resulting in generalised inflation. Interestingly, in contrast to the denial mode of the government after the presentation of the Union Budget, the Survey does admit that increase in petroleum prices will have an impact on price levels though it also takes the view that sustaining the current petroleum prices in this scenario of rising international prices may not be viable from the fiscal side....

The Survey provides useful reviews of developments in the area of financial intermediation (Chapter 5) and of the balance of payments (Chapter 6). It has a separate chapter on international trade. It notes that India, despite its rapid recovery from the global crisis, faces some risks. The first is that advanced countries face the risk of double dip recession with high unemployment rates and growing fiscal deficits, and this can have negative implications for an Indian economy increasingly integrated into the global economy.

The second risk, the Survey points out, is that of a surge of portfolio capital flows from metropolitan countries to developing countries such as India because of interest rate differentials and the opportunities to make quick speculative gains in developing country stock markets. This also poses problems of price stability versus exchange rate stability. Since the Survey regards relatively unrestricted capital mobility across countries as desirable, it implicitly considers it necessary to live with the impossible trinity dilemma of policy choice between price stability, exchange rate stability and capital mobility.

On agriculture and food management, the Survey expresses concern over the relative stagnation in farm productivity and argues for a greater policy focus on agricultural research. At the same time, it laments the decline in private sector investment in agriculture and wants this trend to be reversed through the creation of a favourable policy environment and availability of credit at reasonable rates on time for the private sector to invest in agriculture. In this interesting choice of words, one may note that the farmer or peasant has disappeared, and, in his/her place, we have the amorphous private sector.

Is that a euphemism for big agribusiness? Yet, when it discusses the issue of minimum support prices, it refers to the inability of small and marginal farmers to access markets, and uses this argument to question the efficacy of higher MSPs! One would have thought that policymakers would worry about how to ensure that the benefits of MSPs reach small and marginal farmers rather than to suggest that MSP increases are undesirable or necessarily ineffective as a means of benefiting these sections. Likewise, after taking a relatively benign view of various tax concessions and the resulting loss of tax revenues in its discussion of fiscal management, it talks of the huge costs of subsidy involved in the maintenance of buffer stocks of grains.

On the industrial sector, the Survey takes the upbeat view that demand would not be a constraining factor for industrial growth. However, it also makes the point that ensuring balanced and sustained growth of the Indian economy is predicated, to a great extent, on the ability of manufacturing to absorb the vast surplus labour in the farm sector. There has been little evidence of this happening over the years of high GDP growth. The Survey emphasises the need for massive investments in infrastructure and advocates public-private partnerships (PPPs) and further liberalisation to attract funds for infrastructure, rather than a leading role for the public sector in this regard.

On the issues of poverty, human development and state spending on the social sector, the Survey points to the increased spending in recent years but is silent on the commitments made in the National Common Minimum Programme of the first United Progressive Alliance (UPA) government. It also does not address the issue of increasing disconnect between the official poverty line expenditure and the attainment of the original nutrition norms on which the poverty line is ostensibly based.

It presents the completely arbitrary recommendations of the Tendulkar Committee report without comment but in a somewhat approving manner. The abysmal nature of the official poverty line, which constitutes a line of destitution or worse, is apparently not a concern of the Survey.

The most interesting and revealing section in the Survey is the second chapter which purports to deal with the micro-foundations of macroeconomic policy. The claim is that of thinking outside the box and taking an analytical look at policymaking in India.

As a sample of this out-of-the-box thinking, savour the following:

We need a government that, when it comes to the market, sets effective, incentive-compatible rules and remains on the sidelines with minimal interference, and at the same time, plays an important role in directly helping the poor by ensuring that they get basic education and health services and receive adequate nutrition and food.

In the world of this chapter, there are only individuals who meet in the Market. There is no corporate power, nor will the state face any difficulty in raising the resources to give the poor what they have been generously granted by the authors of the Survey: basic education and health services and adequate nutrition and food! After all, the poor should not begin to imagine that they are entitled to all the goodies of life that others may be able to access.

The chapter is full of such out-of-the-box thinking. One is almost tempted to term this chapter an exercise in seductive sophistry.

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