Flawed advocacy

The recommendations of the Economic Advisory Council to the Prime Minister are highly flawed, based as they are on a presumed but incorrect consensus on how the economy works and what promotes growth.

TAKEN together, the report entitled Economic Reforms: A Medium Term Perspective, being the recommendations of the Prime Minister's Economic Advisory Council (EAC), the Economic Survey 2000-01 of the Finance Ministry and the Union Budget for 2001-02 advocate and seek to implement a set of economic policies, presented as sensible technocratic choices claimed to "represent a broad professional consensus on the directions in which we need to move..." (EAC). These policies basically entail acce lerated implementation of the neoliberal economic agenda of liberalisation, privatisation and globalisation (LPG). The most insidious aspect of this orchestrated set of exercises is that they seek to present blatantly partisan policies serving primarily the interests of large foreign and domestic capital in general, and finance capital in particular, as non-political choices in the national interest, based on a consensus of economic wisdom. Nothing could be farther from the truth.

The EAC report makes recommendations on practically every sector of the economy and every aspect of economic policy: agriculture, industry and trade, social and economic infrastructure, financial sector reforms and the fiscal situation.1 In al most every instance, they are advanced not on the basis of any reasoned argument or analysis, but are implicitly taken to follow from a presumed consensus on how the economy works, what makes for greater efficiency and what promotes economic growth. This presumed "consensus" consists essentially of a set of assumptions, the most important of which may be summarised as follows:

(1) Markets encourage "efficiency" and growth and best harmonise the interests of all citizens. (The presumption here obviously is that marktes are invariably free and competitive.)

(2) Government's fiscal deficit is the most important stumbling block to growth (allegedly) crowding out private investment, if financed by borrowing, and causing inflation if financed by money creation.

(3) The private sector is by definition more "efficient" than the public sector.

Armed with its assumptions that are presented as incontrovertible and universally accepted truths, the report makes a series of recommendations in rather cavalier fashion. It asserts that the crisis in agriculture will be best solved by moving away from controls and towards free markets in agricultural products. It advocates that the Food Corporation of India (FCI) should limit itself to a buffer stocking role, storing not more than 10 million tonnes of grain; big grain companies should be permitted to buy directly from farmers, and without any purchase/sales tax; all reservation for small-scale industry (SSI) in agricultural processing should be eliminated; private seed companies should be exempt from land ceiling laws; and controls on distribution a nd marketing of sugar should be abolished. These and other recommendations regarding agricultural policy reflect a touching faith in the efficacy of agricultural markets not supported by empirical evidence. They imply a dismantling of the public distribu tion system (PDS) and handing over the responsibility for ensuring food security for the poor to private market operators, especially big grain and seed companies. Reality occasionally intrudes, however, as for instance when the report concedes:

"... private investment is not a substitute for public investment in all areas. In fact, it can be argued that additional public investment in critical areas of agricultural and rural infrastructure is crucial, and private investment would go up further once investment in such rural infrastructure picks up."

So, private and public investment are complementary after all! However, on the question of where resources for such public investment are to be found, the report recommends "...price and institutional reforms in power, canal irrigation and fertilizer sec tors", but not higher direct taxes on the rural and urban rich. The discussion on power sector reforms is less than candid about the disastrous results of the policies of the 1990s, including the notorious Enron deal, of seeking to privatise the power se ctor through the so-called independent power producers (IPPs) and fast-track projects.

On Industry and Trade, the report recommends a phased transition from an average import duty of 34 per cent to 12 per cent in five years, abolition of reservation for SSI sector, scrapping of the Sick Industrial Companies Act (SIC) and winding up of the Board for Industrial and Financial Reconstruction (BIFR), privatisation of all public sector undertakings except of those having a strategic/security aspect, investing employers with an unfettered right to retrench employees, subject only to payment of s ome compensation and allowing for widespread out-sourcing and use of contract labour (sans protection, though this is not so explicitly stated). Essentially, these conform to the agenda of the large corporate sector, with an additional bias in favour of foreign investors. They will not help in overcoming the present industrial recession, but will in fact worsen it.

Attack on States

In para 7.17 of the report, it is proposed that "...from the Tenth Plan onwards (that is from April 1, 2002) half of the normal Central assistance to State Plans should be provided on the basis of a quantitatively worked out fiscal reform plan", and that "release of Central assistance during the year should be linked to achievement of milestones of policy action agreed by States as part of the Tenth Plan exercise." The report itself recognises in para 7.18 that this proposal "... may be questioned on th e grounds that it introduces an element of conditionality in the release of Plan assistance which may appear to be a departure from existing practice", but seeks to justify the proposal by invoking the Eleventh Finance Commission's recommendation linking devolution of funds from the Centre to the States to performance. This proposal constitutes an assault on the principle of federalism, and seeks to take away even the limited authority that States enjoy in the quasi-federal Indian Union.

In section 7.11 on 'Expenditure Control', the report proposes that interest rates for the national small savings (NSS) scheme, the public provident fund (PPF) and for the public account be lowered to a level not exceeding two percentage points above the inflation rate of the previous six months. Apart from the practical difficulties and the scope for abuse that this proposal entails, it strongly undermines the incentive to save on the part of middle-income and less well-to-do households. It will also le ad to a sharp decline in small savings collections, which will primarily affect the States. It is not entirely unreasonable to suggest that this recommendation reflects the pro-Centre and anti-State bias evident in some of the other fiscal proposals in t he report.

In a section on 'Fiscal correction at the State level', the report pontificates on what the States should and should not do, but does not breathe a word on the failure of the Centre to impose a Consignment Tax, although it is more than 10 years since the enabling constitutional amendment was passed. It is indeed ironic (although the authors of the report are evidently unconscious of the irony or perhaps have chosen the safe option of diplomatic silence) that the report recommends (in 7.14) "...reducing the size of State Cabinets, which are often very large" but is silent on the not overly modest size of the Union Cabinet. Despite its anti-State bias, the report grudgingly recognises (para 7.7) that between 1990-91 and 1999-2000 "...States tax revenues as a percentage of GDP have at least remained stationary, whereas the Central Tax-GDP ratio has actually fallen by over 2 percentage points."

Interestingly, after conceding the Centre's lack of tax effort by pointing to the decline in Central Tax-GDP ratio between 1990-91 and 1999-2000, the report refuses to suggest enhancement of direct tax rates, on personal income and corporate profits even for the highest levels of income/profits. Instead, it proposes lowering of import duties and increasing excise duties (by removing the exemptions for SSI), moves that are bound to affect small domestic producers.

Fiscal fundamentalism

The report hails the introduction of a Fiscal Responsibility Bill in Parliament as a commendable step, although it concedes in the same breath that "...legislation by itself will not guarantee fiscal discipline" (para 7.9). This commendation is entirely unwarranted. Such a Bill should be opposed strongly, for it is not about fiscal responsibility, it is about abdication of fiscal and political responsibility. A Central government that seeks to practise fiscal responsibility should make itself accountabl e to a democratically elected Parliament rather than rely on an Act which takes away its room for flexibility in managing receipts and expenditures. The Fiscal Responsibility Bill is of a piece with other legislation being proposed, such as those relatin g to a fixed term for Parliament and a presidential form of government, in that all these are fundamentally undemocratic.

The report mentions a growth rate of 8 per cent. If one assumes an incremental capital output ratio (ICOR) of four, this would imply a required saving rate of 32 per cent. Currently, the saving rate is 22.5 per cent. The report offers no worthwhile sugge stions on how to enhance the saving rate, but in a directly contradictory manner, recommends lowering of interest rates on small savings. It deals at great length with the need to control public revenue expenditure so as to enhance capital formation for government, but is silent on the minimal contribution of the non-household private sector to savings. By default, the failure to tax the profligate consumption of the well-to-do, implicit in the report's view that direct taxes need not be touched, will o nly leave a savings gap that will serve as an argument for inviting foreign direct investment (FDI) on the most liberal terms.

Contrary to the perspective of the report, the growth rate can be stepped up to 8 per cent or even 10 per cent if the Centre shows the political will to enhance the rates and enforce the collection of direct taxes on the well-to-do, especially the corpor ate sector, widen the tax base to include the rural rich and professionals and clean up tax administration. The fetish with the "fiscal deficit", a product of a pre-Keynesian mindset, should be discarded. A bold programme to use surplus foodgrain stocks in a massive food-for-work programme, carried out in a decentralised manner through elected local bodies, can help build rural infrastructure and stimulate growth.

Greater public investment in infrastructure, health and education, financed primarily by better tax collection, together with elimination of hidden subsidies to the rich in the form of tax breaks and exemptions, and appropriate and judicious revision of user charges will lay the basis for a higher growth rate and more equitable and healthier growth process.

If the report is serious about achieving higher growth rates, it has only to look to countries such as China whose policies it approvingly cites elsewhere in the report. If China and South Korea report high growth rates, this is directly linked to their high savings rates, which in turn is linked to their focus on investment as against the conspicuous consumption that a transnational corporation-led assault on India's domestic market implies. It must also be added that China's achievements in growth and poverty reduction predate the current policy regime in China and that much of foreign investment in China is from overseas Chinese and not transnational monopolies.

Venkatesh Athreya is Professor and Head of the Department of Economics, Bharathidasan University, Tiruchirapalli.

1. This article deals largely with some of the recommendations of the EAC. Two things may be noted. First, there is considerable overlap (and identity of views) among the EAC Report, the Economic Survey and the Union Budget for 2001-2002. Second, cert ain aspects of the EAC recommendations have already been dealt with in

(March 2) and hence will not be discussed here.