Economic Survey 2015-16

Sophisticated neoliberalism

Print edition : April 01, 2016

LPG cylinders being loaded on to a truck outside a depot in New Delhi on February 29. The Economic Survey calls for ending subsidies on LPG, among others. Photo: SAJJAD HUSSAIN/AFP

The second phase of Mission Indradhanush, the Centre's immunisation programme, kicked off on October 7, 2015. The Economic Survey argues for greater investment in maternal and child health. Photo: R. Ragu

Economic Survey 2015-16 covers vast ground but its premises are essentially neoliberal, marked by an overwhelming focus on fiscal consolidation and an implicit refusal to consider alternatives.

Economic Survey 2015-16 bears the stamp of its main author, Arvind Subramanian, a distinguished academic economist who has donned the role of Chief Economic Adviser to the Union Finance Ministry with great ease and sophistication. It is a veritable tour de force that covers a lot of ground and seeks boldly to defend the economic policies of the government with a level of sophistication that has not been a feature of the government’s political spokespersons and sundry Ministers.

The Survey is in two volumes, with an additional volume that provides both a “Technical Appendix” that sets out the various economic models used and a “Statistical Appendix” that provides, as is usually the case, a wealth of information on the Indian economy with international data to give a comparative picture.

Between them, the first and second volumes cover a vast territory. The second volume is, in terms of its structure and chapter headings, the more conventional Economic Survey that most people who read it every year are familiar with. It provides a wealth of information and a detailed treatment of issues relating to the Indian economy and is a must-read for any serious student of the Indian economy. It also deals with issues of climate change.

In this review, however, we shall focus on the first volume, which raises some key policy issues in interesting ways and makes important points, though ultimately within a neoliberal framework as far as the emphasis on fiscal consolidation is concerned. The second volume will be, so to speak, “taken as read”, for the simple reason that it would not be possible to cover it in a manner that does justice to it within a short article. To some extent, this is also true for the first volume, but given its rather novel way of raising key issues, it would be worthwhile trying to do a brief review of it.

The opening chapter of the first volume of the Survey, titled “Economic Outlook, Prospects, and Policy Challenges”, provides an overview of the present state of the economy, the global context which plays an important role in influencing its prospects and the key policy challenges as seen from the viewpoint of the author. It describes the international economic environment as one of “unusual volatility” and refers to “faltering global recovery”, and claims that against this “gloomy landscape, India stands out as a haven of stability and an outpost of opportunity”. It hails India’s macroeconomic stability as being founded on the government’s commitment to fiscal consolidation and low inflation.

It cautions, however, that with the correlation between India’s growth and that of the world economy rapidly becoming stronger, the growth of the Indian economy could be seriously negatively affected if the world economy weakens, or worse, lurches into a crisis. After identifying several challenges, of which the problem of “exit” of (inefficient) players is seen as the key, the chapter ends on a note of optimism, claiming that India is poised for growth with a long-term growth potential of between 8 and 10 per cent per annum.

The second chapter invokes the “ chakravyuha” legend from the Mahabharata, using it as an analogy to illustrate the dangers of tactics that ease entry but fail to provide for exit, to argue that over the last several decades India has eased entry into economic activities for new players but the challenge now is to provide for an orderly exit of inefficient players and activities and strategies that have outlived their relevance and usefulness.

It argues that while a market economy requires easy entry for new players so that competition can allocate resources efficiently, it requires mechanisms for exit so that resources can be retrieved from inefficient uses and redirected toward efficient use. It speaks of the Indian economy having moved from “socialism with restricted entry to ‘marketism’ without exit”. It suggests a number of measures to address the problem of exit of inefficient players—a favourite target here is the set of public sector banks, damned as “inefficient”— and places great faith in particular on “technology”, primarily the tools of information technology, as exemplified by the Survey’s favourite trinity—Jan Dhan, Aadhaar and the mobile, or JAM for short.

Interestingly, while discussing privatisation, which it strongly favours, the Survey recognises the concern that privatisation may mean weakening of the policy of reservation as an instrument of social justice, and the need for credibly ensuring that such policies will be maintained in order to create wider acceptability for privatisation.

The theme of the third chapter is that “large-scale, technology-enabled, real-time direct benefit transfers can improve the economic lives of India’s poor, and the JAM trinity can help government implement them”. In its eagerness to push this trinity, the narrative tends to underplay, though not altogether ignore, serious problems and bottlenecks as well as negative fallouts in this process. The fourth chapter, which focusses on agriculture, argues for greater crop diversification and a focus on pulses. It also emphasises the need to improve productivity in agriculture rapidly and in a manner that recognises the importance of economising on land and water, especially in the context of climate change and the need for industrialisation. It notes the importance of strengthening the national agricultural research system and the extension system and brings home the point that India lags far behind several other developing countries in terms of expenditure on agriculture research and development as a share of the gross domestic product (GDP) in agriculture.

For instance, in 2010 this figure was 31 per cent for India but as high as 65 per cent for China, 49 per cent for Thailand, 38 per cent for Bangladesh, 37 per cent for Indonesia and a whopping 97 per cent for Malaysia. The Survey argues for greater market integration across India in agriculture. Interestingly, while noting the potential of genetically modified organisms (GMOs), the Survey also strikes a note of caution, stating that there are “ good reasons for some of the public apprehensions on GMOs. Therefore, the regulatory process in India needs to evolve so as to address the concerns in a way that does not come in the way of adapting high-yielding technologies and rapidly moving towards the world’s agro-technological frontier.

In a chapter titled “Mother and Child”, the Survey argues for greater investment in maternal and child health. It notes that “relatively low-cost maternal and early-life health and nutrition programmes offer very high returns on investment”. It points out that despite recent progress, “ India generally underperforms on maternal and child health indicators: pre-pregnancy weights and weight-gain during pregnancy are both low. India is already halfway through its demographic dividend, and taking full advantage requires a healthy and educated population. Making these investments in maternal nutrition and sanitation, and enhancing their effectiveness by working to change social norms, can help India exploit this window.

Inadequate allocations

These facts are well recognised, and while it may be some consolation that the Survey reiterates them, the fact also remains that these pious pronouncements are never matched by corresponding budgetary allocations. Witness, for instance, Budget 2016-17 presented in Parliament just a couple of days after the Survey was tabled. In the budget, the allocation for the Integrated child Development Services (ICDS) scheme has been cut, and the allocation for the Ministry of Women and Child Development actually shows a decline from the Revised Estimates for 2015-16. After discussing the issue of investment in maternal and child health, the Survey moves to the next chapter of the first volume, provocatively titled “Bounties for the Well Off”, to a discussion of who really benefits the most from some key subsidies. It argues that tax incentives for saving benefit largely those in the top 1 to 2 per cent of the income distribution and that India “should move, in a phased manner, to the EET (exempt at entry, exempt interest and tax withdrawal) method of taxation of savings”.

It notes that gold is taxed at very low rates and that 98 per cent of the implicit subsidy (resulting from the difference of roughly 25 percentage points between an average tax rate on gold as against all other commodities) accrues to those in the top three deciles of the population. It estimates that about Rs.1 lakh crore goes as subsidies to the top seven deciles—which the Survey terms as “the rich”—on account of small savings schemes and subsidies on gold, electricity, petrol, diesel, kerosene, aviation turbine fuel, LPG and railway fares, and calls for ending them. The Survey moves on in the seventh chapter to the issue of fiscal capacity of the state in terms of both taxation and spending.

It recognises that India underspends and is under-taxed if one were to use simple tax-GDP ratios and government expenditure to GDP ratios, but argues that when India’s current level of development is taken into account, India is not an outlier in this regard. The one concession it makes is that the proportion of India’s adult population that pays individual income tax is far too small at 5.5 per cent as against the 23 per cent that it considers desirable. It takes the standpoint that “ if spending is about the entitlements of citizenship in a democracy, taxation is about the obligations of citizenship”. It views “democracy” as a contract between the state and its citizens.

Set within this essentially liberal framework, the discussion on taxation and fiscal capacity in the Survey concludes that the state, in order to prevent “the middle class” from exiting the state, must first focus on providing public goods that enhance its credibility before it embarks on redistribution through taxation. It quotes the experience of “Western democracies” in support of this view.

The point that is missed out is that unlike the establishment of capitalism through primitive accumulation involving the separation of the primary producer from the means of production in much of the so-called Western world, in which incidentally colonial plunder also played a key role, there have been other trajectories of development accompanied by radical redistribution of productive assets in an egalitarian direction.

Undefined middle class

The other point is that “the middle class” remains an undefined term in this discourse. Nevertheless, it is to be noted that the Survey does argue for “reasonable taxation of the better-off, regardless of where they get their income from—industry, services, real estate, or agriculture”. It also argues that “the government’s spending priorities must include essential services that all citizens consume: public infrastructure, law and order, less pollution and congestion, etc”.

It makes a case for greater reliance on property taxation, especially in the context of enhancing the fiscal capacity of local governments. In a chapter on multilateral trade agreements and free trade agreements, the Survey makes the plea that “analytical and other preparatory work must begin in earnest to prepare India for a mega-regional world”. There are also chapters on reforming the fertilizer sector and on India’s labour markets. The final chapter deals with power sector reforms.

Overall, both the volumes read well and are carefully argued for the most part. But their premises remain essentially neoliberal, with an overwhelming focus on fiscal consolidation and an implicit refusal to consider scenarios where the fiscal constraint need not be so compelling. The latter would require some degree of regulation of both international trade and policies concerning the flow of capital across country borders.

There is also an implicit conviction (occasionally made explicit in passing) that the question of redistribution of productive assets, especially comprehensive land reforms, is irrelevant to a discussion of the welfare implications of India’s economy.

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