By Ashok V Desai
The finance ministry is rejuvenating itself. It has removed budgets before 1997 from its website. Its Economic Survey has not yet met the same fate; one can still read Surveys right back to 1958. That was the time when ambitious Nehru wanted to give all possible resources to the five-year plan and develop the country as fast as possible. The finance ministry was torn between his ambition and the modest government revenue, even after reckoning the aid that the US poured into India. All this could not be explained in the Budget speech; so IG Patel wrote up a brief review of the economy and tagged it to the budget. Soon, the spending ministries also wanted to publicise what they were doing, and rather than let each of them issue its own volume, the finance ministry let them each contribute a chapter to the Economic Survey. When I joined the finance ministry in 1991, I found that the Survey was full of dull chapters from the ministries saying that this expenditure went up and that went down. So I added a new first volume to explain how the economy had run into a crisis and what we were trying to do to rescue it. Now we have another chief economic advisor in Arvind Subramanian with a suitably high level of ambition. He has written a first volume outlining what ails the economy and what must be done to heal it.
He begins with the proposition that there are too many inefficient firms because they are not sold off, dismantled or liquidated as they would in a well run capitalist economy. He gives convincing evidence: the average Indian firm grows much less with age than in the US or Mexico, and firms’ growth rate has fallen over time. Banks’ bad debts and modest, falling rates of return on assets tell the same story. The solution tried out in the 1990s reforms of debt recovery tribunals has failed. He gives five possible solutions which suggest he is dithering; the only effective solution is permitting, encouraging and promoting exit of failed firms.
JAM – Jan Dhan, Aadhaar and mobile – trinity is a favourite of the CEA. An Aadhaar number gives an Indian a unique identity, a mobile is an instant way of reaching him and Jan Dhan is the name the BJP prefers to give subsidies. Mobiles are also a way of transferring money, and are extensively so used in Kenya. Almost 80 percent of Indians have an Aadhaar number; the number of issued mobile numbers issued exceeds the population. But Jan Dhan does not reach even 200 million people. Basically, safe money transfer requires bank accounts, and over a half of the population remains unbanked. That is because banks do not like sending money through mobiles; they prefer human transfer agents, and their favourite bank correspondents remain thin on the ground. But the CEA reckons that JAM significantly reduced corruption in LPG distribution and MGNREGA.
Agriculture is the industry that gets enormous subsidies and helpful government interventions; consequently, it is one of our most inefficient industries. The Economic Survey documents this. Between 2002 and 2008, India consumed over 109 cubic kilometers of water. As a result, the water table is going down a foot a year. The Survey proposes suggests basing subsidies on social instead of private returns. But that will not stop farmers from using excessive water and fertiliser or burning crops. It also does an analysis of fertiliser subsidies with shocking results: a quarter of urea subsidy goes to inefficient producers, two-fifths of the rest goes to buyers other than farmers or importers abroad, and a quarter of the rest goes to rich farmers. Policy could hardly get more perverse. The Survey suggests decanalising imports to increase competition, and giving producers subsidy in proportion to the nutrient content of fertilizers – essentially, a negative excise duty.
The Survey shows how liberally the finance minister subsidises the rich. There are so many subsidies on savings and on interest, which go disproportionately to the rich. It deplores the low tax on gold purchases, forgetting how easy it is not to pay any tax on it if one buys it under the counter.
The Survey asks whether India taxes more or less than comparable countries. The ratios of India’s tax revenue as well as expenditure to GDP are lower than those of similar poor countries. Its tax ratio is not lower than that of countries with similar income per head. But it is lower than that of democracies with similar income. Its direct taxes are as high as for comparable countries; it is indirect taxes that are lower. It recommends that subsidies should be taken away from the rich, and that property should be taxed more heavily.
The Survey documents effects of legal hassles related to employment of workers in registered firms. It has led to massive substitution of contract workers for regular workers, moved employment to unregistered firms, and destroyed India’s international competitiveness in labour-intensive industries such as garments.
Finally, it documents another major reason for loss of competitiveness: the high cost of electric power. It suggests that cross-subsidy to poor power consumers should be financed by overcharging rich individual consumers; industrial consumers should be charged the average cost and exempted from having to subsidize anyone.
Altogether, this Survey is the first official compendium of possible economic reforms since the Economic Survey of 1992; and it is of superb quality. The new CEA has more than repaid the cost of his import from America. All we need now is a government to implement his ideas.