The new CEA understands the perils of unbridled capitalism and will have a balanced view on reforms
The problem with critics, including economists, is that they tend to think they know better than the government about what has to be done. This is understandable as the role of these professionals is to offer suggestions for improvement, especially when there is little response from the other end. We tend to overlook that when we debate doing away with non-merit subsidies or enhancing infrastructure spending, these options are very well known to the government officials as well. They cannot do what we think they should be doing simply because of the structure that exists.
Also, we tend to forget at times that governments are not corporate entities. Companies work to make money and enhance shareholder value and have to be efficient. Governments know how to spend and are not good earners as public economics is all about doing social good. Therefore, when we view government expenditure in particular, we tend to look at it as a corporate and bring in efficiency issues when such authorities are never too concerned about the same. Governments come into being based on politics, and electoral victories are based on promises that cannot be reneged. Therefore, every policy action has to be viewed from this angle.
This said, the appointment of a new Chief Economic Advisor (CEA) obviously brings in hope considering that Dr Raghuram Rajan comes with an impeccable CV—right educational and professional qualifications. He has been close to the PM while offering special advice and has written a report on the financial structure for the country. There is an IMF stamp, which could be an irritant in operational economic life as anyone with a liberal economic mind could be branded as being an ambassador of the West. The issue is, can he make a difference?
His predecessor, Dr Kaushik Basu, is one of the most brilliant economists, who had his nose to the ground when talking of policy. But his open talk on the pace of reforms gathering steam after 2014 did not go down well and, while the Economic Survey has become more academic than a collection of data points, he tried to blend with what can be called real-economics. His analysis of how India’s rating should be seen on a relative scale did not quite catch the attention of the rating agencies which are still threatening a downgrade. His view on subsidy being limited has not really been accepted, as government expenditure is often more about politics than economics.
Can a new CEA actually make a difference in this setting? We had the FM give way to the PM, who spoke tough on how things will change. But nothing really has taken off and the Sensex yo-yoed for a few days. Now the new FM is talking of putting on track road and power projects and clearing papers. These are essential, but only peripheral changes that can change the sentiment for only a day or two. This is more a case of bringing in efficiency in the system rather than changing it.
Balancing economics with politics requires a different mindset. The idea is not to upset the applecart by voicing opposition to diesel or food subsidy. These issues are political compulsions and cannot be changed overnight and hence a practical approach is required. The existing structures are defective, but the alternatives are less attractive. The UID could never have worked in a country where the poor do not have electricity to swipe their cards. Cash transfers are excellent theoretical models, which have worked in Brazil, but given our population and extent of poverty, can never be a solution when our mentality is to game the system. Besides, we have started one white elephant without thinking of the linkages with prices—what happens if food prices, which are currently controlled through PDS, start shooting up in the market when cash transfers take place?
Therefore, can Dr Rajan actually change the way the polity works or get the parties who would oppose any reform on issues which can be linked with a constituency? Can we really bring down the level of priority sector lending of banks when we are all talking of inclusion? Can we raise prices of LPG? Can we change land laws to enable a power plant to come up? Can we privatise banks that easily? Banning futures trading in commodities is a rule today and a political rather than an economic decision. Can we change this?
Therefore, the CEA has to be malleable and try and work slowly to have new ideas accepted. In fact, more than new ideas, it is the implementation that is important. If strategies for doing something which required sensitive consensus can be executed without getting obtrusive, then things may work. The job is tough as it has to balance one’s own beliefs with the reality.
Even in the corporate world, we never have any bank economist backing high interest rates as it goes against the bank’s profitability or an India Inc economist argue for higher corporate tax rates for better distributive justice, as it is against the capitalist ethic. By this logic too, the CEA should be toeing the line and suggesting changes that are palatable and hopefully acceptable over time rather than being critical of what is being done. That sounds fair.
Therefore, we should not expect anything revolutionary. But, going by Dr Rajan’s own approach in the ‘one hundred small steps’, one can be sure that he would use gradualism to make things move the right way. Despite his IMF lineage, he understands the perils of unbridled capitalism and hence will have a more balanced view on reforms, which will help to bring about change.
The problem with critics, including economists, is that they tend to think they know better than the government about what has to be done. This is understandable as the role of these professionals is to offer suggestions for improvement, especially when there is little response from the other end. We tend to overlook that when we debate doing away with non-merit subsidies or enhancing infrastructure spending, these options are very well known to the government officials as well. They cannot do what we think they should be doing simply because of the structure that exists.
Also, we tend to forget at times that governments are not corporate entities. Companies work to make money and enhance shareholder value and have to be efficient. Governments know how to spend and are not good earners as public economics is all about doing social good. Therefore, when we view government expenditure in particular, we tend to look at it as a corporate and bring in efficiency issues when such authorities are never too concerned about the same. Governments come into being based on politics, and electoral victories are based on promises that cannot be reneged. Therefore, every policy action has to be viewed from this angle.
This said, the appointment of a new Chief Economic Advisor (CEA) obviously brings in hope considering that Dr Raghuram Rajan comes with an impeccable CV—right educational and professional qualifications. He has been close to the PM while offering special advice and has written a report on the financial structure for the country. There is an IMF stamp, which could be an irritant in operational economic life as anyone with a liberal economic mind could be branded as being an ambassador of the West. The issue is, can he make a difference?
His predecessor, Dr Kaushik Basu, is one of the most brilliant economists, who had his nose to the ground when talking of policy. But his open talk on the pace of reforms gathering steam after 2014 did not go down well and, while the Economic Survey has become more academic than a collection of data points, he tried to blend with what can be called real-economics. His analysis of how India’s rating should be seen on a relative scale did not quite catch the attention of the rating agencies which are still threatening a downgrade. His view on subsidy being limited has not really been accepted, as government expenditure is often more about politics than economics.
Can a new CEA actually make a difference in this setting? We had the FM give way to the PM, who spoke tough on how things will change. But nothing really has taken off and the Sensex yo-yoed for a few days. Now the new FM is talking of putting on track road and power projects and clearing papers. These are essential, but only peripheral changes that can change the sentiment for only a day or two. This is more a case of bringing in efficiency in the system rather than changing it.
Balancing economics with politics requires a different mindset. The idea is not to upset the applecart by voicing opposition to diesel or food subsidy. These issues are political compulsions and cannot be changed overnight and hence a practical approach is required. The existing structures are defective, but the alternatives are less attractive. The UID could never have worked in a country where the poor do not have electricity to swipe their cards. Cash transfers are excellent theoretical models, which have worked in Brazil, but given our population and extent of poverty, can never be a solution when our mentality is to game the system. Besides, we have started one white elephant without thinking of the linkages with prices—what happens if food prices, which are currently controlled through PDS, start shooting up in the market when cash transfers take place?
Therefore, can Dr Rajan actually change the way the polity works or get the parties who would oppose any reform on issues which can be linked with a constituency? Can we really bring down the level of priority sector lending of banks when we are all talking of inclusion? Can we raise prices of LPG? Can we change land laws to enable a power plant to come up? Can we privatise banks that easily? Banning futures trading in commodities is a rule today and a political rather than an economic decision. Can we change this?
Therefore, the CEA has to be malleable and try and work slowly to have new ideas accepted. In fact, more than new ideas, it is the implementation that is important. If strategies for doing something which required sensitive consensus can be executed without getting obtrusive, then things may work. The job is tough as it has to balance one’s own beliefs with the reality.
Even in the corporate world, we never have any bank economist backing high interest rates as it goes against the bank’s profitability or an India Inc economist argue for higher corporate tax rates for better distributive justice, as it is against the capitalist ethic. By this logic too, the CEA should be toeing the line and suggesting changes that are palatable and hopefully acceptable over time rather than being critical of what is being done. That sounds fair.
Therefore, we should not expect anything revolutionary. But, going by Dr Rajan’s own approach in the ‘one hundred small steps’, one can be sure that he would use gradualism to make things move the right way. Despite his IMF lineage, he understands the perils of unbridled capitalism and hence will have a more balanced view on reforms, which will help to bring about change.
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