Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.” — Ayn Rand
Evaluating the performance of any government in its first year of rule is normally based on the expectations that were generated, either rationally or otherwise, when it had taken over. If the expectations were too high, the assessment could be overtly critical, if not cynical. A government can only play its role in resuscitating the economy and cannot be the be-all and end-all of the prescription.
The role of the State in a market-oriented economy like ours is to create an enabling environment in two ways. This can be done by formulating the right set of policies to encourage investment, which also includes provision of an administrative set-up that eases the process of doing business. The second way is to provide the right fiscal signals on both the revenue and expenditure fronts, along with tax reforms and directed expenditure that enhance growth. In terms of these measures, the current NDA government has performed commendably, achieving what the State can practically do.
At the same time there are limitations to what any government can deliver and hence, finding statistical correlations — either positive or negative — though an interesting exercise, can lead to erroneous readings.
In terms of policies, the government has done everything right. It has cleared projects that were stalled for the last few years. While the previous government did this too, macroeconomic conditions have to change significantly to drive projects full steam. Second, successful coal auctions are important as they solve two bottlenecks — issues relating to mining and power generation — in one stroke.
Third, labour laws in terms of administrative issues have been tackled through changes in regulation to ensure employees are not harassed.
Fourthly, the issue of land, though still far from being resolved, is at the stage of active debate where a reconciliation may be expected in time from the various constituents. Fifth, the passage of the bills for getting foreign direct investments (FDI) in railway infrastructure, defence equipment and enhanced levels in insurance was a major step in the last year. Finally, signing of the pact between the finance ministry and the Reserve Bank of India on the conduct of monetary policy means there will now be less controversy surrounding the motivations of interest rate policy.
The government’s ability to contribute to growth is through the Budget. The July FY15 Budget lacked any clear avenues of spending; it was more a case of putting the house in order. But the FY16 Budget shows more spirit in terms of making the expenditure more effective, with the focus on spending on projects. Given that the Finance Commission has provided for higher allocations to the states, this implies that the Centre has kept only some flagship programmes within its purview — like the NREGA — and passed on the social welfare programmes to the states. This makes sense as most of what happens at the ground level has to come from the states and further, from the urban local bodies and panchayats. The real test is whether the government would be able to adhere to its capital expenditure targets. Quite significantly, the fiscal deficit for the next year is pegged at a pragmatic 3.9 per cent of the GDP, which means there is scope for some stimulus in these numbers.
Caution, however, has to be exercised on two fronts before showering praises. First, the concept of Make in India is a broad theme the government is working with. While there have been debates on what this initiative means, the fact is that this theme or slogan is a broadsheet for attaining goals across sectors. The steps the government has taken to ensure ease of doing business and enable reforms should help realise this dream. But there are no specific allocations in terms of money, incentives or reforms to make this broadsheet happen and hence, the two cannot be linked. The response has to come from the private sector.
Second, in terms of economic numbers serendipity has contributed to better performance. The revision of the GDP methodology has not found any takers, causing some embarrassment for the government, when we argue now that the economy is better off, and was so, even in FY14, even though that was probably one of the lowest points in our contemporary economic history. Inflation has cooled down not because of higher interest rates or productivity but a chance crash in global oil prices and a high base effect for agricultural commodities that now manifest in lower prices. Lower prices of onions and tomatoes —high prices of which, in the past, were the culprits for high inflation — cannot be credited to any authority.
Similarly, a stronger current account deficit is the result of a drop in oil prices leading to a fall in imports. But the fact that exports have also declined means this is more of a statistical phenomenon rather than economies in use of imports, and a definite push or enhanced demand for exports. Higher forex reserves are due to excessive liquidity in the market due to quantitative easing programmes all over, which have helped emerging markets, including India.
Speaking dispassionately, the government has done very well on what may be practically expected from it. Maintaining focus on incomplete themes that require legislative acquiescence, reinforcing an efficient bureaucracy and spending appropriately on capital projects will, more realistically, embellish the performance parameters in FY16.
- See more at: http://www.businessworld.in/news/economy/india/well-begun-is-more-than-half-done/1852323/page-1.html#sthash.vlsAAWmZ.dpuf
Evaluating the performance of any government in its first year of rule is normally based on the expectations that were generated, either rationally or otherwise, when it had taken over. If the expectations were too high, the assessment could be overtly critical, if not cynical. A government can only play its role in resuscitating the economy and cannot be the be-all and end-all of the prescription.
The role of the State in a market-oriented economy like ours is to create an enabling environment in two ways. This can be done by formulating the right set of policies to encourage investment, which also includes provision of an administrative set-up that eases the process of doing business. The second way is to provide the right fiscal signals on both the revenue and expenditure fronts, along with tax reforms and directed expenditure that enhance growth. In terms of these measures, the current NDA government has performed commendably, achieving what the State can practically do.
At the same time there are limitations to what any government can deliver and hence, finding statistical correlations — either positive or negative — though an interesting exercise, can lead to erroneous readings.
In terms of policies, the government has done everything right. It has cleared projects that were stalled for the last few years. While the previous government did this too, macroeconomic conditions have to change significantly to drive projects full steam. Second, successful coal auctions are important as they solve two bottlenecks — issues relating to mining and power generation — in one stroke.
Third, labour laws in terms of administrative issues have been tackled through changes in regulation to ensure employees are not harassed.
Fourthly, the issue of land, though still far from being resolved, is at the stage of active debate where a reconciliation may be expected in time from the various constituents. Fifth, the passage of the bills for getting foreign direct investments (FDI) in railway infrastructure, defence equipment and enhanced levels in insurance was a major step in the last year. Finally, signing of the pact between the finance ministry and the Reserve Bank of India on the conduct of monetary policy means there will now be less controversy surrounding the motivations of interest rate policy.
The government’s ability to contribute to growth is through the Budget. The July FY15 Budget lacked any clear avenues of spending; it was more a case of putting the house in order. But the FY16 Budget shows more spirit in terms of making the expenditure more effective, with the focus on spending on projects. Given that the Finance Commission has provided for higher allocations to the states, this implies that the Centre has kept only some flagship programmes within its purview — like the NREGA — and passed on the social welfare programmes to the states. This makes sense as most of what happens at the ground level has to come from the states and further, from the urban local bodies and panchayats. The real test is whether the government would be able to adhere to its capital expenditure targets. Quite significantly, the fiscal deficit for the next year is pegged at a pragmatic 3.9 per cent of the GDP, which means there is scope for some stimulus in these numbers.
Caution, however, has to be exercised on two fronts before showering praises. First, the concept of Make in India is a broad theme the government is working with. While there have been debates on what this initiative means, the fact is that this theme or slogan is a broadsheet for attaining goals across sectors. The steps the government has taken to ensure ease of doing business and enable reforms should help realise this dream. But there are no specific allocations in terms of money, incentives or reforms to make this broadsheet happen and hence, the two cannot be linked. The response has to come from the private sector.
Second, in terms of economic numbers serendipity has contributed to better performance. The revision of the GDP methodology has not found any takers, causing some embarrassment for the government, when we argue now that the economy is better off, and was so, even in FY14, even though that was probably one of the lowest points in our contemporary economic history. Inflation has cooled down not because of higher interest rates or productivity but a chance crash in global oil prices and a high base effect for agricultural commodities that now manifest in lower prices. Lower prices of onions and tomatoes —high prices of which, in the past, were the culprits for high inflation — cannot be credited to any authority.
Similarly, a stronger current account deficit is the result of a drop in oil prices leading to a fall in imports. But the fact that exports have also declined means this is more of a statistical phenomenon rather than economies in use of imports, and a definite push or enhanced demand for exports. Higher forex reserves are due to excessive liquidity in the market due to quantitative easing programmes all over, which have helped emerging markets, including India.
Speaking dispassionately, the government has done very well on what may be practically expected from it. Maintaining focus on incomplete themes that require legislative acquiescence, reinforcing an efficient bureaucracy and spending appropriately on capital projects will, more realistically, embellish the performance parameters in FY16.
- See more at: http://www.businessworld.in/news/economy/india/well-begun-is-more-than-half-done/1852323/page-1.html#sthash.vlsAAWmZ.dpuf
No comments:
Post a Comment