With the installation of a new government at the Centre, the time is apposite to take stock of the macroeconomic policies and implementation of various state initiatives to improve the lot of the weakest segments of society. Inclusive growth is not a mere political slogan to assuage the vote banks, it is a serious effort to correct the extremes of inequalities and in the process strengthening the growth momentum. Inclu-sive growth is not only good politics but good economics. Put another way, it is the broad-basing of the economic growth process. The endeavour should not be on maximising the growth rate to the exclusion of everything else, as reflected by the “9 per cent growth fixation”. It is also vital to ensure an equitable distribution of income. The skill of economic management is in optimising the two objectives. 

Pattern of Investment and Growth

Sixty years ago, Jan Tinbergen, in his path-breaking analysis of the growth process, explained that the pattern of investment determines the pattern of output and the pattern of output, in turn, determines the pattern of distribution of income. Thus, given the objective of arriving at an appropriate distribution of income, it is essential to ensure the appropriate pattern of investment.

Assessing the Potential for Medium-Term Growth

It is true that after touching a growth rate of 9 per cent, in the recent period, the growth rate has dropped to 6-6.5 per cent. It will be otiose to project, with any element of precision the growth rate over the next year or two. As Dr  C  Rangarajan, the former Reserve Bank Governor, has explained, global factors and other domestic constraints have reduced the growth rate of the economy by 1.5-2 percentage points. Although the Indian economy has less interface with the global economy than many other countries, the fact remains that the global economy has had some impact on India. It will be unrealistic to expect that we can attain an average growth rate of 9 per cent over the next five years. The prospects for recovery of the global economy are uncertain and the green shoots can well turn out to be brown shoots, and there is a strong possibility that the global economy can experience a double-V slowdown which will then be spread over a number of years. It is sometimes argued that as a continental economy, India can divert the export sector output to the domestic sector, thereby minimising the extent of the impact of the slowdown; this is easier said than done.

We need to recognise that the economic and social infrastructure has been neglected for many years. Infrastructure investment has a long gestation lag; more particularly, social sector infrastructure has an even longer lag. Thus, calls from the cheer squads on the sidelines for an immediate reversion to the 9 per cent growth path lack credibility. More than the overall growth rate, emphasis has to be on the quality of the GDP. The thrust of policies, as outlined in the President’s address to Parliament, sets out the kind of policies which will be pursued during the next five years. Quite appropriately, increased outlays are envisaged for the economic and social infrastructure. Hence, the endeavour should be to gradually creep up the present growth rate of 6-6.5 per cent to 9 per cent by the end of the next five years.

It is fashionable to argue that state expenditure is wasteful. But, it is increasingly becoming clear that public-private partnerships can only function up to a point. Beyond that, there are areas, particularly in the social sector, where the state inevitably has to bear responsibility.

It has become fashionable to argue that government expenditure is wasteful, that the government should provide massive incentives to the corporate sector, which, according to this line of reasoning, is ex-definition more efficient and that a higher growth rate will automatically deliver a more equitable distribution of income. This is a false start. While it is by no means argued that it will be desirable to revert to the erstwhile dirigiste regime, it is increasingly becoming clear that public-private partnerships can only function up to a point and beyond that there are vast areas, particularly in the social sector infrastructure, where the state inevitably has to bear the major responsibility.

It is increasingly being recognised that schemes like the Mid-Day Meal Scheme are not mere populist measures but effective vehicles to uplift the very poor strata. Also the National Rural Employment Guarantee Act (NREGA) scheme has been particularly successful. Other flagship schemes dealing with education, health, housing, rural electrification, water supply, etc., just cannot be replicated by the private sector and the state necessarily has to partake in such investments.

It is readily conceded that there is a disconnect between education, employability and employment, and this requires a major overhauling of the education system to overcome the skill deprivation. Here again, the state just cannot renege on its responsibilities and hence there is need for large public sector outlays in these areas. Inclusive growth is not charity or a slogan but a vital input for sustaining long-term growth of the economy.

The Agony of the Fisc

For the past 50 years, India has had the unfortunate experience of a fisc running unbridled deficits with blatant use of the printing press. From the 1990s, efforts were made to contain the fiscal deficit, culminating in the Fiscal Responsibility and Budget Management Act, 2003 (FRBM). It is unfortunate that while efforts were made to contain the visible gross fiscal deficit, unashamed use was made of the quasi-fiscal deficit, which is nothing short of a fudge.

The global slowdown has resulted in the major industrial countries as also the emerging market economies consciously undertaking very large fiscal deficits. We are told by fiscal expansionists–who abound in India– that countries reputed for fiscal rectitude are undertaking free recourse to the printing press and that we should do likewise. It is conveniently forgotten that India has a very high government debt-GDP ratio of over 80 per cent and there is a strong possibility of an internal debt explosion.

While an external debt crisis invariably builds up gradually, an internal debt explosion takes place suddenly. The gross fiscal deficit of the Centre, states and the quasi-fiscal deficit is now estimated for the current year at a critically high level of 12-13 per cent of the GDP. Fiscal expansionists will no doubt take comfort from the fact that the government debt-GDP ratio in Ruritania is 200 per cent of GDP and as our own ratios are much lower, there is no anxiety in running larger fiscal deficits.

When there is talk about curtailing the fiscal deficit, the axe invariably falls on the social sector infrastructure. Fortunately, the present government is far too committed to giving a massive thrust to the social sector infrastructure. There is, however, a need for a quantum jump in governance standards and accountability, and active steps need to be taken to prevent leakages and diversion of funds to categories outside the target group.

Reducing the gross fiscal deficit by ruthlessly cutting expenditures on social sector infrastructure will damage the economy and is a sure way of causing a nationwide upheaval. As Arun Maira has poignantly said, “the knocking on car door windows will get louder”. Hence, the government’s tilt towards social sector expenditures, as outlined in the President’s address, deserves widespread support.

Rather than a total revocation of the FRBM targets or an unrealistic commitment to go back to the FRBM path in one or two years, the government will do well to fully get back to the FRBM targets over the next five years, but with a total assurance on transparency. It is surprising that persons of standing in public life recommend that the Reserve Bank’s internal reserves should be plundered to ensure that there is a sharp reduction in the gross fiscal deficit. Such clever financial engineering should be totally eschewed. Furthermore, the time has come to shift the indicator from the gross fiscal deficit to the public sector borrowing requirement (PSBR), which will once and for all get rid of the animal called the “quasi-fiscal deficit”.

It is time for policy-makers to introspect and to seriously assess whether the present structure of the fisc can claim to provide distributive justice. A dispassionate assessment will reveal that the burden sharing is extremely skewed. In the past decade, unconscionable tax exemptions have emerged. India is unique in that it has moved from a brutal income tax regime to one of the most plutocratic regimes wherein large tracts of upper income groups are totally exempt from tax.

The Indian system is distinguished by the fact that dividends received by individuals are totally exempt from income tax without any limit. In the upshot, there are persons who receive hundreds of billions in dividend income and yet are free from tax.

Similarly, there are exemptions without limits for long-term capital gains from the stock market, gifts and wealth in the form of financial assets. The argument is that as corporates have paid tax, taxing dividend income of individuals will tantamount to double taxation. This is a non sequitur. It is a basic principle of public finance that corporates and individuals are distinct separate entities and therefore, have to be taxed separately.

These exemptions are justified on the ground that they foster the development of the equity market. While this is laudable is it necessary to give such blatant exemptions without any limits? Providing unlimited exemptions are not reflective of a just society. Rather, it reflects the Thrasymachus doctrine that “justice is the interest of the stronger”, which is rejected in Plato’s Republic. The government should seriously consider allowing these exemptions subject to very reasonable limits. Reputed economists and direct tax experts have recommended the curtailment of unlimited tax exemptions and it is time that the government faces up to this issue of distributive justice.

It is readily conceded that there is a disconnect between education, employability and employment, and this requires a major overhauling of the education system to overcome the existing skill deprivation

Rather than resorting to jiggery-pokery of financial engineering, it will be preferable to commit that the present gross fiscal deficit of the Centre and states of 12-13 per cent of GDP (inclusive of the quasi-fiscal deficit) will be reduced to 6 percent of the GDP over a period of five years but with total transparency.

As Planning Commission Deputy Chairman, Dr. Montek Singh Ahluwalia has rightly said: “We should make up our mind what we want the fiscal deficit to be five years from now and can we bring it down over the next five years to reach the target debt-GDP ratio. It will be desirable if the government debt-GDP ratio were to come down from the present level of 81 per cent of the GDP to say 75 per cent of the GDP over the next five years. What is more important is the trend that counts. If public perception is that this ratio is going down and fiscal deficit is going down, the concern of fiscal prudence will be met.”

In the recent period, there have been very strong monetary-fiscal stimuli. As Dr YV Reddy aptly puts it “the challenge before the authorities is unwinding the packages in due course. Otherwise, vested interests will develop in some stimulus packages and that will add to the inflationary pressures. You cannot do recovery at any cost. Your recovery has to be at an appropriate price”.

Overriding Concern of Inflation:

If we have a serious concern about the poor, there is need for an unswerving policy on inflation control. Nothing hurts the poor more than inflation. There are serious problems of the appropriate index for judging the true inflation rate as it affects the poor.

There is a need for an in-depth examination of the appropriate measure of inflation. Given the importance of this issue, it will be only appropriate if the government were to set up an independent high-powered National Inflation Comm-ission which, apart from determining the appropriate price index, submits periodic reports on inflationary trends and more importantly inflationary expectations to enable the government-RBI to take pre-emptive measures to prevent inflation from attaining intolerable levels. It is pertinent to mention that the leading industry body, Assocham, has also recommended the setting up of such a commission.

This is a matter of urgency, as there are erroneous views that the inflation problem has been licked. Serious commitment by the government on inflation will only be the barometer for judging whether we are seriously committed to a ‘just society’.