Shed The Baggage - Focus on reform and targeted social spending.

The prime minister’s remark last week about inflation threatening growth made the bourses bearish. The latest impressive growth projection for 2010-11 hasn’t lifted the gloom much. Led by farm output’s spirited show, growth’s been pegged at 8.6% for the current fiscal. Manufacturing is also wind in the economy’s sails, expanding by an estimated 8.8%. Clearly, periodic statistical cheer alone can’t buoy investor and business confidence, flagging of late. With the budget coming up, the government has a chance to initiate big ticket reforms kept in abeyance. Correcting the economy’s structural anomalies through a second wave of reforms is the game changer India needs.

    There are inflationary pressures on the economy not least due to northbound international crude prices. But the real bad news on the domestic price front still concerns high food inflation. No wonder the RBI’s last round of relatively modest rate hikes belied expectations of hawkish action. It signalled the limits to what monetary policy can do, and that inflation and growth both need watching. As economist Raghuram Rajan has suggested, we should focus on trimming subsidies, cut government demand, contain the size of existing social schemes and hold back on new ones. While further monetary hardening will hit business and hence economic expansion, reform coupled with belt-tightening can curb inflation through supply side innovation and fiscal consolidation. 

    Power, fuel or fertilisers, it’s no secret India’s subsidy architecture promotes fiscal recklessness, waste and corruption to a greater degree than it does social good. Artificially capped kerosene and diesel prices, for instance, enrich and embolden a politically coddled fuel mafia. They also encourage consumers who can afford petrol to use diesel, which has negative economic and environmental costs. It’s imperative as well to plug leakages via which social benefits – say, NREG funds or poor-directed food – get diverted. Our focus must be on PDS’s revamp, introduction of smarter delivery channels and linking of social benefits to extended UID and banking cover for better targeting. 

    Undeniably, developing India needs firm social sector commitments. But so-called redistributive disbursal of state largesse largely misdirects resources that are better spent on building schools, hospitals, irrigation, roads, ports, power grids and the like. State-sponsored employment guarantee compensates for neither higher farm incomes nor better-paying factory jobs. So, there’s no avoiding agriculture’s reform to boost productivity and supply in a country with massive and growing food needs. Ditto for framing industry-friendly labour rules. Centre-state social spending, more than doubling between 2004-05 and 2009-10, needs funding less by borrowing – which chokes credit to the private sector – than revenues efficiently mobilised. This means tax reform, price decontrols and fasttracked disinvestment. The less government hampers or presides over economic activity, the more it can fulfil its real brief: delivering education, health, infrastructure and equal opportunities.

TOI, 8 feb