Wednesday, 25 June 2014

Planning Commission should go, but its expertise should be used

This piece was published in That heading doesn't capture what I am saying- that it should go forever but giving the link anyway.
 So, for the first time since 1950, the country does not have a Planning Commission. The fact that the rooms of Yojana Bhavan, the building that houses this ode to a socialist economy, are still populated does not mean anything.
Technically, the Planning Commission is the deputy secretary and the various members. The denizens of Yojana Bhavan are merely the secretariat to the Commission. Technically, they are all jobless, as of now.
The Narendra Modi government may not have formally rescinded the March 1950 cabinet resolution setting up the Planning Commission, but by not naming a new commission, even a month after taking over, it has indicated that it has little use for the body that dominated the management of the economy for 64 years. Already one of its central functions – Plan allocations in the budget -- is being handled directly by the finance ministry. It was rather ridiculous for one body to sit and determine how much funds ministries and states should get and what they should spend it on.
This rather dismissive approach is not new. It was expressed in far more contemptuous terms by Rajiv Gandhi, who ridiculed the Commission as a bunch of jokers. But he stopped short of dismantling it. None of the post-1991 governments too questioned the Commission’s relevance. The closest anyone came to it was Bharatiya Janata Party (BJP) which, in its manifesto of 1998, said `the Planning Commission will be reformed and reorganized in light of the changing developmental needs of our country’. However, the revamp plan drawn up by Jaswant Singh, the deputy chairman during its 13-month first tenure, only attempted to expand the Commission’s empire. Subsequent BJP manifestos remained silent on this matter.
But the idea that the Commission needs to be recast in a different mould stayed. Singh’s immediate successor, K. C. Pant (in the National Democratic Alliance government of 1999), roped in private consulting firms to suggest what the Commission’s role should be. In the United Progressive Alliance’s (UPA) second stint, Manmohan Singh tasked member Arun Maira to suggest how to overhaul the Planning Commission as a Systems Reform Commission. We never got to know what this meant, though Maira has been vocal in complaining that nothing got done. Nevertheless, the proposed name change itself was a major gain; it showed growing acceptance of the irrelevance of the Planning Commission in a liberalised era.
So, the Modi government’s failure to name a new Commission is welcome. In fact, it is high time the cabinet passes a resolution quashing the 1950 one.
But should all the economist-bureaucrats in Yojana Bhavan be given a golden handshake and the piece of prime real estate be turned into a money-spinning office complex? (Incidentally, this was a suggestion given in the late nineties by a Congress ideologue before he took a  ideological left turn.)
Perhaps not. Over the six decades of economic management, the Planning Commission has built up some expertise and resources which could be put to good use. What could these be? Here are four possibilities:
* It will be silly to assume that economic policy making will be done in a vacuum, without any forecasts and projections on macro-economic indicators. Sure, there’s a chief economic advisor and a planning unit in the finance ministry but that need not preclude an independent think tank kind of body that will monitor economic developments, assess their impact on India and provide intellectual inputs for economic policy. During Pant’s stint as deputy chairman, a Delhi-based consulting firm ACOR had suggested something on these lines, comprised of experts on contractual appointments. It had said this could be called the Planning Commission Policy Research Institute or the Strategy Research Institute of the Planning Commission. The Planning Commission nomenclature will have to be dropped, though.
*  Why not, as former minister, Arun Shourie, suggested in a recent newspaper interview, replace the Planning Commission with a Reforms Commission? There is a slew of second generation reforms that are needed; there could be many more that are not evident right now. A Reforms Commission can suggest how to sequence reforms, how to implement them and also help in the political management of reforms. It could be something similar to the Productivity Commission of Australia which its website describes as the `government's principal advisory body on all aspects of microeconomic reform’. Its recommendations, which cover both private and public sector, are based on extensive research and public enquiries.
* Another option could be to have something like the Congressional Budget Office of the United States. The CBO, though it is part of the Congress system, provides independent assessment and analyses of the economic and other costs of every legislation. Its recommendations are taken with utmost seriousness. This is something that is completely missing in India. There is hardly any impact analysis of laws and the result is that the government is ill-prepared for the costs – economic and non-economic - that surface at the time of implementation. India sorely needs a  body that assesses the impact of our multiple regulations and laws both before they are passed and periodically when they are implemented.
* We have seen enough examples of inter-ministerial wrangles making for messy policy, policy paralysis and implementation problems. The Prime Minister’s Office is supposed to sort these issues out but sometimes it may need some expert inputs to work out a compromise. For years, the Planning Commission has played a coordinating role between ministries as well as between the Centre and the states. Why not institutionalise this in a new organization?
A body that replaces the Planning Commission can do any one of these or a combination of these. The basic idea should be that the idea of central planning is anachronistic and contradicts the spirit of a liberal economic order. It’s time to make a clean break from the past.

Tuesday, 17 June 2014

Some bad days are needed for good times to roll

This was published in Nai Dunia, 17 June 2014.
Giving below the English draft that I sent.

Prime Minister Narendra Modi’s remarks in Goa on Saturday that tough economic measures will have to be taken to put the economy back on track have invited predictable jokes about achche din and bure din. Perhaps the BJP brought these jokes upon itself by overdoing the achche din aane vaale hain message during the elections, but this is neither the time nor the subject for jokes.
Because the simple truth is that the economy is in a bad state and government finances are in even worse shape. It is true that the UPA government was not fiscally responsible. Former finance minister P. Chidambaram may have kept the fiscal deficit at 4.6% of GDP, but this has been done by postponing some expenditure (which the new government will have to bear) and getting some revenue in advance. So the Modi government’s first economic step will have to be to restore some order to government finances. Sound government finances are the foundation of a robust economy.
The other major problem facing the government is that of inflation, which is still not in the comfort zone. The Reserve Bank of India governor Raghuram Rajan has moderated his hawkish stand on interest rates to give the new government time to address the structural issues that are fuelling inflation. The government needs to get cracking on these to create an environment where he can bring down interest rates. 
So what are the tough measures that Modi is planning? It is clear by now that the only person who knows Modi’s mind is Modi himself, but if he is really serious about doing what he has indicated, these are some of the steps he could – and should - take.
One, on the revenue side, increase in tax exemption limits may not happen (though media reports say this is expected). The inflation monster has not been tamed yet and giving people more money to spend without addressing supply shortages and bottlenecks will not be a wise step. The economy certainly needs a demand push, but this has to be calibrated. Besides, an increase in the exemption limit to Rs 3 lakh is expected to cost the exchequer Rs 60,000 crore a year, according to the finance ministry. This is certainly not the time for such giveaways. The corporate sector, too, will have to reconcile itself to having some excise cuts given by the previous government taken away.
Two, on the expenditure side, there will be a drastic overhaul of the subsidy regime. The President’s address and Modi’s own statements during the elections show a welcome emphasis on infrastructure. This will mean that the bias towards revenue expenditure – which is 86% of total expenditure – will be corrected and capital expenditure will get the focus it sorely needs.
But revenue expenditure has one item that is committed expenditure – interest payments, which absorb over 40% of tax revenues. Defence and salaries too cannot be touched. That leaves subsidies, which eat up 25% of tax revenues. Interest payments do not affect people’s budgets directly, so it can be safe to assume that when Modi speaks of tough measures, he intends to cut the subsidy burden significantly. This is something the economy has been crying out for.
Subsidy reform will not mean withdrawing all subsidies or drastically cutting allocations across the board. What it will mean is better targeting, which means only the genuinely needy will get subsidies and a lot or undeserving people will not.
If Modi is really serious about subsidy reform, then the cap on subsidised LPG cylinders should go back to nine. That will not only result in a saving of nearly Rs 4000 crore, but it will still cover 89% of the population.
His government should also allow decontrol of diesel prices or at least allow price hikes. This will have an immediate inflationary effect, but that will fade out in time. Importantly, it will also moderate wasteful consumption and bring enormous savings to the government.
A far more tricky issue will be tackling the food subsidy, the biggest subsidy item at nearly 40% of the total bill. The BJP backed the National Food Security Act (NFSA) which could lead to the food subsidy bill ballooning. But this problem will have to be tackled. One way to bring down the food subsidy bill would be to bring down the cost of procuring foodgrains. This could mean not allowing huge increases in the minimum support price. There are other ways to reduce this cost – reforming the procurement mechanism and eliminating inefficiencies but that will be a long-drawn out process. The farmers will be up in arms, but the government will have to remain firm. 
There are a whole lot of other tough measures that the economy needs but these are the ones that will bite the people. That is why governments are generally loath to take them. The fact that Modi seems to be preparing the climate for these unpopular measures is a good sign. It shows two things. One, that he is not going to let politics prevail over good economics. Two, he has realised the necessity of explaining things to the people, something all reforming prime ministers and finance ministers from 1991 onwards have ignored.
People are not unwise. They know the need for belt tightening and cutting wasteful expenditure – they do it all the time with their household budgets. Surely, they will realise that if they want achche din forever, they will have to put up with bure din for some time.