Sunday, 13 July 2014

Earth to Mr Jaitley: socialism is not pro-poor, markets are not anti-poor

So why did the Narendra Modi government, whose high-pitched pre-election rhetoric promised a decisive rightward shift in the management of the economy, debut with a budget that would have done the Congress proud? This is something both Congress president Sonia Gandhi and former finance minister P. Chidambaram have smugly pointed out.
This piece by M. K. Venu argues that the maiden budget was `socialist’ because Modi wanted to be seen as pro-poor. Venu quotes finance minister Arun Jaitley telling him in an interview done for Rajya Sabha TV that in a country with so many poor people, any economic philosophy which is totally market based will not work. Listen to the interview here.
That is the problem – the assumption that socialist policies are pro-poor and market-friendly policies are not.  This fairly widely-held assumption is itself based on two wrong assumptions, one about socialist policies and the other about pro-market policies.
That socialist policies are pro-poor flies in the face of evidence from India itself. India’s economic policies were overwhelmingly socialist before 1991. Indira Gandhi’s socialist agenda got an emotional anchor, as it were, with the Garibi Hatao slogan. Apart from the plethora of anti-poverty schemes, all economic policies supposedly had a pro-poor focus. And yet the pace of poverty reduction has been faster post-1991, once India embarked on pro-market policies!
All manner of subsidies have been rolled out in the name of the poor; any withdrawal is slammed as a move to abandon the poor to the vagaries of the market forces. But, barring a few, these subsidies really go to the better off. The poor are anyway left to the market forces. Take Delhi, where highly subsidised water and electricity supplied by the government go to the middle classes while the poor, who live in slums and unauthorised colonies, pay several times more for the same facilities supplied by the market. Yes, the rates are exploitative but the so-called pro-poor state is just not present in these areas peopled by the poor. Yes, the issue is that of governance, and that precisely is the point. Good governance is not about socialism or capitalism; it is about how efficiently the state goes about fulfilling its responsibilities.
Now for the other bogey that Jaitley seems to be mindlessly parroting – that a pro-markets approach necessarily neglects the poor. This stems from the trenchant criticism by the critics of socialism of the dole-centric approach to helping the poor, especially the rights-based entitlements legislations that the Congress initiated (and the BJP supported). But the question whether doles are more effective in helping the poor needs to be examined. This question came up last year when poverty figures released by the Planning Commission showed a sharp decline in poverty levels between 2009-10 and 2011-12 and also a decline in the absolute number of poor. The Congress party was quick to claim credit – not for the years of highest ever economic growth during UPA 1 (which they otherwise kept boasting about), but for welfare measures during its rule, especially the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA). 
But economist Surjit Bhalla questioned this claim in this article. Using NSSO data, he pointed out that MGNREGA accounted for only 1 percentage point of the 13.1 percentage points decline in poverty between 2009-10 and 2011-12. In this second article, he gives a more direct link between growth and poverty reduction.
Now to the wrong impression about pro-market policies.
Venu’s article argues that Modi’s statements that government coffers are meant for the poor is `very socialist in its tenor and intent’. This reinforces the completely fallacious image of pro-markets ideologues as unfeeling cads who want the government to work for the well-off and the rich. Not even free market fundamentalists (except those in the loony fringe) argue against measures to help the poor. There will, they admit, always be disadvantaged people who will need the helping hand of the state. The point of divergence between socialist policies and pro-market policies is not about helping the poor; it is about how to help them.
The socialist approach is through price-distorting doles and welfare programmes (no matter how leaky and inefficient they are). The pro-markets approach is to get the state to stop meddling in, and micro-management of, the markets and to concentrate on providing public goods, thus ensuring high growth which will bring more people above the poverty line (no matter how high or low it is set).
Venu cites two new schemes in Jaitley’s budget - Deendayal Upadhyay Gram Jyoti Yojana and  Shyama Prasad Mukherjee Rurban Mission – as examples of BJP social sector schemes and calls this BJP’s own brand of socialism. But these are not welfarist schemes; these are schemes to provide physical infrastructure - clearly the role of the state even in a market economy – that will spur economic activity and growth. Socialist policies do not bring high growth; pro-market policies do. We have seen that in India.
High growth will not only help address the problem of poverty, it will, far more importantly, provide the resources for targeted interventions to help the poor and the needy. If there is no money in government coffers, even socialist states cannot help the poor. Such interventions should ideally be through income support and cash handout measures than inefficient welfare programmes that are liable to corruption and cornering by the better off, leaving the poor where they are. Even Amartya Sen has not argued against excessive state intervention in the markets; he too believes growth is necessary for poverty reduction. It is another matter that he prefers inefficient welfarism over more efficient income support measures.
The problem with the discourse on political economy in India is that words like socialism, pro-poor and market friendly are bandied about, especially by politicians, without adequate understanding of what they mean. Jaitley’s statements prove this.

Wednesday, 9 July 2014

India just published its most explicitly pro-markets policy document in history
Each year, the Economic Survey offers a snapshot of the economy and a glimpse into the government’s thinking on important policy matters. Along with the budget, it is the most important annual statement on policy made by the government of India.
This year, the Economic Survey tabled by finance minister Arun Jaitley in Parliament earlier today, is an emphatic statement. It is the first policy document in modern India that has explicitly pitched for a market-based economy and for the government to work on an enabling regulatory framework. It goes to the extent of saying that market failure should be demonstrated before the government considers stepping into any sphere of economic activity.
If this document is any indication, the Narendra Modi government intends to usher in an unprecedented policy push towards a markets-based economy and away from the welfare-centric approach favoured by all the previous governments, including the earlier governments led by the Bharatiya Janata Party (BJP) .
Since the mid-1990s, Economic Surveys have pitched for many reforms—of the labour market, real estate market, agriculture, the food economy and the subsidy regime. But none have set out a case for the market economy in such explicit terms as this one has.
Consider this: a chapter titled Issues and Priorities has a section called Foundations of a Market Economy. The opening paragraph says: “The biggest challenge today is improving state capacity suitable for a market-based economy. A long-term, careful and systematic effort is required for undertaking institutional change.” This is perhaps the closest a government can come to in moving away from a socialist legacy which has got enshrined in the Constitution. The Preamble to the Constitutions describes India as a sovereign, socialist, secular, democratic republic (the words socialist and secular were inserted in 1975).
And mull on this: “In a market economy, the economy thrives because the state interferes only when there is ‘market failure’, i.e. monopoly power, asymmetric information or externalities.” The Survey argues that any restrictions on private activity must be “part of a known and predictable regulatory regime unlike now where a lot of restrictions—well intentioned as they are—are not part of a stable framework.”
That is probably a veiled reference to the retrospective amendment of tax laws by the previous government, an issue that has been making foreign investors extremely jittery. It could just as well be interpreted as a reference to the ruling BJP’s opposition to foreign direct investment in multi-brand retail. One of the first actions that the BJP government in the state of Rajasthan did was to rescind the earlier Congress government’s decision to allow FDI in retail. There are differing schools of thought within the ruling BJP on economic matters.
Though the Survey speaks about the state intervention in the case of market failures, it insists on credible and strong grounds for such intervention. “Before a state intervention is initiated, it is important to demonstrate that there is a market failure. It should be shown that an intervention will solve the market failure. Further, the costs to society of government intervention should be outweighed by the benefits.” The significance of this is underlined by the fact that even a reformist government like the present one thinks it fit to impose stockholding limits on potatoes and onions and clamp down on exports when prices of these vegetables started heading north.
Will these issues influence the budget that is to be presented tomorrow?
Many of the issues that need to be addressed in order to lay the foundations of a market economy are not within the scope of the Union budget—they relate to other ministries and to state governments (state-level regulations do more to hamper economic freedom). Within the BJP itself there is a group that is not in favour of a genuinely free market economy; it prefers to protect domestic business against foreign competition.
How much of the prescriptions in the Economic Survey will be carried out by the government? This depends on the degree of consensus that differing factions within the BJP can reach. In the past, Economic Surveys have made bold and reformist suggestions. The governments of the day have not always closely followed the policy recommendations.
But as the Survey points out, this government may not have the luxury of inaction. Setting up legal and regulatory frameworks for a market economy is one of the three key measures it recommends to revive investment (the other two are ensuring a low and stable inflation rate and fiscal consolidation). There is hope, then, that this government will move—slowly—in the direction of a real market economy.

Monday, 7 July 2014

The Essential Commodities Act is essentially problematic
Perhaps it is not surprising that the Narendra Modi government has brought onions and potatoes under the Essential Commodities Act, 1955. After all, a committee of chief ministers that he headed on the issue of food prices had recommended that offences under the Act should be made non-bailable and cases should be tried by special courts.
That a committee which rooted for liberalisation of agricultural markets and reform of the Agricultural Produce Marketing Committee Acts should want an outdated piece of legislation strengthened is a bit of an anachronism, but the Indian political economy is full of such contradictions.
Yesterday’s move has come on the back of steady and rapid rise in the prices of these two items, throwing already stressed household budgets out of kilter. There have been reports of hoarding, which is what prompted the decision. But  is this the right way of going about it?
The Essential Commodities Act has its origin in a pre-Independence wartime measure - the Defence of India Rules of 1939. These were promulgated to address the problem of wartime shortages and consequent hoarding. Section 3 of the Essential Commodities Act gives the central government powers to control the production, supply and distribution of specified essential commodities listed in it. The list is drawn up after joint consultation between the centre and the states, and the latter impose stockholding limits on the listed commodities (these vary as conditions and food habits in states differ widely).
The intention may be noble – after all one cannot deny that hoarding and creation of artificial shortages does happen. The retail price of onions in Delhi has been double of what it is in the Azadpur mandi. Ahead of the Delhi assembly elections last year, tomatoes started disappearing from the market and prices headed north. Charges of hoarding were scoffed at, especially since tomatoes have a lesser shelf life than onions and potatoes, till the market was suddenly flooded with stocks and prices crashed the day after voting.
But invoking the Essential Commodities Act is problematic. Stockholding limits do not distinguish between food processing industries and food retail chains, which need to hold large stocks for their operations. Food processing industries especially need to keep stocks for a few months at a time so that fluctuating prices don’t throw their economics out of gear. But under the Essential Commodities Act, these can become liable at least for harassment. These are corporate entities with large, earmarked storage facilities which can be easily identified. So it is easy for inspectors to go after them.
On the other hand, identifying the actual hoarders is not at all easy. These may not be small traders but their operations are not corporatized and they have many avenues to spirit away and hoard supplies. The conviction rate under the Act is also abysmally low. So the hoarders go scot free and genuine players in the food economy are harassed.
The Act is not in tune with present times. It made sense at a time when the transport infrastructure across the country was poor and markets not integrated. So a production shock in one part of the country could lead to hoarding and black marketing. That’s not the case any more. Shortages in one part of the country can be countered if there is ample supply somewhere else.
So does that mean no steps should be taken against hoarding? Certainly not. The state has to step in where there is a clear case of market distortion. There is another legislation called the Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities (PBMSEC) Act, 1980 which the centre and states can invoke to check hoarders.
There is, however, a problem with this law – it is linked to the Essential Commodities Act. So action under the PBMSEC Act can only be taken against offences punishable under the Essential Commodities Act. The list of items that the PBMSEC can be invoked for comes from the Essential Commodities Act. And it is the stockholding limits under the Essential Commodities Act that defines hoarding.  It is this anomaly that needs to be addressed, not pushing more and more items under the Act whenever there is a price shock.
The Essential Commodities Act is out of tune with current realities and needs to be either scrapped or drastically overhauled to deal with crisis situations like supplies getting disrupted due to war, natural calamities and breakdown of law and order. But if even an otherwise natural reformist like Modi wants the Act to be retained and strengthened, looks like the country is going to have to live with an ineffective, harassment-prone law. And ordinary people will continue to suffer.

Do a FRBM on subsidies, Mr FM, put a cap on the subsidy bill
President Pranab Mukherjee, once the finance minister, has often been blamed for the mess the economy itself is in. Why, even his successor from his own former party, P. Chidambaram, has often hinted that the economy may have been in better shape if the fiscal easing that Mukherjee had done in the wake of the global meltdown had been reversed a year earlier than it ultimately was.
But one has to give credit to Mukherjee for one initiative in his last budget in March 2012, which has not got the attention it deserved. Dealing with the vexed issue of subsidies, Mukherji had said he would try to restrict the subsidy bill of the Centre to under 2 per cent of GDP in 2012-13 and bring it down to 1.75 per cent of GDP over the next three years.
It is another matter that the subsidy bill in 2012-13 actually shot up to 2.54 per cent of GDP, up from 2.41 per cent in 2011-12. Mukherjee could perhaps disown responsibility, using the excuse that he had moved to Rashtrapati Bhavan within a few months of that landmark statement.
But it is a pity – and a surprise - that Chidambaram did not take this ball and run with it. After all, he had, in his first stint in North Block in the United Front government backed by the communist parties, made bold to commission a discussion paper on government subsidies. He got an update done in 2004 soon after assuming charge during his second shift. In both his stints – and in between – he had constantly stressed the need to trim this bill.
Capping the subsidy bill is a sound idea and one that Arun Jaitley needs to push. It imposes a measure of discipline on the government, saying this is all the cloth you have, now cut it in a manner as to make the most of it. Decide which subsidies are more important, give more to those, less to the others but all within this limit.
Mukherjee took the initial step; Jaitley needs to take the next one and get legislative backing for this, something similar to the Fiscal Responsibility and Budget Management (FRBM) law. Once the cap is set – to be achieved in a phased manner over a period of time like Mukherjee suggested - any move to spend more than the cap will have to be get parliamentary approval. How will this help?
Right now the subsidy burden is a problem of only the government in power. When it attempts any trimming exercise, the rest of the political class comes together to force it to roll back subsidy cuts. Getting legislative backing for a subsidy cap will force Parliament to debate on an appropriate ceiling. Hopefully, it will be one that will not threaten macroeconomic fundamentals. Indeed, the very process of debating the need and level of the cap will reinforce the logic of reining in subsidies, highlight wasteful and unjustified ones, bring out hidden ones, strengthen the case for the necessary ones and focus attention on effective delivery. Importantly, the ownership of that cap will be that of Parliament as a whole.
Since breaching this cap will also require parliamentary approval – an exercise that will involve going through the legislative rigmarole – governments will not be so cavalier in infringing it. This might force more serious efforts at ensuring that only the really deserving get subsidies.
And even if a government does go back to Parliament, once again the entire debating process will again highlight its own inefficiencies and put a black mark on its fiscal performance. So it will try to come back on track soon.
This does sound too easy and good to be true. After all, Parliament did legislate the FRBM Act. And Parliament itself allowed it to be breached. But no party is denying the legitimacy of the milestones set in the FRBM Act and the fact that the UPA government breached it is something that it is constantly pilloried for. The whole process of legislating the FRBM Act – from the time the idea was floated to actual enactment – took a few years and intense debate. Thanks to this, Parliament is serious about it; there is no talk of raising the deficit caps or postponing implementation or even scrapping it.
In taking the initiative to legislate a cap on subsidies, Jaitley can show his party as a fiscally responsible one. It was Yashwant Sinha, during the NDA regime, who initiated the FRBM legislation. It just so happened that the Act got passed toward the end of the government’s tenure and the UPA government notified the rules, allowing it to take credit. But the sheen was taken away from that credit by the fact that first Chidambaram asked for a pause in its implementation (in 2005) and then Mukherjee amended it to relax the deadlines.
Jaitley can now do for subsidies what Sinha did for overall fiscal consolidation.  It will be a feather in the BJP’s cap both economically and politically.