The Economic Survey 2017 covers a broad sweep of issues straddling the proximate and the persistent. It is rich in perspective, data and analysis, but to the extent that Surveys are an important vehicle for signalling the broad direction of government economic policy, the document lacks focus. Especially, in this age of 140 characters, its core messages are diluted by the breadth of issues it tries to cover.
As far as perspective goes, the Survey reminds us that despite all the progress made, the two key challenges we face are the following: First, more than 25 years after liberal economic reforms were launched, as a country, we still remain ambivalent about letting market forces drive our economy; and second, we continue to do a terrible job of redistribution. The second challenge actually reinforces the first, and both are compounded by huge gaps in state capacity. Having identified state incapacity as one of the root causes of our predicament, I wish the Survey had framed this as the centrepiece of its section on persistent issues, rather than the eclectic melange it lays out.
The two most substantive policy suggestions offered in the Survey pertain to the challenge of dealing with the damaged twin balance sheets of banks and large corporates, and to the future direction for reform of our welfare architecture. We are still struggling with the detritus of our infrastructure boom-bust cycle, unable to find a mechanism to distribute the losses relating to non-performing loans. To cut through the coordination failures and perverse incentives preventing public sector banks from resolving problem assets, the Survey advocates a centralised, public sector — government-backed, but not government-managed — asset rehabilitation agency, to which banks would be induced to transfer their problem loans.
This is not a new idea. But what is new and interesting is the proposal for how to fund the recapitalisation of public sector banks by, in essence, transferring some of government’s capital in the RBI to the balance sheets of these banks. Creating such an agency may also help with the politics of the issue. Taxpayer assistance for asset resolution risks being viewed as a bail-out for corrupt big business and complicit or incompetent bankers. However, based on the experience of other countries, the proposed agency, if properly managed and structured, could actually deliver significant profits for its government shareholders.
The Survey validates this government’s seriousness about overhauling our approach to welfare. For the New Right, a key objective is to make our redistribution policies radically more efficient through effective targeting and elimination of leakages. In this context, I am not persuaded that the political economy of our country needs to force us down the path of Universal Basic Income. As the foundations of the JAM (Jan Dhan, Aadhaar and Mobile) architecture become stronger, as more bank accounts become Aadhaar-seeded, and we become more data-rich, it should be feasible to replace a significant share of the current in-kind subsidy programmes with Direct Benefit Transfers into the accounts of eligible citizens, while minimising exclusion errors.
Turning to Budget 2017, this NDA budget should be most reassuring to markets — it remains true to the broad policy direction set out in the previous two budgets. It is focused on reviving long-term growth, job creation, providing more effective and less wasteful protection to the poor and vulnerable, while remaining fiscally prudent. And it signals steady progress on reforms to broaden the tax base, improve tax administration and utilisation of budgetary spending. The change in the timing of the budget itself is a material and sensible one, as is the merger of the railway budget.
The track record of this government should inspire suitable confidence in its commitment to fiscal discipline. Moreover, the slightly elongated path to fiscal consolidation — a deficit target of 3.2 per cent instead of 3 per cent in FY18 — is consistent with the FRBM review committee’s recommendations and will be accompanied by a continued improvement in the quality of public spending away from consumption towards capital investment. Budgetary capital expenditures are set to increase, with significant allocations made towards key transport infrastructure, including railways and rural roads. The focus of spending on rural India, and support for SMEs (small and medium-sized enterprises), MSMEs (micro, small and medium enterprises) and affordable housing is appropriate, given their importance for job creation.
On demonetisation, the finance minister echoed the message of the Survey. To secure long-term gains in the form of behavioural change, the budget announced meaningful reduction in direct taxes for lower income individuals and for small businesses with the objective of inducing more people to join the formal economy.
Perhaps the most significant budgetary announcement was to accept the Election Commission’s recommendation to restrict anonymous cash contributions for political financing to under Rs 2,000 per individual. How effective this will be in making party funding more transparent remains to be seen, but it is an astute move to retain the moral high ground and keep the public discourse alive on the importance of reforming political finance to the government’s campaign against black money.
Where did the budget disappoint? It had very little to say about cleaning up the twin balance sheets problem identified in the Survey — the Rs 10,000 crore set aside for recapitalising public sector banks is woefully inadequate. And the budget once again avoided the thorny question of reforming public sector banks, instead seeming to reinforce a penchant for using these banks to direct subsidised credit to priority segments, notably small business. A lot more work is needed to figure out how to harness market forces to induce credit flow to areas or activities of strategic policy importance without resorting to the authority that comes with the government ownership of banks.