"There's a difference
between a philosophy and a bumper sticker."
—Charles M. Schulz
(American, 1922-2000)
Word for the day
Guisard (n)
A person who wears a mask;
mummer
Malice towards none
Is P. Chidambaram batting
for BJP?
For obvious reasons, of
course.
First random thought this morning
Telecommunication, especially digital communication is inarguably
at core of almost every economic plan and program in the country. You can't
even imagine any development without digital communication capabilities
strengthening its foundation.
If the font size of newspaper headline is any indication, the
imminent retrenchment of 1200 RCom employees is a major national concern. A
number of HR experts and recruiters have apparently opined that these employees
with 5-10 years of experience will find it extremely hard to get alternative
jobs and might have make significant compromise with their pay and expertise.
Do you see the paradox?
Fiscal & monetary policy - avoid adhocism, focus on reforms
PMEAC has identified Fiscal framework and monetary policy as two
key focus areas for stimulating faster economic growth and employment.
Monetary policy
I am not sure about the role of monetary policy in stimulating
economic growth. To me the role of monetary policy is to ensure the stability
& sustainability of the financial system; improve its efficiency; and
catalyze necessary corrections in markets wherever demand-supply equilibrium is
deviating from the desired path.
An efficient conduct of monetary policy does eventually help the
objective of economic growth. But designing monetary policy to stimulate
economic growth could at best be an emergency short term measure not a
sustainable solution.
This argument may look out of place in light of the dominant role
monetary policy has played in the economic recovery in post global financial
crisis (GFC) period since 2009. But the fact remains that post GFC
non-conventional monetary policy measures were emergency steps, never intended
to be integral to the monetary policy design of respective jurisdictions.
Moreover, the monetary policies in almost all jurisdictions, with very few
exceptions, is conducted by autonomous monetary authorities with no
interference from the executive branch of the government.
PMEAC may therefore be better off leaving the conduct of monetary
policy to MPC and RBI.
Fiscal policy
Now coming to fiscal policy framework, the efforts of the
successive governments have so far been focused on improving tax to GDP ratio
and improving fiscal discipline. Besides, fiscal policy has been used to
incentivize (or otherwise) investment and consumption in specific regions and
products.
Tax incentives
While there is evidence to suggest parochial development as
outcome of fiscal incentives, I am not aware of any holistic impact analysis on
overall economic growth of the country as a result of a particular fiscal
incentive. For example, tax exemption on new investments in a particular
industrially backward area may have resulted in development of that area and
creation of additional employment. But I have not seen an impact analysis that
shows what would have been overall economic impact if that investment was not
made at all or made in an industrially developed area.
A few years back a report in
Business Standard highlighted that many small and medium size pharmaceutical
manufacturing firms located in Baddi (Himachal Pradesh) are facing the threat
of closure. These units were lured into this location a decade back by tax
concessions and capital subsidy given under special status state category.
Despite huge influx of benefit seekers, the infrastructure in this area could
not be developed. The connectivity remained poor.
As the tax (Excise and income tax) concessions begin to expire,
many of the 250 odd units face closure. In our view, many industrial units in
Kashipur and Rudrapur areas of Uttrakhand may also meet similar fate.
We feel, this should initiate a serious nationwide political
debate over the efficient allocation of scarce resources vs. parochial
regionalism, and even more important “enablement vs. provision”.
Gujarat model of development based on enablement has attracted
more investment and hence created more growth opportunities, rather than the
model based on “provision” adopted through special status mechanism.
Fiscal deficit
In recent months a whole lot of commentators have (over)emphasized
on the extent of fiscal deficit India can or should or cannot or should not
afford. I do not think I can add anything useful to the arguments in favor or
against the need for expansion of fiscal deficit to support the efforts for
revival of investment cycle in the country.
My point is that the government's fiscal policy needs to be in
harmony with the popular mandate it has received.
I strongly believe that the mandate of this government is
unmistakably for pragmatism, development, inclusivity, nationalism and good
governance. Accordingly, I feel the budgeted estimate of ratio of fiscal
deficit to the GDP should actually not figure very high in the priority list of
the government. In my view there are a multitude of deficit that needs to be
bridged on a higher priority.
In particular the following deficits (not necessarily in the given
order) need to be assigned priority over the budgeted fiscal deficit:
1. Capital deficit
2. Demand deficit
3. Skill deficit
4. Employment opportunity
deficit
5. Trust deficit
6. Social infrastructure
deficit
7. Physical infrastructure
deficit (
8. Productivity deficit
9. Compliance deficit
10. Corporate governance
deficit
Fiscal prudence is good. But that discussion could wait for a
sunny day. In overcast conditions, as forecasted for this Saturday, we need to
bother more about leaking roof and broken umbrella.
....to continue tomorrow
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