Domestic challenges that India is facing today
Especially after 1991, India has progressively made considerable strides in improving the management of the economy. Yet much more needs to be done to realize its ambitions -
1. Accelerate growth
2. Expand employment opportunities
3. Achieve social justice
PUBLIC vs. PRIVATE:
India is not yet following the standard development model.
Broader societal shifts are required in ideas and narratives to address three long-standing metachallenges:
First, there has been a hesitancy to embrace the private sector and to unambiguously protect property rights, combined with continued reliance on the state to undertake activities that are more appropriately left to the private sector.
Second, state capacity has remained weak, as can be seen from poor delivery of essential services.
And third, redistribution has been simultaneously extensive and inefficient.
1. Ambivalence about private sector and property rights
All states, all societies, have some ambivalence toward the private sector. After all, the basic objective of private enterprises – maximizing profits – does not always coincide with broader social concerns, such as the public’s sense of fairness.
But the state of having mixed feelings or contradictory ideas towards private sector in India seems greater than elsewhere. It appears that, India has distinctly anti-market beliefs relative to others, even compared to peers with similarly low initial GDP per capita levels.
The symptoms of this ambivalence (mixed feelings or contradictory ideas) toward the private sector can be manifested in multiple ways:
The most well-known example is the difficulty of privatizing public enterprises, even for firms where economists have made strong arguments that they belong in the private sector.
Consider the civil aviation sector. Defying history, there is still the commitment to make the perennially unprofitable public sector airline “world class.” Recently, airport privatization has taken the form of awarding management contracts rather than change in ownership. Moreover, policy reform in the sector has been animated as much by an interventionist as liberalizing spirit, reflected for example in restrictions on pricing.
A similar spirit pervades the policy approach to the banking sector. Discussion of disinvesting the government’s majority stake in the public sector banks is often difficult in part because of the view that they are legitimate instruments for the state to allocate and redirect resources.
The agriculture sector is entwined in regulation, a living legacy of the era of socialism. While progress has been made in the last two years, producers in many states are still required by the Agricultural Produce Marketing Act to sell only to specified middlemen in authorized markets (mandis). And when this system nonetheless generates price increases deemed to be excessive, the Essential Commodities Act is invoked to impose stock limits and controls on trade that are typically procyclical, thereby exacerbating the problem.
A similar legacy from the past circumscribes property rights. Initially the right to property was inscribed as a “fundamental right” in the Constitution. But during the socialist era the 44th Amendment removed Articles 19 (1) (f) and Article 31 and replaced them with Article 300-A, thereby downgrading property to that of a “legal right”.
The ramifications of this decision continue to be felt to this day, in such issues as retrospective taxation. The government has made clear its commitment not to act retroactively on tax and other issues. But the legacy issues of retroactive taxation remain mired in litigation, with uncertain prospects for early resolution.
Any (expropriation) action by the state or an authority of taking property from its owner for public use or benefit is being seen as favouring the private sector, especially the foreign private sector.
Gist: All these anti-market or anti-private laws and excessive intervention by public sector have hampered private investment and hence aggregate growth. One important reason this problem has not been resolved in the many years is the political difficulty to take decisions favouring
Therefore broader societal shifts are required in ideas and narratives to address these problems.
2. State Capacity
A second distinctive feature of the Indian economic model is the weakness of state capacity, especially in delivering essential services such as health and education.
Nearly all emerging markets started off with weak state capacity at independence. But as their economies developed and prospered, state capacity improved, often at an even faster rate than the overall economy. In India, by contrast, this process has not occurred.
Reason: The Indian state has low capacity, with high levels of corruption, clientelism, rules and red tape.
There were some recent measures taken by the government to strengthen state capacity in delivering essential services and regulating markets, such as
Bringing reforms in public distribution system (PDS)
Reforms in the power sector to improve delivery and cost recovery
However, on health and education in particular, there are insufficient instances of good models that can travel widely within India and are seen as attractive political opportunities.
There is abundant caution in bureaucratic decision-making, which favours the status quo.
For example, in the case of the twin balance sheet problem, it is well-known that senior managers in public sector banks are reluctant to take decisions to write down loans for fear of being seen as favouring corporate interests and hence becoming the target of the referee institutions, the so-called “4 Cs”: courts, CVC (Central Vigilance Commission), CBI (Central Bureau of Investigation) and CAG (Comptroller and Auditor General). This encourages evergreening of loans, thereby postponing a resolution of the problem.
3. Inefficient redistribution
Third distinctive aspect of the Indian development model.
Redistribution by the government is far from efficient in targeting the poor. Welfare spending suffers from considerable misallocation: the districts with the most poor suffer from the greatest shortfall of funds.
This leads to: exclusion errors (the deserving poor not receiving benefits), inclusion errors (the nonpoor receiving a large share of benefits) and leakages (with benefits being siphoned off due to corruption and inefficiency).
The central government alone runs about 950 central sector and centrally sponsored schemes and sub-schemes which cost about 5 percent of GDP.
In India for past long we have witnessed that our subsidy programmes are benefitting more the non-target groups compared to the intended beneficiary of the subsidies. Recent Economic Survey 2016 also highlights that India’s rich feed off subsidies worth over Rs. 1 lakh crore a year that are meant for the poor.
A very high leakage in distribution. Once a former PM said if government spends 100 rupees, only 15 rupees reaches the actual beneficiary.
Mistargeting of subsidies is another problem. Many of the people, who do not actually need subsidies are also entitled to get subsidies.
What steps have been taken by the government to improve the efficiency of redistribution?
1. The government has made great progress in improving redistributive efficiency over the last few years, most notably by passing the Aadhaar law, a vital component toward realizing its vision of JAM.
2. Over the past two years, the government has made considerable progress toward reducing subsidies, especially related to petroleum products. Not only have subsidies been eliminated in two out of four products, there is effectively a carbon tax, which is amongst the highest in the world.
3. Pilot project of Direct Benefit Transfers in fertilizer represent a very important new direction in improving redistributive efficiency.
Universal Basic Income
The Survey has advocated the concept of Universal Basic Income (UBI) as an alternative to the various social welfare schemes in an effort to reduce poverty. The Survey points out that the two prerequisites for a successful UBI are:
(a) functional JAM (Jan Dhan, Aadhar and Mobile) system as it ensures that the cash transfer goes directly into the account of a beneficiary and
(b) Centre-State negotiations on cost sharing for the programme.
* Universal Basic Income (UBI) proposal a powerful idea, but not ready for implementation
* UBI an alternative to plethora of state subsidies for poverty alleviation
* UBI would cost between 4 and 5 per cent of GDP
The Conceptual/Philosophical Case for UBI
Universal Basic Income is a radical and compelling paradigm shift in thinking about both social justice and a productive economy.
It is premised on the idea that a just society needs to guarantee to each individual a minimum income which they can count on, and which provides the necessary material foundation for a life with access to basic goods and a life of dignity.
A universal basic income is, like many rights, unconditional and universal: it requires that every person should have a right to a basic income to cover their needs, just by virtue of being citizens.
Economic Survey considers that the time has come to think of UBI for a number of reasons:
UBI is, first and foremost, a test of a just and non-exploitative society. From Tom Paine to John Rawls, nearly every theory of justice has argued that a society that fails to guarantee a decent minimum income to all citizens will fail the test of justice. It should be evident to anyone that no society can be just or stable if it does not give all members of the society a stake.
A Universal Basic Income promotes many of the basic values of a society which respects all individuals as free and equal. It promotes liberty because it is anti-paternalistic, opens up the possibility of flexibility in labour markets. It promotes equality by reducing poverty. It promotes efficiency by reducing waste in government transfers. And it could, under some circumstances, even promote greater productivity. It is not an accident that Universal Basic Income has been embraced both by thinkers of the Left and of the Right.
Conditional on the presence of a well-functioning financial system, a Universal Basic Income may simply be the fastest way of reducing poverty. UBI is also, paradoxically, more feasible in a country like India, where it can be pegged at relatively low levels of income but still yield immense welfare gains.
The poor in India have been treated as objects of government policy. Our current welfare system, even when well intentioned, inflicts an indignity upon the poor by assuming that they cannot take economic decisions relevant to their lives.
An unconditional cash transfer treats them as agents, not subjects. A UBI is also practically useful. The circumstances that keep individuals trapped in poverty are varied; the risks they face and the shocks they face also vary. The state is not in the best position to determine which risks should be mitigated and how priorities are to be set.
UBI liberates citizens from paternalistic and clientelistic relationships with the state. By taking the individual and not the household as the unit of beneficiary, UBI can also enhance agency, especially of women within households.
UBI is an acknowledgement that society’s obligation to guarantee a minimum living standard is even more urgent in an era of uncertain employment generation.
Moreover, UBI could also open up new possibilities for labour markets. It creates flexibility by allowing for individuals to have partial or calibrated engagements with the labour market without fear of losing benefits. They allow for more non-exploitative bargaining since individuals will no longer be forced to accept any working conditions, just so that they can subsist.
In India in particular, the case for UBI has been enhanced because of the weakness of existing welfare schemes which are riddled with misallocation, leakages and exclusion of the poor.
When the trinity of Jan-Dhan, Aadhaar and Mobile (popularly referred to as JAM) is fully adopted the time would be ripe for a mode of delivery that is administratively more efficient. The administrative argument however has to be made with some care. While Aadhar is designed to solve the identification problem, it cannot, on its own, solve the targeting problem.
It is important to recognise that universal basic income will not diminish the need to build state capacity: the state will still have to enhance its capacities to provide a whole range of public goods. UBI is not a substitute for state capacity: it is a way of ensuring that state welfare transfers are more efficient so that the state can concentrate on other public goods.
The Conceptual Case Against UBI
From an economic point of view there are three principal and related objections to a universal basic income. The first is whether UBI reduces the incentive to work – a worldview encapsulated in the quote by Gandhiji above; critics conjure up images of potential workers frittering away their productivity.
This argument is vastly exaggerated
For one thing, the levels at which universal basic income are likely to be pegged are going to be minimal guarantees at best; they are unlikely to crowd incentives to work.
One school of thought would argue that it truly is a diminution of human dignity to suppose that the only motivation for which people work is necessity; take away the yoke of necessity and they will be lazy.
The same kinds of arguments used to be made against high wages: that if wages rise beyond a certain level workers will choose leisure over work. There is very little evidence to sustain that proposition.
The second concern is this: Should income be detached from employment?
The honest economic answer to this concern is that society already does this, but largely for the rich and privileged. Any society where any form of inheritance or accepting non-work related income is allowed, already detaches income from employment. So, receiving a small unearned income as it were, from the state should be economically and morally less problematic than the panoply of “unearned” income our societies allow.
The third is a concern out of reciprocity. If society is indeed a “scheme of social cooperation”, should income be unconditional, with no regard to people’s contribution to society? The short answer is that individuals as a matter of fact will in most cases contribute to society, as stated above. In fact, UBI can also be a way of acknowledging non-wage work related contributions to society.
In the current social structure, for example, homemaking contributions of women are largely unacknowledged economically, since they do not take the form of wage or contract employment. It is important that UBI is not framed as a transfer payment from the rich to the poor. Its basis is rather different. UBI gives concrete expression to the idea that we have a right to a minimum income, merely by virtue of being citizens. It is the acknowledgment of theeconomy as a common project. This right requires that the basic economic structure be configured in a way that every individual gets basic income.
All these arguments require that UBI be indeed universal, unconditional, and involve direct transfers.
Table 1 lays out succinctly the arguments – conceptual and practical – in favour of and against UBI.
Table 1 : Arguments in Favour and Against UBI
UBI is a powerful idea whose time even if not ripe for implementation is ripe for serious discussion.
One can easily imagine the Mahatma as fair mediator, deliberating and examining both sides of the argument carefully.
The Mahatma as the embodiment of universal moral conscience would have seen the possibility of UBI in achieving the outcomes he so deeply cared about and fought for all his life. But the Mahatma as moralist would have had doubts because of seeing uncompensated
rewards as harming responsibility and effort.
As a fiscal conservative he would permit UBI only if convinced that macro-economic stability would not be jeopardized. Recognizing the difficulty of exit, the Mahatma as astute political observer would have anxieties about UBI as being just another add-on government programme.
But on balance he may have given the go-ahead to the UBI.
Political changes in advanced economies
Appointment of Donald Trump as the Republican candidate for US President
Rise and spread of blatantly racist anti-immigration political parties and movements in Europe
The impact of Brexit and the US elections, though still uncertain, risk unleashing paradigmatic shifts in the direction of isolationism and nativism.
The post war consensus in favour of globalisation of goods, services and labor in particular, and market-based economic organization more broadly, is under threat across the advanced economies.
What happens in the developed countries still matters hugely in international relations and to the rest of the world despite all the talk of a shift in global power to some large “emerging nations”.
For India, three external developments are of significant consequence:
1. First in the shortrun, the change in the outlook for global interest rates as a result of the US elections and the implied change in expectations of US fiscal and monetary policy will impact on India’s capital flows and exchange rates.
2. Second in the medium-term, changed political outlook for globalisation and stagnant or declining trade at the global level (due to protectionist policies). This changed outlook will affect India’s export and growth prospects. (See box 2 below)
3. Third, developments in the US, especially the rise of the dollar, will have implications for China’s currency and currency policy. If China is able to successfully re-balance its economy, the spillover effects on India and the rest of the world will be positive.
On, the other hand, further declines in the yuan, even if dollar-induced, could interact with underlying vulnerabilities to create disruptions in China that could have negative spillovers for India
Therefore, any political backlash against globalisation in advanced countries, and China’s difficulties in rebalancing its economy, could have major implications on India’s economic prospects.
During the boom years between 2003-2011 India’s real GDP growth averaged 8.2 percent, and exports grew at an annual rate of between 20 and 25 percent.
Given the India’s current growth ambitions of 8-10 percent, it requires export growth of about 15-20 percent and any serious retreat from openness on the part of India’s trading partners would jeopardize those ambitions.
Reestablishing private investment and exports
The decline in oil prices from their peak in June 2014 – lead to increased incomes and which combined with government actions imparted dynamism by increasing private consumption and facilitating public investment, shoring up an economy buffeted by the headwinds of weak external demand and poor agricultural production.
This year that important source of short-term dynamism may be taken away as international oil prices are now on the rise.
Moreover, private investment remains weak because of the twin balance sheet problem that has been the economy’s festering wound for several years now.
Therefore, reestablishing private investment and exports as the predominant and durable sources of growth is the proximate macro-economic challenge.
Review of Developments in 2016-17
Real GDP growth in the first half of the year was 7.2 percent (2016-17)
Economic Survey 2015-16 had projected 7.0-7.75 per cent
7.6 percent rate was recorded in the second half of 2015-16
The growth rate of the Indian economy has been estimated to be in the range of 7-7.5% in 2016-17.
The medium-term growth trajectory has been pegged at 7-7.5% percent.
The survey has emphasised that an 8% growth is possible only after two years, with continued economic reforms.
Why low GDP?
Fixed investment declined sharply as stressed balance sheets in the corporate sector continued to take a toll on firms’ spending plans.
International oil prices have stopped falling
The major highlights of the sectoral growth outcome of the first half of 2016-17 were:
(i) moderation in industrial and non-government service sectors;
(ii) the modest pick-up in agricultural growth on the back of improved monsoon; and
(iii) strong growth in public administration and defence services
Fiscal deficit refers to the difference between total revenue/income and total expenditure of the government. It indicates the total value of the government's borrowings.
The survey states that fiscal deficit target of 3.9% for 2015-16 is attainable. However, the government wants to adhere to the fiscal deficit target of 3.5% in 2016-17.
The survey points out that in 2016-17, the 7th Pay Commission recommendations and demands of the OROP scheme will pose a challenge to achieve fiscal target.
Inflation is the percentage change in the value of prices of a basket of goods and services in a year.
CPI inflation seen around 4.5-5% in 2016-17.
The RBI is expected to meet 5% inflation target by March 2017.
CPI and WPI inflation
Consumer Price Index (CPI)-New Series inflation, which averaged 4.9 per cent during April-December 2016, has displayed a downward trend, thanks to good kharif agricultural production and pulses.
The decline in pulses prices has contributed substantially to the decline in CPI inflation.
The second distinctive feature has been the reversal of WPI inflation, from a trough of (-)5.1 percent in August 2015 to 3.4 percent at end-December 2016 (Figure 2), on the back of rising international oil prices.
Current Account Deficit
CAD is a measurement of country's trade when value of goods and services imported is higher than the value of goods and services exported. It includes net income, such as interest and dividends as well as foreign aid/grants.
Current account deficit is seen at around 1% of GDP in 2016-17.
The growth in agriculture sector in 2015-16 has continued to be lower than the average of the last decade, mainly due to second successive year of lower-than-normal monsoon.
As per the information of the Department of Agriculture, Cooperation and Farmers Welfare for 2015-16, the production of food-grains and oil-seeds is estimated to decrease by 0.5% and 4.1% respectively, while the production of fruits and vegetables is likely to witness a marginal rise.
A brighter picture is expected to emerge from the allied sectors like livestock products, forestry and fisheries, with growth exceeding 5% in 2015-16, which will improve rural incomes.
It refers to a sum of money extended through a government grant to keep the price of a commodity low.
The Economic Survey states that rationalisation and reprioritisation of subsidies through better targeting would be crucial role for fiscal consolidation and for targeting more expenditure towards inclusive development.
The total subsidy bill as a proportion of GDP is expected to be below 2% of GDP as per Budget estimates for 2015-16.
The 1.7% decline in majors subsidies was a result of nearly 44.7% decline in petroleum subsidy during April - December 2015, while other major subsidies-food and fertiliser -increased by 10.4% and 13.7% respectively during the period.
Growth in the industry sector accelerated during the current year due to improved manufacturing activity.
The Index of Industrial Production (IIP) showed that manufacturing production grew by 3.1% during April-December 2015-16, vis-à-vis a growth of 1.8% in the corresponding period of the previous year.
The ongoing manufacturing recovery is supported by vigorous growth in petroleum refining, automobiles, apparels, chemicals, electrical machinery and wood products, including furniture.
Apart from manufacturing, other three segments of the industry sector-electricity, gas, water supply-and related utilities, mining and quarrying and construction activities are witnessing a slump in growth.
The growth in service sector is moderated slightly but remains robust.
Being the main driver of the economy, the service sector has contributed about 69% of the total growth during 2011-12 to 2015-16. It has, therefore, expanded its share in the economy to 53% from 49%.
India’s Future Economic Outlook
A. GDP Growth
India’s future GDP growth depends on its exports, consumption, private investment and government.
India’s exports appear to be recovering, based on an uptick in global economic activity. This is expected to continue in the aftermath of the US elections and expectations of a fiscal stimulus.
IMF’s World Economic Outlook forecast projects an increase in global growth from 3.1 percent in 2016 to 3.4 percent in 2017, with a corresponding increase in growth for advanced economies from 1.6 percent to 1.9 percent.
Given the high elasticity of Indian real export growth to global GDP, exports could contribute to higher growth next year, by as much as 1 percentage point.
In the aftermath of the Global Financial Crisis, the eurozone crisis, and the China scare of 2015, international trading opportunities are becoming scarcer.
As discussed in Box 2, the world export-GDP ratio has declined since 2011, and going forward a sharp rise in the dollar is expected with a corresponding decline in the currencies of India’s competitors, notably China and Vietnam.
Given India’s need for exports to sustain a healthy growth rate, it is important to track India’s competitiveness. A second reason to review India’s competitiveness is the rise of countries such as Vietnam, Bangladesh, and the Philippines that compete with India across a range of manufacturing and services.
The outlook for private consumption is less clear.
International oil prices are expected to be about 10-15 percent higher in 2017 compared to 2016, which would create a drag of about 0.5 percentage points. Geopolitics could take oil prices up further than forecast.
The ability of shale oil production to respond quickly should contain the risks of a sharp increase, but even if prices rose merely to $60-65/barrel the Indian economy would nonetheless be affected by way of reduced consumption; less room for public investment; and lower corporate margins, further denting private investment.
On the other hand, consumption is expected to receive a boost from two sources: catch-up after the demonetisation-induced reduction in the last two quarters of 2016-17; and cheaper borrowing costs, which are likely to be lower in 2017 than 2016. As a result, spending on housing and consumer durables and semi-durables could rise smartly.
Since no clear progress is yet visible in tackling the twin balance sheet problem, private investment is unlikely to recover significantly. (Probable Mains question in this area)
Some of this weakness could be offset through higher public investment, but that would depend on the stance of fiscal policy in coming years, which has to balance the short-term requirements of an economy recovering from demonetisation against the medium-term necessity of adhering to fiscal discipline.
There are risks from the possible eruption of trade tensions amongst the major countries, triggered by geo-politics or currency movements. This could reduce global growth and trigger capital flight from emerging markets.
B. Fiscal Outlook
The fiscal outlook for the central government for next year will be marked by three factors.
First, the increase in the tax to GDP ratio of about 0.5 percentage points in each of the last two years, owing to the oil windfall will disappear.
Second, there will be a fiscal windfall both from the high denomination notes that are not returned to the RBI and from higher tax collections as a result of increased disclosure under the Pradhan Mantra Garib Kalyan Yojana (PMGKY).
A third factor will be the implementation of the GST. It appears that the GST will probably be implemented later in the fiscal year. The transition to the GST is so complicated from an administrative and technology perspective that revenue collection will take some time to
reach full potential.
C. Trade Policy
The environment for global trade policy has probably undergone a paradigm shift in the aftermath of Brexit and the US elections.
At a time of a possible resurgence of protectionist pressures and India’s need for open markets abroad to underpin rapid economic growth domestically, it is increasingly clear that India and other emerging market economies must play a more proactive role in ensuring open global markets.
A vacuum in international trade leadership is being created which must be filled with voices and influences such as India’s that favor open markets. This will, of course, require that India also be more willing to liberalize its own markets, a greater “openness to its own openness.”
Focus should be to promote labor-intensive exports. India could more proactively seek to negotiate free trade agreements with the UK and Europe.
At the same time, with the likely US retreat from regional initiatives such as the Trans- Pacific Partnership (TPP) in Asia and the Trans-Atlantic Trade and Investment Partnership (TTIP) with the EU, it is possible that the relevance of the World Trade Organization might increase.
As a major stateholder and given the geo-political shifts under way, reviving the WTO and multilateralism more broadly could be proactively pursued by India.
D. Climate Change and India
The Paris Agreement on climate change in December 2015 has been one of the shining recent examples of successful international cooperation. The focus will now shift to implementing the agreements.
So far, and for the conceivable future, India’s reliance on fossil fuels remains well below China (the most relevant comparator) but also below the US, UK and Europe at comparable stages of development (this echoes the commitment made by India at Heiliengdamm that it would never exceed the per capita emission of advanced countries).
Going forward, of course, India needs to bend the curve to ensure that its reliance on fossil fuels declines and keeping it below the level of other countries so that its good global citizenship on climate change can continue.
E. Ensuring Women’s Privacy
In each of the last two years, the Economic Survey has focused on a dimension of concern to women.
FY 2015 Survey focused on violence against women related to coercive family planning methods.
In FY2016, the Survey featured a chapter on “Mother and Child,” emphasizing the importance of government interventions to ensure long term well-being of women and children.
This year Survey focuses on relationship between sanitation practices and health outcomes. How deficiencies in sanitation facilities affects women: threat to life and safety while going out for open defecation, reduction in food and water intake practices to minimize the need to exit the home to use toilets, polluted water leading to women and children dying from childbirth-related infections, and a host of other impacts. Women and girl-children should take a key leadership role to play in Swachh Bharat’s objective of creating defecation free communities, by nudging men and boys of the household to change their own defecation behaviors.