Government

Arvind Subramanian’s Exit Shows us That Economic Policy-Making in India Is Still Too Centralised

At this point, it seems that the actual economic policy-making process at the higher government level features a small, concentrated group of decision-makers that is largely unaffected by the influence of econocrats.

The announcement of the exit of chief economic adviser (CEA) Arvind Subramanian will be a great loss for the domain of economic policy-making by econocrats (economists working as bureaucrats) within the Indian government.

Subramanian served as the CEA to the Centre for nearly four years and is now the third renowned economist with international recognition to leave his position with the government and return to the US.

Former RBI governor Raghuram Rajan and former NITI Aayog boss Arvind Panagariya were the other two econocrats, who left to return to the US for undertaking academic roles at different universities. While it would be speculative to comment on the common links between these three departures, it is vital to acknowledge the contributions made by Subramanian during his term, and perhaps, understand the failure of the current government to retain some of its best policy minds.

During his term, Subramanian was involved in implementing the Goods and Services Tax with the finance ministry and contributed one of the most comprehensive and meticulous Economic Surveys in recent times this year, presenting a robust policy action plan for the government to prioritise upon.

From a careful review of the most recent Survey, one could get a nuanced analysis of the twin-balance sheet problem affecting the credibility of the banking sector; the disparate patterns in agricultural productivity across India and its link with trends in overall temperature changes and water availability (recommending different irrigational strategies like drip irrigation in dry areas of states); the issue of gender inequality and its impact on sectors within the economy; and an interesting study on the ineffective nature of government export-subsidies in the textile sector.

All these analytical observations offered a set of critical issues and measures to be undertaken by the government in its action plan.

Unfortunately, Subramanian’s contributions didn’t seem to have a big effect on the government’s enacted policy approaches and vision (as evident from this year’s Union Budget). On the issue of ineffective export subsidies allocated by the government in the apparel sector, the Economic Survey depicted how a Rs. 6,000 crore package (announced by the Cabinet in 2016) failed to boost exports of readymade garments (silk, cotton etc.) with a limited impact on other manmade fibre exports, proposing a revision to the government’s export enabling strategies. Similarly, some of Subramanian’s recommendations pertaining to the GST fell on the government’s deaf years. For instance, the GST structure he suggested was far simpler with a minimum rate of 18%, but this was ignored, leading to a complex web of GST tax slabs with multiple rates causing initial implementation hurdles.    

The case of ignoring consequence-sensitive policy insights fromSubramnian remains quite similar to the earlier experiences of Raghuram Rajan (in case of demonetization) and Arvind Panagariya (cautioning against the fiscal spending spree).The exit of eminent scholars in inconsistent ways not only affects the international impression about India’s political economy of policy-making, it also reflects a trust deficit between elected politicians and econocrats where the latter play a limited role in guiding or shaping government policies during their term as bureaucrats.

While the application of economics in actual policy-making can hardly be recognised as some form of exact science, there remains a vital need to nurture and value insights from econocrats like Subramanian, Rajan and Panagriya, who demonstrate skills of economic craftsmanship through a rich body of work and prior experience. At this point, what seems certain is that the actual economic policy-making process at the higher government level features a small, concentrated group of decision-makers that is largely unaffected by the influence of econocrats.

India’s former Reserve Bank of India (RBI) Governor Raghuram Rajan, gestures during an interview with Reuters in New Delhi, India September 7, 2017. Credit: Reuters/Adnan Abidi

India’s former Reserve Bank of India (RBI) Governor Raghuram Rajan, gestures during an interview with Reuters in New Delhi, India September 7, 2017. Credit: Reuters/Adnan Abidi

Earlier this year, Raghuram Rajan made a statement to such effect, questioning the so-called “democratic” nature of decision-making within the government (evident since the time of demonetisation).

Questioning what he thought was an undemocratic way of running the country, the former central bank governor said: “…We also have to ask whether things are getting too centralised and if we are trying to run the economy by a very small set of people and whether there is enough sort of capacity to manage what a $2.5 trillion economy needs,” he said.

Bizarrely, and seemingly contradictory, there is an assortment of one-too-many economic advisory committees at this point in the presence of the NITI Aayog, the Prime Minister’s Economic Advisory Council (PMEAC) and other temporal changes within the Finance Ministry’s management (Arun Jaitley’s battling ill-health and Piyush Goyal taking charge), yielding confusion on the direction of economic policies and objectives of the government.

For the Modi government, which is currently facing major macroeconomic challenges, nurturing domain expertise from hired scholars as bureaucrats remains vital to ensure the creditability of democratic decision-making within the government, while also promoting scholars across other disciplines (outside economics) to come forward and contribute towards the process of public-policy designing.

Politicians need to further facilitate a space for reasoned disagreement within the policy-design and review stages, offering operational autonomy to eminent individuals in effectively shaping economic policies for desired outcomes.

It is important to acknowledge that we are living through a period in which the general public distrusts academic expertise as soon as it affects real-world topics such as economics, medicine, climate science etc. The implicit social contract between the government, the citizen and the academic researcher too, is at its weakest in an age where fiction is often mistaken as facts (and vice-versa). Confronted with such realities, econocrats (or other eminent scholars) with limited operational autonomy or influence may often get dis-incentivised and prefer to retreat into their academic worlds, detached from such existential realities.  

Such “ivory tower” retreat approaches need to be deterred and require a deeper introspection from agencies and elected leaders of the government to retain and value talent in parliamentary democracies.

At a time when the Modi government seeks to allow lateral entry into the bureaucracy to promote new talent and knowledge within public-policy making and implementation processes, it remains to be seen the extent to which ministers can actually ensure their intended objectives by ceding enough space to expert insights and giving them enough autonomy to independently function within India’s parliamentary democracy.

The popular belief around the making of a policy, which unfortunately is still seen to be a prerogative of the politician alone, needs to change.

Deepanshu Mohan is assistant professor of economics at Jindal School of International Affairs, O.P. Global Jindal University. 

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