The new government is moving fast to tackle the slowing economy, the crisis facing farming and generation of work for the youth. It has announced two important policy decisions in its first cabinet meeting. Two cabinet committees have been set up to boost growth and investment, and employment and skills. Second, it has asked each ministry is to prepare five-year plans for achieving their goals.
Need for policy coordination
The committees consist of multiple ministers and are akin to the earlier groups of ministers (GoMs). They stand as reminders of the need for coordination of policies across ministries. This was the role played by the erstwhile Planning Commission. The Ministry of Finance cannot play such a role since its task is to allocate funds and ensure that the budget deficit is minimised. After the abolition of the Planning Commission, no other agency has been playing this role of coordination. However, it is crucial to achieve complex goals like stemming the decline in economic growth and increasing employment generation. These goals require almost the entire government to act together.
Growth and investment refer to the entire economy and not just a sector. If growth accelerates in one sector but declines in another then higher growth will not follow. This has happened in the economy, with the organised sector growing while the unorganised sector has declined. Now, the impact of the slowdown in demand has also affected the organised sector so that the overall rate of growth has been coming down and the index of industrial production has remained largely stagnant.
Similarly, investment has to be prioritised across the economy. In a poor country, investment is needed in areas like, education, agriculture and industry. An overview is needed to prioritise the sectors where more investment is required.
If investment and employment are to be coordinated, one needs a policy on appropriate technology and sectoral prioritisation for the country. Investment in modern industry or construction does not generate many jobs, due largely to automation and mechanisation. Investment even in modern agriculture is labour displacing. So a highly nuanced policy is needed to generate adequate employment through a proper investment policy. This would require fiscal incentive to investment in the appropriate avenues, like small and cottage sectors.
Further, at present, investment and employment will not rise with tax concessions or cuts in interest rates. As long as capacity underutilisation in industry remains high, as indicated by Reserve Bank of India data, investment rates will not rise, in spite of tax concessions and lowering of interest rates. The RBI has cut interest rates twice earlier but that did not spur investment or the rate of growth of the economy, which has continued to decline. Demand has to be generated for the investment rate to rise. So, appropriate fiscal policies become crucial and monetary policy has to be flexible to support it.
Need for advance planning
Ministries preparing plans for achieving goals is nothing new. The BJP manifesto promised that ’75 milestones for India at 75′ will be achieved by 2022, the 75th year of Independence. But every goal cannot be achieved at the same time, so prioritisation and a road map will be required to achieve targets. This will have to be done not only in individual ministries and departments but by cutting across the ministries.
Resources are needed to achieve goals. Effectively utilising them would require overall planning and coordination across ministries and departments. In fact, the allocation of resources would determine in what order the targets will be achieved. An overall authority, across ministries, would be required to perform this task. The Ministry of Finance cannot perform this task. It can only set the overall constraint on total expenditures but it cannot determine the priorities.
Further, since the state governments would be required to help achieve various goals across sectors like education, health, agriculture and local infrastructure, coordination between the states and the Centre would be required. Would the states agree to the priorities set by the Centre? This would also require coordination and monitoring by some authority.
The Planning Commission played these roles in the past but the NITI Aayog has not been doing so. The moot point is, would a transformed NITI Aayog emerge to fulfil the need for coordination of polices and optimum resource use and allocation? It is not necessary to go back to the idea of an economy with a centralised plan but for the optimum allocation of resources some degree of planning may indeed be required. One could even consider the idea of a rolling plan which can be adjusted periodically.
What is to be done?
Boosting growth, employment and investment takes time. For instance, it may seem easy to fill up millions of posts lying vacant in government and educational institutions. But recruitment takes time since people have to be interviewed and candidates with appropriate skills selected. Posts should not be filled up for the sake of filling them. Hurriedly filling up posts can prove costly since those employed will stay in their posts for several decades.
If growth has to be boosted, additional demand is to be generated in the economy. It would require a boost to the unorganised sectors which have been languishing since demonetisation was announced. A boost to the organised sectors through tax concessions and interest rate cuts would not do. Yet this is what the powerful lobbies of big business would want. They would demand that of the budget and they would get it too. It, however, would not solve the problem faced by the economy, for which the cabinet committees have been set up.
For the schemes already announced in the Budget in February (like the Pradhan Mantri Kisan Samman Nidhi) and for the schemes that will now be additionally pursued after prioritisation by the cabinet committees, more resources would have to be raised. This will be daunting since tax collections have already been behind target due to a slowing economy. So a view would have to be taken about how much fiscal deficit the system would be willing to accept before tax resources would have to be found. How would the business groups and the stock markets react to such proposals? Quite a task awaits the new committees and the coming Budget.
Arun Kumar is Malcolm Adiseshiah chair professor of the Institute of Social Sciences, and author of Ground Scorching Tax, published by Penguin Random House, India