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Last week, the Indian government appointed Dr Raghuram Rajan, a distinguished economist, as its chief economic adviser (CEA). The CEA advises the government on possible policy options and priorities. There are no executive responsibilities other than to prepare the various economic reports that are presented to Parliament - including the Economic Survey. In this context, it may be useful to look at the policy preferences of the new CEA.
In April, Rajan made a speech in New Delhi in the presence of the PM where he signed off with "I have been frank as an academic, that is the only value I bring". This suggests that perhaps he thought that his speech would not be to the liking of his listeners. But was it really that radical?
The speech (along with my somewhat liberal translation for the non-economists) identifies some issues with recent economic policy:
"Rent, patronage, or entitlement enhancing measures have sailed through."
"Private consumption, especially in rural areas, is growing strongly on the back of rising incomes, strong credit growth and continuing government transfers and subsidies. The result: The gap between our spending and our saving is making us dependent on short term foreign inflows to a dangerously high extent."
Policy paralysis led to bureaucratic/political adhocism, encouraging corruption. India's unwashed masses have been satisfied through hand-outs in the form of subsidies for which there is no apparent way to fund.
The Government has raised minimum support prices for agri commodities at much higher rates than the rate of inflation. Along with free hand-outs (referred above), and forced lending to rural sector through compulsory priority sector lending, we are consuming well over what we save. Soon we will need China to fund us!
So far, I see no problems with the diagnosis. The problem starts now!
Rajan says: "We need a common minimum programme across all sensible political parties to ensure that we stabilise the economy and foreign investor perceptions quickly."
Here we have it. By implication, democracy in India is a problem. If you don't agree with policy wonks of the government, you are not "sensible", and foreign investors are more important than local.
In reality, democracy is good for the economy as are policy disagreements. Enough data exists to prove it. One example is that India's growth rate has gone UP significantly in the period since we have had coalitions ruling the country.
Additionally, most large Indian houses have been investing overseas (perhaps in quanta at least as large as inflows) over the past few years. That should cause policy makers to pause and see why domestic industry does not see the potential in India while we are supposed to invite foreigners.
Rajan goes on to suggest that by 2000's, "powerful elements of the political class which had never been fully convinced about giving up rents from the License Raj ..., had by then formed an unholy coalition with aggressive business people ..... The new post-License Raj equilibrium became the Resource Raj."
The statement is misleading seeming as it does to suggest that the unholy politician/industry alliance is new. When did India ever have a strategy to offer national resources in a transparent manner? It was always through licensing which is by its nature open to corruption. Only difference this time the scale of corruption is unprecedented under the current dispensation.
So what is the solution that Rajan prescribes? He says, "simply moving our millions from low productivity agriculture to rural industry or services will give us growth for years to come, provided we are willing to do the minimum necessary to collect the low hanging fruit."
How do we do this? "We need to liberalise sectors like education, retail and the press, freeing entry and improving customer choice. We need to transform more government-owned firms into well-managed publicly owned firms which are free from political influence or government support. And we need to evolve transparent means of pricing and allocating the bountiful natural resources in our country."
Get the connection? Huh? Well I don't too. How does letting foreign investment in the press, retail or higher education (he speaks of higher education, not primary, when he speaks of liberalisation somewhere else in the speech) help in increasing rural industry or services? Privatisation of government-owned companies has already been ruled out of the policy tool box of the current government and is unlikely to find its way back.
Unfortunately, the rest of the prescriptions too don't offer anything new: increase fuel prices (instead of curtailing wasteful government expenditure), find a policy for allocation of natural resources (non contestable except that no format has been suggested, so this is a motherhood statement and no more) and look out for foreign investors (I fail to see why it is not necessary to be kind to Indian investors as well).
So far, what one sees of the new CEA seems to be only old wine in new bottle. Worse, it does not seem to be based on fact or cogency of argument. Hopefully the reality will be better for India's economic future.
More about Anand Tandon
Anand Tandon joined JRG Securities Ltd in November, 2010 . He is a B.Tech from IIT, Kanpur and a PGDBM from IIM, Ahmedabad. He has over 20 years of experience in the capital market. He has in the past held senior leadership role at ASK Raymond James & Associates, Edelweiss Capital and in the Global Analytics Group of Citibank. He was also the Co-founder of Gryffon Investment Advisors, a boutique investment management company focusing on alternate investment strategies and Portfolio Management Services.
Anand is a regular media commentator on capital market trends. Prior to joining JRG, he was Head of Equities at Brics Securities Ltd, Mumbai.
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