A renewed effort to achieve acche din
A cycle of low consumption impacting production needs to be arrested. Industry and agriculture require urgent reforms.
If the NDA government is elected today, with the mandate up to early 2019, what should its agenda be? No doubt, the objective should be sustainable and inclusive development aka acche din. But what steps can government take in three-years to generate visible benefits for it to get re-elected?
We know that the impact of reforms is visible in the medium to long term. Significant reforms require legislative backing but the opposition seems in no mood to relent. The NDA government needs to take into account all these limitations, while designing the way forward.
Humans are psychologically conditioned to respond to incentives. A correct set of incentives can nudge behaviour towards accepting change. And the Centre has the resources to develop the correct set of incentives to obtain desirable behaviour from all stakeholders. It just needs to use these resources adroitly.
A prerequisite for sustainable and inclusive growth is a healthy and mutually reinforcing production and consumption cycle. India lags on both accounts. So what incentives can improve the situation?
Improving farm production
There is a need to ramp up agriculture and industrial production. Let us first focus on agriculture. We need a Make in India campaign for our farms, which can impact the bahujan.
To achieve this, the government subsidises procurement of specific inputs to farmers. The output support is provided in form of minimum support price (MSP) to select farm goods. Such input and product-based support incentivises farmers to focus on them, and could divert attention from other products and other factors.
Such initiatives might have been essential when envisaged, but need to be tweaked over time.
As eminent economist Ashok Gulati points out, only wheat and rice farmers benefit from high MSPs, that too in a few States. He points out that the country spends around ₹200,000 crore in input and output support measures, which could be better utilised if provided in the form of income support to farmers at around ₹14,000 per hectare.
Such income support will not restrict the freedom of farmers. It will allow them to adequately prepare for and react to market forces and nature.
The country has the technology to make this happen. It has started to taste success with direct benefit transfer programmes. Technocrats like Nandan Nilekani will be more than willing to support the government to design similar technologies for a Make in India campaign for farmers.
Existing policies also result in excess production of supported agriculture products, for which adequate storage and warehousing facilities are not available.
The government’s plans to restructure the Food Corporation of India and the Central Warehousing Corporation are not moving forward due to vested interests. The government must revive its plan to improve agriculture production. It must remember that agriculture supports close to half of India’s population and ignoring it could result in a fate similar to that of the Vajpayee government.
Better industrial output
Incentives to promote industrial production have often been outweighed by administrative and bureaucratic delays in approvals, high non-performing assets, a complex and uncertain tax regime at the Centre and state-level, and inefficient dispute resolution. This results in investors holding back investments and, as RBI Governor Raghuram Rajan recently pointed out, both private and public investments have been dropping. He observed that factories are running at 30 per cent below capacity.
Today’s problems are the result of an inefficient incentive structure of the past. For instance, the high growth phase between 2003 and 2008 incentivised industry to leverage their balance sheets and banks to provide credit, without adequate due diligence.
The result is for all to see. The incentives for tax officers to meet yearly collection targets and the revenue deficit made the tax regime adversarial. This was coupled with a lack of efficiency-based incentives, leaving no reason for bureaucracy to perform.
While the government has committed to take several steps to improve the business environment, little appears to have changed on the ground, especially with regard to interaction between low and mid-level government officers and small scale industry.
This needs to be improved with better monitoring, supervision, accountability and performance incentives, and providing conducive environment for sustenance and growth of small and medium scale entrepreneurs.
The government would also do well for itself if it is able to get the goods and services tax up and running. This would require providing the right incentives to the opposition to bring it to the negotiating table and get a workable GST passed. It must not forget that GST has potential to garner votes.
Raising living standards
One of the reasons for subdued industrial production is that demand has not picked up yet.
The relation between low consumption and production quickly turns into a vicious cycle which needs to be addressed. Consumption of industrial products is linked to income levels and prices of essential goods.
A significant proportion of the famed Indian middle class belongs to lower middle income aspirant category which is unable to go beyond managing spending on essentials like food, health and education. Health and education requires much more efforts than are visible at present. Unless people are productive, economic activity suffers.
The government needs to provide right incentives to the whole system, including getting the States on board, for boosting the living standards of people. Only then can we hope to see acche din.
The writer is Secretary General of CUTS International.