Building half-bridges

Government doesn’t get it. Problem is not decision making, but state capacity.

Reformers don’t understand that state capacity is depleted. We worry too much about where the state should get out and too little about where it should get in. Reformers don’t understand that state capacity is depleted. We worry too much about where the state should get out and too little about where it should get in.
Written by Pratap Bhanu Mehta | Published on:July 11, 2014 12:12 am

The Union budget is a deep disappointment. It displays India’s weakness as a nation in full measure: articulate lofty goals, give a lot of promissory notes and then design pitiable instruments. Or, if you prefer a numerical metaphor, it is a trillion-dollar economy with a hundred crore mindset (of course, no pun intended). The finance minister’s opening statement sounded promising: it eloquently diagnosed the economic challenges and set three-year fiscal goals that sounded eminently sensible. It delivers some fiscal reform, promises, some administrative simplification, but then devolves into a series of small-minded schemes, both on the taxation side and the government expenditure side. It may be some consolation that the budget does not stray into fiscal irresponsibility, but it does not, as yet, signal a major paradigm shift.

The budget, for the most part, falls short of its ambition. India needed four basic transitions: macro-irresponsibility to macro-prudence; stagnation to growth; welfare to participation; and from a flailing to a successful state. The budget numbers, if true, are not bad on the first transition. But it is disappointing on the others. To be fair, as the Economic Survey so clearly articulated, the challenge before the finance minister was immense and not all things required to revive the economy are budgetary. And admittedly, fixing the economy is a work in progress.

But the budget clearly does not have a framework for growth or for curbing inflation. Or insofar as one can detect a framework, it goes like this. Keep on the path of fiscal consolidation so that private investment is not crowded out, inflationary pressures are eased and India is not downgraded. There was always going to be a tension between the imperatives of fiscal consolidation and inducing growth, particularly through public investment. That is perhaps the reason why many economists, even those like Arvind Panagariya, had argued that even a 4.5 per cent fiscal deficit would not be such a bad thing provided the investments were productive. The finance minister began by saying that the tax to GDP ratio needed to be increased, but there is no effort to break new direction.

The government has made some infrastructure commitments. But its big bet is on the private sector to revive investment through three instruments: unlocking bottlenecks in existing investment; reforms in the financial sector to enable raising of capital; and public-private partnerships. But no matter what the budget says, the core infirmity in all three instruments is governance. Investment got stuck not because of lack of financing but because of a whole range of issues from land to environment. Even for small and medium industries, the issue is …continued »

Do you like this story