Thursday, Dec 18, 2014

Building half-bridges

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 | Posted: 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 not availability of money — it is that most banks are not organised to give loans to businesses. The fact of the matter is that none of those issues have gone away, and on matters of environment, any temptation to take shortcuts will backfire in the near future because we don’t have credible processes in place. The financial sector reform is meaningless without a serious reform in the banking sector, and on the face of it may expose India to even more volatility if growth does not pick up. The budget is geared towards short-term capital inflows; on FDI, it is still in the 26 to 49 mindset. And public-private partnerships are being thrown up as a solution to every problem, without a clear sense of where they are not viable.

The second big disappointment is the continued random and ad hoc structure of public spending. What health and education needed most was a framework in the context of which particular allocations make sense. Instead, what you get is the same distribution of crumbs with the same old, failed models. The worry about these odd hundred crore allocations is the mindset they reveal. In almost none of the schemes, whether climate change or welfare related, are outlays matched to any kind of objective. Someone once rightly said that building half-bridges amounts to building no bridges at all; they are a functional waste. Something like that affects much government expenditure, and this budget continues that trend.

Reformers do not understand that state capacity is severely depleted. We worry too much about where the state should get out and too little about where it should get in. The fallacy is this. In the slogan “minimum government, maximum governance”, we seem to think that the latter simply follows from the former. But governance is a capacity that needs to be created. A mere hundred crore for gender security is meaningless when there is not enough outlay for core sovereign functions like law and order. Maximum governance requires building a smart state, and a smart state costs money. Projects got stuck because DPRs were not done properly, there is no environmental monitoring capacity, our statistical service does not produce the data a modern economy requires, and will we create hundreds of smart cities with a fistful of urbanists? Except some use of technology, there is no building of the state. Governance on the cheap will get you a cheap kind of governance.

The greatest cheer seems to be for financial sector and taxation reform, and odd items around flexibility in skilling and apprenticeship. Most of the taxation reform is still in the future. But the finance minister handled the issue of retrospective taxation well, with the right kinds of distinctions; the proposed commissions and increase in tribunal capacity may bring some relief. But the real problem on the taxation side has been fiscal targets — governments struggling to meet them incentivise tax authorities to arbitrarily extract. Administrative uncertainty is a bigger killer than legal uncertainty.

When Narendra Modi took office, even some of his supporters conceded that his strength was thinking in terms of projects, not policy. The government would be more comfortable thinking about hardware not software. This budget reflects that, except that most projects are half-baked. The government’s growth theory was converting India into a giant construction arena, except now it is hoping that PPPs will miraculously achieve this. The government’s diagnosis, fuelled by a feckless corporate sector, was that a slowdown in decision-making was the economy’s biggest problem. Well, it was not just decision-making, it was the lack of modern institutions upto the task of managing the legal, epistemic, regulatory and political demands of a modern state. This budget is a cross between bad elements of UPA 2 and NDA 1; there is no new Modi 1 in sight yet. The budget has no poetry and uncertain plumbing.

The writer is president, Centre for Policy Research, and contributing editor for ‘The Indian Express’

express@expressindia.com

comments powered by Disqus