Focus on ‘general government’ to attract global investment: former finance commission chairman NK Singh

Taking an example of FRBM act’s adoption, Singh said that in 2003 when the first FRBM Act was adopted all states eventually passed their own fiscal responsibility acts.

“However, when the central government enacted the second FRBM in 2017, state policies largely remained unamended. It is therefore important that states are incentivised and cajoled into accepting the 2017 FRBM amendments,” Singh explained. He added, “We must mainstream states into this discipline through incentives and consequences that reward prudence and discourage profligacy. Investors watch the general government and not only the Centre”.

Singh pointed out that as Finance Minister Nirmala Sitaraman stated this week, debt will be the principal fiscal anchor of the central government in the forthcoming budget. “How do we replicate this for the state governments? What mechanisms, with the bounds of federal autonomy, would be appropriate?” he asked.

In his speech, Singh pointed out that China has outperformed the Indian economy because the latter treated trade as something to be rationed.

While India and China, till 1950, were similar in economic size, the latter per capita income was roughly 5.5 times India’s by 2023, Singh pointed out. How did this happen, he asked, adding authoritarianism alone cannot account for this massive growth in China. “We should not draw false conclusions on the hiatus between democracy and development. Indeed, the recent performance of the Indian economy, particularly over the last few years, strongly suggests that democracy and development are not inimical. In fact, they are symmetrical,” he said. The difference between India and China and other countries including South Korea is that these economies treated trade and exports not as a source of foreign exchange, but as basic to economic growth, this led to improvement in logistics, skills, technology and governance.

“In sharp contrast, Indian policymakers…treated trade as something to be rationed, not expanded through enhanced competitiveness…what prevented us from learning from the performance of East-Asia and indeed our own neighbourhood?” Singh asked.

To make India a competitive investment destination, the cost of land, labour and capital matters, he said. Recent changes in the government’s variable based wage framework was an important step toward calibrating labour costs closer to international best practice, he said, adding what matters equally is improving the productivity of investment, measured by economists through Incremental Capital Output Ratio (ICOR). “India’s ICOR has been around 5. It has now come down to about 4.5. The real question is how do we bring it down further, to around 3 at least over the medium term,” Singh asked.

The Indian economy needs reform, Singh pointed out, adding Fabian socialism was not able to provide this reform in the early years of the country’s development. “When reform was deep, results followed. Telecom is the clearest example. After the new telecom policy of 1999, access to telephone services rose from under 1% in 1999 to over 50% by 2010. Information Technology tells the same story. Software exports rose from about $130 million in 1990-91 to over $6 billion by 2000, and their share of total exports increased from about 2% in the mid-1990s to over 16% by the early 2000s,” Singh said.