Sustaining growth – Stanford prescriptions

Each one of these templates has a bearing on our strategy. The sharpest ones are about pricing energy efficiently, subsidising not all but the lowest income segment, and applying rigorous tests before commencing a new spending programme. In respect to the first, Boskin argued that differential taxes or subsidies create serious distortions, embed powerful constituencies to retain them and generate an eventually more costly unwinding. For example, India’s subsidised retail prices of energy could cost the state oil companies up to four percent of GDP at current oil prices. In fact, the opposition parties have argued that the economic and social disruption could have been far less painful if subsidies had been progressively reduced to mitigate any shock effect. Besides, subsidising everyone who may not be in need of a subsidy is distortionary and it is always more efficient to have either a targeted programme to transfer resources more directly to the people or restrict them to infra-marginal prices, implying the price of an initial subset of consumption. We know, however, that identifying the intended beneficiary and the criteria to do so has remained debatable. On the theme of subsidies, the prescription of avoiding large transfer programmes that risk establishing permanent government dependence, particularly when they become inter-generational, is most appropriate. The challenge to policymakers in managing expectations and not radically over-promising is crucial while recognising the limitations of a public delivery system. Finally, on applying critical evaluation before commencing a large public outlay programme is a theme on which I have written several times. The suggestion that governments must do what is necessary in any event like investments in public infrastructure, education and public health but not create an open-ended, never-ending growing entitlement is at the centre of any effort to reform public expenditure policies. The revenue-sharing arrangement in India between the Centre and the states seeking to balance equity and efficiency over time is acceptable, but any fixed paradigm mitigates against the broader principle of using states as laboratories by building necessary flexibilities at the local level in the conception design and implementation of public outlay programmes. The last issue about tolerating some inequality during rapid growth may not have many takers in an India wedded to the principle of growth with equity and committed to what has now become fashionable in being described as its inclusive growth strategy. Seeking to mainstream the rural economy, special poverty alleviation programmes, a wider spread of education and healthcare which ameliorates the handicaps of the very poor is not new in our growth strategy. T N Srinivasan commented that while the slogans may be new, these policy directions had a continuity embedded right from our First Five Year Plan.

In overall terms, while there was both appreciation and awareness regarding our recent rapid economic growth, there were also overwhelming concerns regarding our fiscal stability, large contingent liabilities, rapidly expanding public outlay programme unmindful of their efficiency, and populism overtaking performance. The emerging energy and food environment complicates policy options. Balancing growth and inflation is never easy. It is even more so in trying times like these. The Stanford prescriptions are valid, but may not be novel.