***Economics*** #IAS #UPSC #GS =>Elephant has become mouse (Excellent Article by Bibekdebaroy on Indian Economys state and challenges lying ahead) - Sentiment-wise, India was never perceived as an East Asian tiger. It was a lumbering elephant. With 4.7 percent growth in 2013-14 the lumbering elephant has now become a squeaking mouse. ***First, there is the inflation story, distilled into its three components of manufactured, agriculture and commodities. With the exception of manufactured, monetary policy is singularly inappropriate to address other forms of inflation. =>What has caused inflation? The main reason is increased public expenditure, which has pumped in liquidity and increased demand. We can look upon this as a desirable objective, provided that supply-side changes are triggered by reforms, especially agro. But if supply is inelastic and there are no reforms, agro-type inflation is inevitable. Inelastic production has been compounded by an increase in transportation costs. On expenditure, barring subsidies (read petroleum products), there is not much that can be curtailed. At best, we can control increases (read education, food subsidy). Therefore, it becomes important to increase revenue, either tax or non-tax. Whether non-tax receipts (spectrum, disinvestments) should be used to plug a deficit is a separate point. However, this (especially disinvestments) has stagnated. Had genuine tax reform — read Goods and Services Tax (GST) and Direct Taxes Code (DTC) — been introduced and all exemptions eliminated, there would have been additional revenue amounting to 5.5 percent of the GDP None of that has happened and matters have become unnecessarily complicated because of policies like General Anti-Avoidance Rules (GAAR). As share of the GDP, investment has declined by 4 percent. That’s certainly going to be reflected in GDP growth. We have always had problems with labour (education, skills, mortality, morbidity). That’s got compounded by labour shortages and high labour costs (effects of MGNREGA). Fourth, land access has become an issue because of acquisition problems. Add to that forest and environmental clearances causing problems in infrastructure (power, coal). The solutions to the growth problem lie elsewhere, not with the Reserve Bank of India (RBI). But since the RBI is the only organisation that seems capable of taking some action, tighten monetary policy. As mentioned earlier, monetary policy doesn’t address inflation. It makes growth worse. However, loosening the monetary policy doesn’t solve the problem either. There is plenty of liquidity in the system WHILE there are reasons economists mention, there is another one that economists rarely mention. This is the complete collapse of decision-making within the ministerial and bureaucratic systems, compounded under UPA-2. RTI and scams have contributed to this. However, everything isn’t about malafide decisions based on personal corruption. There are bona fide decisions too and the political system needs to insulate the bureaucracy from the consequences of these decisions.
Posted on: Thu, 14 Aug 2014 10:02:11 +0000
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