So I waited for the mid-term survey, which he usually brings out towards the end of the calendar year. But there was none this year. It may have been because he would have had to report some bad news. For one thing, foodgrain procurement and distribution have done poorly: rice procurement this year is less than half of the normal, and offtake a third less. Wheat stocks are down too. It is unclear whether this is bad luck, or whether a policy decision was taken to neglect PDS. The October index of industrial production was 2 per cent lower than a year before; the capital goods index was a whopping 25 per cent lower. Output of all energy products – coal, crude oil, and natural gas – was down. Trade balance till November was slightly improved, but that was entirely due to the fall in international oil prices; the oil war between the US and the Arabs had been good for us. Budgetary deficit in all its definitions had fallen in the first half of last financial year; this year it went up. And a quarter of the 270 million Jan Dhan accounts had zero balance, the average balance in the rest was about Rs 3300, 8.3 million account holders had asked for an overdraft, and 2.4 million had got one of Rs 1300 on the average. The rest were refused.
But to say that he avoided the bad news is unfair or premature, for Subramaniam has promised an old-style Economic Survey of the past year some time in the coming year. He has completely changed the form and intent of the regular Economic Survey. It concentrates entirely on fundamental questions, which the finance ministry in my time left to the planning commission. I had tried to raise them in my first Economic Survey in 1992; but I was eased out soon after, and the initiative died. Subramaniam has gone deep, covered both short-and long-term issues, and involved an amazing number of people – about 200, both outside and inside government – in the debate the survey encapsulates. Even the finance minister is supposed to have written a chapter, though which one is not revealed.
The Economic Survey compares India with other countries in many dimensions. It draws three major lessons: India has been stepmotherly towards the private sector, it has a pretty inefficient government, and the government has actively but ineffectively redistributed incomes. This is a good summary of two generations of independent India; demonetization is the latest instance of this inefficient redistribution. But its aim of digitization of payments was good, and should be promoted by introducing GST and extending it to real estate transactions, reducing income tax rates, widening the income tax net, reducing corporate tax faster and reducing discretion and increasing accountability in tax administration. Preference for cash is not just because people dislike paying taxes; it is also because taxation is inefficient and corrupt. Improving it is more important than making everyone use cheques and cards.
The Economic Survey goes in some detail into what it calls the twin balance sheet problem – companies borrowed from banks, and did not repay the loans, making the balance sheets of both unsound. This has happened in many countries; elsewhere, it led to bankruptcy of banks. It did not happen in India because most of the banking system is owned by the government; mounting bank losses simply meant that the government’s equity in the banks was wiped out. But if companies do not repay loans, accumulating interest on them keeps raising their liabilities; and if banks cannot realize loans, they cannot give fresh loans. For instance, state electricity boards do not pay power generation companies for electricity, the generators cannot repay loans or expand capacity, and growth in the power sector comes down. The Economic Survey’s suggestion is that the government should set up an asset reconstruction agency which would take over big bad debts from the banks, and resolve them in various ways – taking over the assets of debtors and selling them, selling the businesses to new entrepreneurs at a loss, and converting some of the loans into equity. This is pretty obvious, and has been tried before, in the 1990s. It may resolve the problem for now, but it will recur for a reason the Economic Survey does not mention: SEBI has killed off the equity market, and the government has banned new private banks. The result is excessive debt-equity ratios, which lead to bankruptcies from time to time.
The Economic Survey gives much attention to a problem that has not occurred, namely public debt. So many countries across the world have run into intractable debt problems; Greece is the most notorious example. India has avoided it. The Economic Survey attributes the success to the Fiscal Responsibility and Budget Management Act of 2003, and the subsequent, relatively responsible behaviour of the states.
I would trace it to another cause, namely India’s high growth, which has continuously reduced the debt-GDP ratio and raised government revenue. In my view, the problem lies elsewhere: it lies in the poor quality of government. It spends so much and so inefficiently on consumption, and so little on investment. As a result, India’s infrastructure has continued to be poor. The Economic Survey points out India’s low tax collection, and proposes raising it. That would be even worse if the government continues to be as inefficient as it is. I hope that the Chief Economic Advisor will spend this year studying why the government works so badly and what can be done about it.
There is so much more in the Economic Survey. I have not even come yet to universal basic income, for which the Survey has made news. I have not discussed it largely because the underlying idea is good: the dozens of personal subsidies the governments give need to be unified, and the corruption in doling them out to be eliminated. But they need to be subjected to good empirical analysis. This is a subject to which Arvind Subramaniam should give some attention in the coming year. The other issue on which he might spend some time is prioritization amongst his myriad policy ideas.
