Economics alone doesn’t save a government

Economists in India had enjoyed periods of much recognition and also much neglect. In Independent India, under Nehru, economists came to much public notice. P.C.Mahalanobis, V.K.R.V. Rao and many others, including the foreign economists of the calibre of Nicholas Kaldor and Tan Tinbergen, Oscar Lange (Communist economist) were more welcome, the Soviet Russian Five Year plans were our model.
P.C.Mahalanobis laid the statistical foundation for much of economic planning, he was the real author of the Second Five Year Plan. That plan shifted our planning from agri/irrigation perspective to heavy industrial model.
Then, came Indira Gandhi, things got wrong from day one and from one misstep to another, it was more and more State control of the economy. A recent essay in a popular journal narrates how Indira Gandhi’s years were described as “the dark age of Indian economy.”. This was said by Rakesh Mohan, now RBI deputy governor.

A period that spawned most of our draconian laws like FERA, the MRTPA, COFEPOSA and the Urban Land Ceiling Act. When we nationalised our coal mines, general insurance and banking.

That period was an unexpected irony after India started industrialisation with the help of the world’s best economic brains. The Industries (Development and Regulation) Act, 1951, says ex-chief economic advisor Ashok V Desai, gave legislative sanction to wartime controls.

And this led to “the regulatory arteries hardening after the mid-’60s”, writes Mohan, with government interventions like licensing quota, high import tariffs and subsidies. To set up an industrial unit, entrepreneurs had to run from pillar to every post.

In 1964 itself, Manmohan Singh, who shot to fame with inflation management in the early ’70s, had come out with a cautiously argued study on the government’s shooting-itself-in-the-foot export strategy.

Mohan writes : “The Indian tragedy is not that we adopted an anti-export bias in the ’50s, when all developing colonial countries did, but that we didn’t change in the ’60s when world trade grew by leaps and bounds.”
Says ex-RBI governor Bimal Jalan : “In the 36 years of 1956-91, there were balance of payments difficulties in 30 years,” forcing India to seek extraordinary aid six times from bilateral donors and the IMF, thrice between 1966-81.
The Constitution was amended 28 times in 1966-80 to protect the various new laws and allow ordinances through. It was a kind of precursor to the 1975 Emergency.

Now, Manmohan Singh is back in power, of all positions, the most powerful, Prime Minister of India. Suddenly, it seems the economists are back in fashion?

Anyway, Mr.Montek Aluhwalia is chief of planning Commission which also has another economist Abhijit Sen. Sen is an agriculture economy expert and his views are now heard with some attention.

Delivering a lecture on `Rural renewal ” options and constraints” at the Administrative Staff College of India. Prof.Sen said that between 1961 and 1996 there were only two years when the “terms of trade” were against agriculture.
But since 1996 “terms of trade” had been against agriculture for five years. This had led to a large rise in rural debt and sharp declines in calorie intake and rural employment. But there were two large macro-economic constraints routing rural investments through the Planning Commission, Prof.Sen pointed out.

The first constraint was that the economy was growing at an average of six per cent a year while the plan assumed an average annual growth rater of 8 per cent. Over the five year Plan period this had implied a total growth of 35 per cent in the GDP instead of the projected 50 per cent, leading to a shortfall of 15 per cent of the GDP in resource availability.
The second macro-economic constraint was the Fiscal Responsibility Act which set down that revenue deficit would be eliminated by 2008 from 4 per cent of the GDP at present. This could be done either by raising income through tax collections or by reducing expenditure.

In the event of tax collections remaining static, expenditure would be hit, including Plan expenditure.

A slower growth in the economy combined with a squeeze on expenditure would make it difficult to sustain rural investments, Prof. Sen cautioned.

Post Navigation