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The Prime Minister’s problem is not lack of good economic advice, but lack of ability to use it; he might as well save money by sacking his advisers
A day before the budget, the government brings out the Economic Survey. This tradition goes back to the 1950s at least. Even now, the survey is big news; newspapers publish entire chapters from it on the day of its publication. But it has lost public interest because of its style and content. The finance ministry, which puts it out, writes only three or four chapters of it. The rest come from various ministries, which trumpet their great achievements, such as meetings held on pretentious issues and crores spent on populist projects. Even the chapters written by the finance ministry are largely descriptive, recounting what went up and what went down. What makes economics interesting is insight — saying what is not obvious to the non-economist, and how the future is going to be different from the past. Of insight there is little evidence in the Economic Survey.
The Prime Minister was an economist in the early years of his career. He understands what enormous effects economic trends can have over fairly short periods of time, and how important economic performance is to a country’s international standing. So, instead of depending on the finance ministry, he has set up his own economic kitchen cabinet — the Economic Advisory Council. It gives him a survey in February, and a forecast in July. Inevitably, both the reports give much space to what happened; but they try also to give the Prime Minister an idea of why it happened, and what to do about it.
The latest survey shows how poorly the government has managed its finances. The fiscal deficit in the first three quarters of the current financial year was 92 per cent of what was budgeted; so the government is going towards a fiscal deficit between 6 and 7 per cent of GDP against the target of 4.6 per cent. Together with the last budget, it had put forward a medium-term fiscal policy statement. It has neglected fiscal responsibility so badly that this statement will have to be consigned to the waste paper basket. The council calls for another fiscal responsibility Act; it does not, of course, say that the government is capable of sending that too to the rubbish bin.
The council points out that the deficit has gone up because the government lost control on subsidies. What it has failed to take on board is that the tax-to-GDP ratio has declined for both the Centre and the states, from 12 and 5.7 per cent in 2007-08 to 10 and 5.4 per cent in 2010-11. This is without any reduction in tax rates; the fall reflects lower efficiency of collection. That would have led one to ask why the government has become less good at collecting taxes. That is too uncomfortable; instead, the council’s thoughts turn to new taxes.
It is particularly keen on the Goods and Services Tax (GST), which would simplify indirect taxation and reduce opportunities for graft, which is why it has failed to win the approval of states till now. They are particularly hostile to the proposed dispute settlement authority, which would impinge on their power to use discretion. Hence, progress on GST is unlikely in the coming budget. But taxpayers can take it that the finance minister will take a hint from the council and replace the current positive list for service tax with a negative list, and thus impose it on almost all services. Its collection will not be very efficient since such a large proportion of services is supplied by small firms such as retailers. But efficiency has never been a prime concern of the finance minister.
He may follow the council’s cue in respect of service tax, but in view of his past record, it is doubtful if he will listen to its wish that he would bring down the fiscal deficit. In the last budget he planned an enormous increase. He enjoys spending public money; there is no reason why he should end his spending spree. The council would tell him that his fiscal deficits are inflationary. But government functionaries are protected from inflation; there is no reason for them to worry about the common people. The balance of payments might have imposed discipline for them. But the exchange reserves are so high that the finance minister does not have to worry about the balance of payments either. The council is hopeful that inflation will come down to 6 per cent. But that is on the assumption that the government listens to its policy advice — an assumption that would be unjustified in the present circumstances. The Prime Minister may think he needs good economic analysis and advice. But it is necessary only if he cares about the quality of economic policy. It is difficult for him to see why he should end his spending spree.
A day before the budget, the government brings out the Economic Survey. This tradition goes back to the 1950s at least. Even now, the survey is big news; newspapers publish entire chapters from it on the day of its publication. But it has lost public interest because of its style and content. The finance ministry, which puts it out, writes only three or four chapters of it. The rest come from various ministries, which trumpet their great achievements, such as meetings held on pretentious issues and crores spent on populist projects. Even the chapters written by the finance ministry are largely descriptive, recounting what went up and what went down. What makes economics interesting is insight — saying what is not obvious to the non-economist, and how the future is going to be different from the past. Of insight there is little evidence in the Economic Survey.
The Prime Minister was an economist in the early years of his career. He understands what enormous effects economic trends can have over fairly short periods of time, and how important economic performance is to a country’s international standing. So, instead of depending on the finance ministry, he has set up his own economic kitchen cabinet — the Economic Advisory Council. It gives him a survey in February, and a forecast in July. Inevitably, both the reports give much space to what happened; but they try also to give the Prime Minister an idea of why it happened, and what to do about it.
The latest survey shows how poorly the government has managed its finances. The fiscal deficit in the first three quarters of the current financial year was 92 per cent of what was budgeted; so the government is going towards a fiscal deficit between 6 and 7 per cent of GDP against the target of 4.6 per cent. Together with the last budget, it had put forward a medium-term fiscal policy statement. It has neglected fiscal responsibility so badly that this statement will have to be consigned to the waste paper basket. The council calls for another fiscal responsibility Act; it does not, of course, say that the government is capable of sending that too to the rubbish bin.
The council points out that the deficit has gone up because the government lost control on subsidies. What it has failed to take on board is that the tax-to-GDP ratio has declined for both the Centre and the states, from 12 and 5.7 per cent in 2007-08 to 10 and 5.4 per cent in 2010-11. This is without any reduction in tax rates; the fall reflects lower efficiency of collection. That would have led one to ask why the government has become less good at collecting taxes. That is too uncomfortable; instead, the council’s thoughts turn to new taxes.
It is particularly keen on the Goods and Services Tax (GST), which would simplify indirect taxation and reduce opportunities for graft, which is why it has failed to win the approval of states till now. They are particularly hostile to the proposed dispute settlement authority, which would impinge on their power to use discretion. Hence, progress on GST is unlikely in the coming budget. But taxpayers can take it that the finance minister will take a hint from the council and replace the current positive list for service tax with a negative list, and thus impose it on almost all services. Its collection will not be very efficient since such a large proportion of services is supplied by small firms such as retailers. But efficiency has never been a prime concern of the finance minister.
He may follow the council’s cue in respect of service tax, but in view of his past record, it is doubtful if he will listen to its wish that he would bring down the fiscal deficit. In the last budget he planned an enormous increase. He enjoys spending public money; there is no reason why he should end his spending spree. The council would tell him that his fiscal deficits are inflationary. But government functionaries are protected from inflation; there is no reason for them to worry about the common people. The balance of payments might have imposed discipline for them. But the exchange reserves are so high that the finance minister does not have to worry about the balance of payments either. The council is hopeful that inflation will come down to 6 per cent. But that is on the assumption that the government listens to its policy advice — an assumption that would be unjustified in the present circumstances. The Prime Minister may think he needs good economic analysis and advice. But it is necessary only if he cares about the quality of economic policy. It is difficult for him to see why he should end his spending spree.
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