Is the Economic Survey trying to dampen the astronomically high expectations that Budget 2016 is burdened with? Here is a give-away sentence from the Survey: "Big Bang reforms as conventionally understood are an unreasonable and infeasible standard for evaluating the government's reform actions."
What India needs, it says, is to "follow a 'persistent, encompassing, and creative incrementalism' but with bold steps in a few areas that signal a decisive departure from the past". This could just be a hint that finance minister Arun Jaitley's first full budget could be somewhat like the Rail Budget that Suresh Prabhu presented--shorn of grand flourishes that could ignite opposition but a lot of much-needed measures that will put the economy on a sounder footing in the long run.
Asking whether India needs big-bang reforms, the Survey points out that Big Bang reforms occur during or in the aftermath of crises and are the exception rather than the rule in robust democracies. "India today is not in crisis, and decision-making authority is vibrantly and frustratingly diffuse".
Now all this may be very disappointing to all those rooting for a breakthrough kind of budget on the lines of the 1991 budget of Manmohan Singh, but it is a more realistic approach. The Indian economy is certainly in a precarious position but not quite in the crisis situation it was in 1991. The reforms then were the easy, stroke-of-pen ones relating to de-licensing and de-regulation. The reforms that are needed now are far more difficult: subsidy reform and factor-market reforms (land and labour primarily), for instance. These will need to be addressed if the economy is to grow at between 8.1 per cent and 8.5 per cent in 2015-16.
The pragmatic approach comes through especially in the approach to subsidies. The survey points out that "eliminating or phasing down subsidies is neither feasible nor desirable unless [emphasis added] accompanied by other forms of support to cushion the poor and vulnerable..." There's going to be a continued reliance on cash transfers facilitated by the Jan Dhan Yojana, Aadhaar and mobile numbers (the JAM Number Trinity, the survey describes this, in keeping with Prime Minister Narendra Modi's fondness for catchy acronyms). The survey says unconditional cash transfers, if targeted well, can boost household consumption and asset ownership and reduce food security problems for the ultra-poor. "The policy issue is no longer whether but how best to provide and protect," it says. There's no arguing with this logic, but this could trip on implementation hurdles. The rollout of the National Food Security Act has been delayed because of problems relating to identification of beneficiaries.
The main theme of the Survey--"creating opportunity and reducing vulnerability"--clearly indicates a move away from a pure sops-based approach to addressing issues of poverty and employment. And it rightly points out that all reference to manufacturing as a transformational sector relates to registered or formal manufacturing. "Unregistered manufacturing cannot be a transformational sector. Thus, efforts to encourage formalization will be critical." Sure, they will. One of the reasons for the large size of the informal sector is the plethora of rules and regulations that kick in once firms cross a certain size threshold. While the whole narrative of the ease of doing business focuses on the formal sector, it is for the unorganized sector that it is crucial. Here again, there are no big-bang measures that will help; it will be a series of incremental measures, with much of the action taking place in the states.
In fact, this is something the Survey lays a lot of emphasis on. It lists three categories of policy interventions to help realise Make in India. The categories are placed in decreasing order of effectiveness and increasing order of controversy.
Improving the business environment, it says, is the least controversial and most effective. The other two categories are (a) industrial policy (providing subsidies, lowering the cost of capital, creating SEZs) and (b) trade policy (shielding domestic manufacturing from foreign competition and providing export incentives. "The risk to avoid in undue reliance on the latter two, especially if it leads to detailed micro-intervention, involving sector-specific tariff and tax changes and sector-specific grant of incentives.
It will be interesting to see how all this plays out in Budget 2016.