SPRING CLEANING - The chief economic adviser can influence economic policy

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By Writing on the wall - ASHOK V. DESAI
  • Published 11.03.08

The Economic Survey is presented to parliament the day before the budget. If it is inferred that it is a part of the budgetary process, the surmise would be wrong. The budget is primarily in the ambit of the revenue department, although the chief economic adviser participates in its construction. The Economic Survey is a product of the economic division, which is the chief economic adviser’s domain. His subordinates have nothing to do with the budgetary process. Secrecy is the hallmark of the process. The need-to-know criterion is rigorously applied. Economic advisers are supposed to have no need to know; they prepare the economic survey in the dark.

It was not always like that. The economic division in the Fifties was small. The Economic Survey used to be written by the chief economic advisor — J.J. Anjaria first and I.G. Patel later on — and they were fully involved in budget formulation. But once Indira Gandhi came to power, the government extended its functions, the workforce expanded, and like all services, the Indian economic service recruited a large number of people. They had to be accommodated somewhere; the finance ministry and the Planning Commission were the most important parking places. As the number of economic advisers increased, each complained of overwork and clamoured for more staff. So by the time I took over in the Nineties, the economic division had half a dozen economic advisers and a couple of hundred staff, of which I do not think more than 30 did much work.

With the expansion of the division, the way in which the Economic Survey was prepared also underwent a change. Roughly half of it was outsourced to other ministries; thus, the chapter on industry came from the industry ministry, and the chapter on agriculture from the agriculture ministry. While one of the Economic Surveys was being written under my tenure, The Economic Times printed an entire chapter of the Survey a few days before it was to come out. I had a serious scandal on my hands. There is nothing secret about the Economic Survey. But because it is presented to parliament, I was accused of breach of privilege. Fortunately, the CBI stepped in and caught the culprit within two days; luckily for me, he was in another ministry.

But there was another problem. For forty years, the country had been socialist. So economic advisers had worked out a formula for the Survey. It gave lots of figures, and repeated them in the text saying this went up and that went down. It was one of the most boring official documents. It needed to be cleaned up for two reasons — first, because it was unreadable, and second, because I felt that it should give a frank, competent, analytical picture of the state of the economy.

There was an unbridgeable gulf between this picture and the mythical economy the economic advisers had in their minds; it was difficult to teach them economics in a few weeks. I would tell them what was required; after a week or two, I would get a draft that showed no effect of my instructions.

I worked out soon that the economic advisers did not write the chapters; they were drafted by the juniormost people under them. They travelled upwards to me through a number of layers; most of the officers on the way just initialed the file and sent it up. So I began to call the advisers’ entire team, right down to the lowest investigator. The advisers were outraged; but my message went to those who drafted the Survey, and I got much better work.

But there was a change of perspective that could not be communicated to them. Right till then, everyone was used to thinking of growth as something that emerged from the planning process with liberal dollops of investment. We wanted to give a vision of an economy that would grow out of the spontaneous enterprise, innovation and labour of people loosely coordinated by the market. This idea was too foreign, if not shocking; I could not make it percolate.

At the same time, the Survey had to be the product of the division; its staff could not be cut out of the drafting without serious effects on the morale. So I decided to leave most of the survey in their hands, but added a first part which I wrote myself. It explained why the crisis of 1989 developed, what was the sequence, what were the policy options, why we had to do what we did, what weaknesses we had to address, and what we needed to do to make sure it did not happen again. I did this for two years. When I left, the innovation was apparently abandoned, and the Survey sank back into its traditional mould.

Arvind Virmani, who became chief economic advisor last July, has completely revamped the Survey. He has brought back the analytical chapter. But it is not the first chapter, which continues to be on the state of the economy as usual. To it he has added a second chapter. All the boring facts being covered in the first chapter, the second chapter can get down to economic strategy.

It gives a brisk account of the acceleration in growth in the past three decades, spurred by the reforms of 1978-80 and then of 1991-93. It gives an interesting explanation of the slowdown between 1997 and 2003: that the removal of import licensing of industrial inputs in 1992 increased effective protection on consumer goods; when their import licensing in 2002 was removed, they suffered from foreign competition, and growth rate of their output came down. It then gets down to explaining India’s twin problems — inflation that persistently exceeds international levels, and persistent increase in reserves. It attributes the inflation to the slow rate of technical advance in agriculture and the high agricultural tariffs that effectively close off the Indian market from import competition, and the rise in reserves to capital inflows, which in turn were due to higher real interest rates in India. It proposes fiscal tightening as a way to reduce domestic demand growth and inflationary pressure, and to bring down interest rates. The finance minister could have done it — increased expenditure less — this year itself, but the Survey passes on the responsibility to the next finance commission.

There is no space here to discuss these ideas, but obviously such maverick thinking makes the Economic Survey highly readable. It is also more attractive now; the printing is better, and the tables and charts look beautiful. Economists may now go beyond giving instant comments on the budget without reading anything; the Survey is something they can read with profit.

I do not know how long Arvind Virmani will stay as chief economic adviser. Most CEAs have used the post as a stepping stone to a job in the Fund, the Bank or the ADB. Virmani will not do that; he is not fond of foreign shores. I hope he will not be kicked upstairs too soon. The chief economic adviser has the opportunity to have considerable influence on the government’s economic policy. Virmani has made good use of the opportunity.