TRANSPARENTLY MUDDLED - A highly confusing mid-year review of the Indian economy

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By Bibek Debroy
  • Published 19.12.02

The author is director, Rajiv Gandhi Institute for Contemporary Studies, New Delhi

We now have a mid-year review of the economy. That’s a good thing. Let citizens know what is happening. All part of the transparency process, no different from placing the Kelkar consultation papers on the internet. However, mid-year suggests after six months. After all, “The aim is to make policy formulation as well as monitoring a continuous effort, rather than a once-a-year event.” You monitor and make course corrections if necessary.

But hang on. We are in the month of December. Less than four months left for the full financial year, less than three months left for the budget. What course corrections shall we do? And remember, the MYRE has nothing to do with the budget. “While the report indicates some possible courses of action at the current juncture, it does not purport to be either a budget or a forerunner to the budget.”

There are other aspects of the MYRE that bewilder me. “The performance of the Indian economy during the first half of the current year has once again demonstrated its intrinsic strength, despite the drag of the most telling monsoon deficiency in two decades…” So the drought was telling in its impact. “Buoyant market arrivals and procurement of rice so far, at levels marginally higher than those in the previous kharif season, indicates that the impact of the drought is telling only in such areas as depend on rain-fed cultivation.” So the drought was only telling in areas that depend on monsoons. “However, the negative sentiment witnessed towards the end of August, subsequent to poor monsoons, has since waned, principally on account of several positive developments in the economy.” Am I the only one who detects a contradiction?

“Enhancement of revenues will require restructuring of the tax system with a move to a stable, impersonal and efficient tax administration with a minimum interface between the assessee and the tax official, a system with a minimum of exemptions in the field of Central excise and State sales tax, and a move to a value-added tax.” This is an echo of the Kelkar proposals, and we understand that the MYRE doesn’t like exemptions. But then we have, “The resurgence of the industry is largely attributable to the ‘textile package’ announced in the Union budget (2002-03)”. The MYRE now seems to believe that exemptions and concessions are a good thing. Also, “the fiscal relief provided to the tourism sector in the budget have led to a pick-up in tourist activity in the country”.

“Indicators inform of better fiscal management during the current year….After a disappointing performance on the fiscal front in 2001-02, the first half of the current year has witnessed some progress in fiscal consolidation.” How and where? Go through tables 4 and 6 given in the MYRE. According to the budget estimates for 2002-03, revenue expenditure was supposed to increase by 11.9 per cent.

During April to September 2002, revenue expenditure has actually increased by 15.9 per cent over the same period last year. The budget estimates promised an increase in capital expenditure by 15.7 per cent. For the first six months of 2002-03, the increase in capital expenditure has been 3.6 per cent. The budget estimates promised an increase in subsidies by 13 per cent. The first six months have produced an increase in subsidies by 62.6 per cent. The budget estimates promised receipts through disinvestments of Rs 12,000 crore. In the first six months, we got Rs 3,022 crore. How is this an improvement? Remember also that the MYRE warns us, “The remainder of the year could, however, see some pressures on both revenue and expenditure.”

The point there is perhaps an improvement if you compare apples and oranges. Here is the apple-cum-orange comparison. “Fiscal deficit to the Central government as a proportion of gross domestic product, based on the provisional data, is 5.9 per cent for 2001-02, compared with the revised estimate of 5.7 per cent. The fiscal deficit is budgeted at 5.3 per cent of the GDP for 2002-03.” Budget estimates differ from revised estimates and those also differ from actuals. Compare budget estimates for 2002-03 with revised estimates and actuals for 2001-02, and you detect the improvement.

Turning to agriculture, “Minimum support prices for rice and wheat have, however, distorted the comparative and regional advantage of some crops, thus generating surpluses (sugar, rice, wheat) and shortages (oilseeds, pulses and fibres).” By the way, does MYRE mean procurement prices or MSPs? Are they the same? Assuming they are, MYRE presumably doesn’t like MSPs, because they distort incentives. But then we have, “The merits of MSP in achieving the objective of food security is established.” No definition of food security is given. But evidently, MSPs are good.

Does MYRE want the public distribution system to be targeted? I am thoroughly confused. “An accumulation of large food stocks has posed serious issues with regard to the current food management policy. Replacement of universal PDS by a targeted public distribution system has created some anomalies.” Does that mean we continue with a universal PDS? I can’t figure it out.

“The Milk and Milk Products Order 1992 has been amended on March 26, 2002. The act is now restricted to maintenance of quality standards and food safety measures.” For God’s sake, this is an order under the Essential Commodities Act. The MMPO is not an act. Doesn’t MYRE know the difference? Probably not. Because it continues to refer to the securitization, reconstruction of financial assets and enforcement of security interest ordinance, despite knowing that the act has now been passed by Parliament.

Let’s turn to the small-scale industry sector. “However, the major anomaly, whereby importers can access the Indian market for products reserved for small sector, but larger Indian producers cannot, needs to be rectified. Measures need to be put in place to encourage the SSI sector to graduate to large-scale and realize its comparative advantage, particularly in production of components and ancillaries.” I have a simple question. Does MYRE want de-reservation or does it not? I can’t figure it out. “The garment sector has already been dereserved, and the limit for small-scale investment for the knitting sector has been raised to Rs 5 crores.” Since this is stated with obvious approval, MYRE clearly wants de-reservation for garments, but continued reservation (with a higher threshold limit) for knitting. If there is a logic somewhere, I haven’t been able to detect it.

“Power sector reforms, though progressing satisfactorily, need to be accelerated by enacting the Electricity Bill.” In infrastructure, if someone mentions progress in telecom, I am prepared to accept it. I am prepared to accept the National Highway Development Programme’s progress, something that the MYRE rightly gloats about. I am prepared to accept some progress on ports. True, the electricity bill needs to be quickly enacted. But satisfactory progress in the power sector? You must be joking. Take a look at table 3 of the MYRE. This sets out the status of power sector reforms in the states.

In my view, setting up a state electricity regulatory commission or signing a memorandum of understanding with the Central government doesn’t constitute satisfactory progress. In a different context, “A Debt Swap scheme facilitated by the Government of India has been proposed to supplement the efforts of the States in the direction of evolving their Medium Term Fiscal Reform Programme and reorienting their plans.” Since this scheme has effectively been shot down by the states, proposing a scheme doesn’t constitute satisfactory progress either.

I don’t think the MYRE idea is a bad one per se. But it should be preponed by a couple of months. It should also be written better, with some semblance of logical coherence. This one reads like an economic survey. Boring.