Economic policy issues
U. SANKAR
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Papers on macroeconomic policy, government finances, fiscal system, and foreign capital flows
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MACROECONOMIC MANAGEMENT AND GOVERNMNT FINANCES: Asian Development Bank; Oxford University Press, YMCA Library Building,
Jai Singh Road, New Delhi-110001. Rs. 750.
The Economic Division of the Department of Economic Affairs in the Ministry of Finance, Government of India, launched a policy and networking programme in collaboration with the Asian Development Bank in 2003. Ashok Lahiri, the then Chief Economic Adviser, says “the idea was to catalyse focussed policy research by experts in selected economic policy fields, and draw on this policy research both for a dialogue within the government as well as to support informed public discussion on economic policy issues.” This volume contains papers dealing with the macroeconomic policy, government finances, fiscal system, and foreign capital flows.
Shortcomings
Pulapre Balakrishnan, in his paper on macroeconomic policy, structural reforms, and economic growth, identifies the shortcomings in macroeconomic management since the 1990s as: non-acceleration of growth especially in the industrial sector, partly because of the almost double-digit real lending rates; the failure to effectively address not just the social sector but also the physical infrastructure in the economy; and the declining budgetary support to capital formation, especially in agriculture.
Sinha and Pant contend that the context and necessity of fiscal correction initiated since 1991 and the current state of government finances show that “more than the fiscal deficit it is the growing revenue deficit which is alarming as it has an inverse relationship with growth.” They urge the need for revenue augmentation by increasing the direct tax-to-GDP ratio, rationalising the user charges for public services, and disinvesting and privatising public sector units both at the Central and State levels.
Budget components
Bhide and Singh analyse India’s budget components and their impact on private investment, private consumption expenditure, and export performance. The policy implications are: fiscal policy geared towards direct taxes for generating revenues rather than indirect taxes is likely to generate greater output effect; decentralisation of expenditure process appears to induce greater output level compared to centralised expenditure; and capital expenditure in the government budget does not promote investment by the private sector.
Marjit and Das note that access to funds poses a serious problem for the small and medium enterprises. They discuss the pros and cons of using a part of India’s foreign exchange reserves for public infrastructure investment. The Appendix deals with the contractual problems and legal hurdles in the context of private-public joint ventures in Indian infrastructure.
Financial system
Chakrabarti and Mohanty provide a view of the Indian financial system from the standpoint of intermediation and risk bearing. In their opinion, there is an improvement in the Indian financial system in terms of efficiency and operational parameters; the banking system is less fragile and more profitable; and the stock market is more liquid than before. However, “the agents in the economy have turned more risk averse, as a result [of which] not only has intermediation widened and deepened, but bank products have gained relative to non-bank financial products.”
Sikdar analyses the determinants of capital inflow into India and the management problems. His major recommendations are: reduce sterilisation and concentrate on improving the credit pass through monetary policy; check the torrent of foreign institutional investors; gradually eliminate exchange rate protectionism; continue trade liberalisation; boost domestic investment in infrastructure; and attract foreign direct investment in manufacturing.
Dua and Sen use econometric techniques to examine the inter-relationship between capital flows, real effective exchange rate, and foreign exchange reserves. They show that the determinants of the real exchange rate include net capital inflows and their volatility, government expenditure, current account surplus, and the money supply.
The macroeconomic analyses in these papers cover the period 1980-81 to 2002-03. The authors undertake critical reviews of economic reforms using sound economic reasoning and suggest what needs to be done to achieve high and stable growth. There appears to be a consensus on policy recommendations such as encouraging investment in physical infrastructures by creating enabling environments, attracting FDI in manufacturing, reducing the cost of capital to industry, and making access to credit easier for SMEs and farmers. On issues such as management of foreign capital flows and utilisation of foreign exchange reserves for investment in physical infrastructure, there is need to build a consensus. The issue of sustainable development has not figured in any of the papers.
Volatile
During the last two years, we observe large changes in the levels and volatility of foreign exchange reserves, share price indices, the rate of inflation, exports, and imports. External factors such as recession in developed countries, volatility in crude oil prices, and fluctuations in capital flows are largely responsible for these changes. Globalisation and the establishment of the global regimes for trade, capital and financial flows, while enlarging opportunities for growth, constrain the domestic policy space.
A networking programme like this would provide an opportunity for scholars, policy makers, and stakeholders to have informed and fruitful discussions on a continuing basis to evaluate trade-offs between different policy goals, articulate India’s concerns in different global forums, and also evolve mechanisms for effecting a smooth adjustment to changes in the global regimes and mitigating the external shocks that affect the Indian economy.
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