Response to “Passing off Politics as Economics”

Analytical pieces which broadly examine economic policies have reduced in the recent past. I find it a bit of a tragedy, since I found such pieces stimulating and informative. However, the upcoming national elections in 2019 seem to have triggered a new round of such pieces and hopefully, we may get more in the coming months.

I wish to highlight a specific piece in this blogpost (I’ll examine other pieces as and when I get the time). Puja Mehra (former Senior Deputy Editor, The Hindu) has a piece on the website of The Hindu Centre for Politics and Public Policy (Passing off Politics as Economics). In her summary at the end, she argues that the current government has drifted away from its original campaign promises of economic change and that the Prime Minister is driven more by politics than economics.

She backs this argument by examining a range of initiatives since 2014: Make in India, Demonetisation, The Goods and Services Tax, the exports policies, the tax policies, and the government’s engagement with the Fiscal Regulation and Budget Management (FRBM) Act. She then shows how each of these were designed or changed due to political considerations rather than economic concerns. For example, she points out that in spite of high political rhetoric around pro-poor policies, the current government hasn’t chosen a specific poverty line between the recommendations of the Rangarajan Committee or the NITI Aayog, making it difficult to measure progress on poverty reduction.

 

Two Responses to Specific Points in the Article

I do not have much to disagree with in this piece. However, I have two responses to specific sections in the piece and a comment on the overall argument. First on specific sections:

1. On Land Acquisition Reforms: Mehra argues that reforms on land acquisition were stalled because the government was spooked by accusations of being a ‘suit-boot sarkaar’ from the opposition. I’d differ with her on this. It’s more likely that land acquisition reforms were abandoned after the government was forced to drop the changes it had ordained to the Right to Fair Compensation Act*. These changes would have exempted certain projects from the provisions of the act, making it easier for the Union Government to acquire land and initiate projects such as industrial corridors.

The rejection of these changes meant that the Union Government now has to rely on individual state governments to make their own changes to state land acts. Land acquisition reforms are probably the toughest types of reforms to initiate in India at present. On one hand, new capital investments by both public private sectors do require easier and smoother land acquisition processes. On the other hand, there is a very valid concern that the true costs of land acquisition – both economic and social – are not reflected in the prices at which they are acquired.

The RFCTLARR Act attempted to correct for this in various ways. For example, it accounted for economic costs by mandating fixed multiples of the market price to paid to landowners and for social costs by ordering a mandatory Social Impact Assessment prior to acquisition. However, the Act has increased costs of land acquisition for the government at a time of depleting public budgets, while uniform compensation formulae across a vast country with complex variables may lead to disparate outcomes. In short, land acquisition is a tough process, and I doubt any Union Government can initiate reforms without making a mess in some way.

(b) On Revenue and Capital Deficits: Mehra has criticised the bloat in the fiscal deficit, attributing it largely to a growing pressure from the revenue deficit side. She mentions that a country may borrow as long as it does so for capital spending, but not to pay for salaries or pensions of its employees. As a result, increased revenue deficits ought to be criticised.

I’m going against the mainstream economic view here, but I’ve always had a problem with this argument. To be clear, I agree that the ratio of capital to revenue deficit should ideally be in the favour of capital deficit, as capital investments today help create significant amounts of wealth tomorrow. However, it’s very easy to slip into thinking that revenue deficits are therefore inherently bad.

Revenue deficits, if used largely to pay for salaries and pensions, are essentially payments for labour, often skilled labour**. While capital investments can create wealth at rates higher than labour investments, it’s simply wrong to think investing in the government’s labour assets has no payoff. Better salaries and pensions are good incentives for skilled labour, and ensuring that government employees are paid at  market-equivalent rates (or higher) is an important step in retaining talent. To be sure, there are many issues with government employment which need to be addressed – lack of accountability to the public, difficulty in monitoring and evaluation of work, rent-seeking, abuse of power, and so on. I agree with Mehra on introducing administrative reforms and stricter assessments but I believe these should be implemented for their own sake. They should not be linked to reducing revenue deficits.

It’s much more useful to keep the focus on increasing the spending on capital, rather than reducing the revenue deficit. In fact, reducing the revenue deficit with no simultaneous increase in spending on capital might inflict a double tragedy – the government is left with fewer capital assets to create wealth and lesser money to compensate talent, thus resulting in an overall weaker government. At the same time, increasing revenue deficits without creating capital assets to generate wealth is a recipe for future disaster, even if it helps retain labour assets in the present. The ideal outcome should be that regardless of increase in revenue deficits, the growth in capital assets (and future wealth) should be enough to offset the costs of revenue deficits. Either way, the focus should be on increasing capital, not reducing revenue deficits.

 

Comment on the Overall Argument

Apart from these two specific arguments, I have an overall comment on Mehra’s core argument, that the last four years have seen most government initiatives driven by politics rather than economics. As the Mostly Economics blog pointed out in its coverage of Mehra’s piece, it’s not just this government that’s being driven by politics over economics. The politicisation of economic policy is a trend that’s becoming more common across the spectrum.

The state of Karnataka is a case in point, with both the new government and its opposition, apparently at different ends of the ideological spectrum, pushing for a waiver on farm loans. Loan waivers are a bad economic practice in the long run, as they punish prudent lending while rewarding bad lending practices. However, they are a politically attractive move, and at a time when banks are being pulled up for bad lending practices anyway, it’s hard to argue against waivers. I’m afraid we’ll have to live with them until our financial sector shows enough of a crisis to cease the practice.

On the whole though, it was refreshing to read Mehra’s piece. Informed data-driven analytical articles, analysing broad economic policies have been missing from news and public debates for some time. It’s good to see some new outputs emerging on this front and I hope this trend picks up.

 

 


*The full name of this act is the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act (RFCTLARR) 2013.

**Strictly speaking, Revenue Deficits = Projected Revenues by the Government at the beginning of the financial year minus Actual Revenues. Revenue deficits can be attributed to causes other than salaries and pensions, but these are often the prime drivers in a government’s budgets.

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