A social role for NITI Aayog

A social role for NITI Aayog
The Hindu, 17 January, 2015
Arun Kumar, CESP, SSS, JNU.

The NITI Aayog could throw light on long-term issues, with solutions that are not just economic or technological but also social and political — of strengthening democracy, building institutions and regaining policy space

NITI Aayog has had its first meeting with the economic experts. This was crucial since the government is trying to revive economic growth. The economy has experienced slow growth in spite of the revised national income data that has indicated faster growth. Industry, exports and so on, have shown tepid growth in recent years. The National Democratic Alliance’s electoral promise of an economic turnaround seems elusive in spite of its accelerating “reforms” by liberalising foreign direct investment (FDI) flows and land acquisition policies to signal its pro-corporate sector and big business inclinations.

Contradictory views

The budget is first a macroeconomic exercise and then a micro one catering to sectors of the economy. Two contradictory macroeconomic views are emerging from the government and its policy advisers. This is similar to the policy dilemma that the United Progressive Alliance faced earlier. The first view is to have a larger fiscal deficit so as to boost demand. The other view is to cut the fiscal deficit to keep the credit rating agencies (proxy for financial interests) happy so as to prevent a downgrade of the economy.

The Finance Minister favours the latter view and argues that a fiscal deficit imposes a burden on future generations who will have to repay the debt. This conservative view assumes that resources are constrained, so if the government spends more, the private sector has less to spend. But that cannot be true when the economy has spare capacity and can produce more. Increased government expenditures then boost the economy and lead to more investments via the accelerator. If increased spending is financed by increased direct taxation, that is even better. This is feasible in India since direct taxes are around 7 per cent of GDP which is low when compared to most other countries. But a government trying to signal its pro-business inclination would not wish to raise direct taxes like income, corporation and wealth taxes. 

Actually, tax rates need not be raised but only the concessions given in taxes (these are called tax expenditures and amount to 4.5 per cent of GDP) need to be curtailed to get more resources. But this may also be seen as anti-business. The other possibility is to tap the black economy (more than 50 per cent of GDP, according to me.) This requires political will which is not yet visible. The business community, the largest generator of black incomes, would see this also as anti business — it has been opposing introduction of general anti avoidance rules (GAAR). Even if the economy grows faster due to the reduction of the size of the black economy and businessmen gain, they fear it since a bird in the hand is worth two in the bush.

The NITI Aayog meeting does not seem to have considered these deeper issues. Advice was sought from former bureaucrats, journalists, industry lobbyists and academics. Media reports suggest a lack of coherence in the discussion or in the advice given. Some of the invitees had been present in the Finance Ministry pre-budget meeting last month. So, what was the point of the meeting now when it did not lead to clarity on long-term issues? Further, the time for incorporation of policies in the budget is over since most of it would have been formulated by now. It may have been better to circulate for comments a discussion paper on the Indian economy’s slowdown and its global interlinkages.

Dilemma with global echoes

India’s current economic dilemma has global roots. The eurozone, Japan and Russia are in trouble, the Chinese economy has slowed down and the U.S. economy is the only big one that has improved. In such a scenario, increasing exports in a big way would be difficult. Declining commodity prices (like that of petroleum goods) signal a weakening global economy. Uncertainty is deepened by the arc of instability due to failing states, from Afghanistan, Syria, Iraq, Libya, Nigeria to East Africa. The war in Ukraine and the rise of IS are compounding the problem.

Greece threatens the economic stability of the eurozone. The new government there is defying the dictates from the world of finance and has promised to end the austerity regime hoisted on the people of Greece. The Greek Prime Minister is telling the European powers that the economic rules of integration of the weaker economies of Europe into the eurozone need change. He is arguing that a substantial portion of the debt resulting from the earlier wrong policies needs to be written off. The other troubled economies of Europe — Portugal, Spain and Italy — are under increasing political pressure to follow Greece’s example.

U.S. President Barack Obama has proposed increasing taxation of the rich while giving more to the middle classes to reverse the growing inequity there. This move not only has a political strategy underlying it but also economic reasons that favour it. Given the Republican domination in the legislature and their conservative inclinations, it is unlikely that this proposal would be accepted any time soon. But, other countries would be forced to think about the idea, especially in the context of the developments in Greece.

In 2011, Mr. Warren Buffett gave a call to tax the rich more not only for the sake of equity but also to tackle the global economic crisis. This call was picked up in Europe with 16 of the wealthiest French urging their government to tax them more. Fifty wealthy Germans backed this petition. In Italy, the chief of Ferrari also lent support.

Inequity has grown in most countries since the mid-1970s following the domination of global financial capital over policies — spearheaded by the World Bank and the International Monetary Fund (IMF). These policies have not only marginalised other sectors of the economy but also promoted bubble economies that are prone to periodic collapse as it happened beginning 2007 and from which the world economy has yet to fully recover.

These policies promoted shadow banking and all manner of opaque financial instruments that created economic instability. A casino economy emerged with speculation leading to a fictitious boost in paper wealth, promoting a false sense of well-being among individuals and increased consumption by them. As inequality increased dramatically, and there was the marginalisation of the vast majority, there followed the “Occupy Wall Street movement”, termed as the “99% v the 1%” and which also popularised the term, “Main street versus Wall street”.

For people policies

Events in Greece and Mr. Obama’s suggestion suggest that the time has come to end the domination of finance capital over the rest of society. Policy space has to be recaptured from the world of finance by the democratic forces so that policies favouring the people can be initiated.

The dilemma currently facing Indian policymakers reflects these global trends. India’s rightward drift started with the Emergency in 1975 when Sanjay Gandhi marginalised the left of Centre thinking in the Indira Gandhi government. The trend continued during the Janata regime and thereafter under the Indira Gandhi government which had to approach the IMF for adjustment in 1980. Rajiv Gandhi, under considerable influence of the liberalisers, pushed this tendency faster. With the New Economic Policies in 1991 and the emergence of the World Trade Organization (WTO) in 1995, there was a paradigm change, with the policies of finance capital becoming entrenched.

For India, which remains very poor and very unequal, policies based on the interest of finance capital and a narrow section of society can only spell disaster. These policies push markets and technology-based solutions which marginalise the individual. The underlying idea is that if making democracy work is difficult, substitute it with technology. Those lacking faith in democracy and social institutions are (in the name of the poor) pushing an autocratic agenda based on greater use of technology. The hard work of creating and nurturing institutions that can deliver to the people and strengthen democracy is sought to be circumvented. So, one of the key proposals today is to push Goods and Services Tax (GST) even if it does not suit the needs of the vast unorganised sectors of our economy and benefits the MNCs and big business. The hard work of making taxation simple and effective and shifting to direct taxes is hardly on the agenda. Creating a large number of jobs is secondary to cash transfers, bullet trains for the elite and smart cities for the upwardly mobile.

The flyovers of Delhi were built to ensure smooth traffic flow but now have speed bumps to slow down vehicles and which leads to jams. The technological solution failed because the institutional design of management of urban traffic is flawed and that is because policymakers did not go deeper into the problem in their urge to provide quick fix technological solutions. The NITI Aayog could throw light on such long-term issues (with solutions that are not just economic or technological but also social and political) of strengthening democracy, building institutions, regaining policy space and so on.

arunkumar1000@hotmail.com