7 January 2015

Genius and impetuosity - How the Niti Aayog could be of use to the prime minister

Writing on the wall - Ashok V. Desai 
January 6 , 2015

On waking up at 5:55 on (Christian) new year's day, the prime minister got a brainwave. It drowned the Planning Commission. Painters from the public works department were summoned; they erased the commission's name from its portico, and renamed it Niti Aayog. Fifty-five is not too old for an institution, let alone a human. The prime minister is going strong at 65, and the aeroplane is still flying 5555 years after its invention by Swamy Kashtacharya. But institutions must reinvent themselves from time to time to stay relevant; unless they do, they fall off the screen like the Congress.

Niti Aayog - what does it mean? Sanskrit words can have many meanings; niti is no exception. It can mean morality, behaviour, guidance, politics, management and a dozen other things. Which one did the prime minister mean? Maybe he did not know, in which case he chose cleverly. But I suspect he meant policy.

Policy is made anyway by elected politicians sitting in ministries all around Niti Aayog; where will it fit in in that political football field? The original Planning Commission was supposed to formulate and supervise five-year plans, which were meant to tie ministries and states to long-term national development. This function is now transferred to the finance ministry. That is not injudicious. It is the function of the finance ministry to manage government money and allocate it amongst objectives and agencies. Finance ministries have this function in many countries. But many of them do much less forward planning than India. India too could do with less. But many countries that ignore long-term planning run into serious problems.

The commonest one is fiscal bankruptcy: governments become so indebted that they have no alternative to reneging on their debts. Most of them avoid it by borrowing from uncles like the International Monetary Fund or the European Central Bank, or renegotiating their debt maturity with creditors from time to time. India also used to do that till the reforms of 1991. In fact, it was such a hopeless case that no international investors would have come near it; it borrowed mostly from international development finance institutions. The P.V. Narasimha Rao government of 1991, which I served for a while, repaired the fisc. Since then, the government of India has not borrowed abroad, although it has allowed state governments to do so. It borrows recklessly from the banks it owns. That cuts into banks' credit to productive sectors such as industry, and reduces the economy's growth. If our government were less of a spendthrift, maybe we could match China's growth.

Some countries resolve the problem of over-indebtedness by printing money, which is zero-interest government debt with infinite maturity. India has done it quite a lot, and has experienced severe bouts of inflation from time to time. I am sure the prime minister has not planned such financial mismanagement. But he should be careful not to stray into it in an unplanned manner.

Still, there will be times when the government has to borrow or print money. It is, for instance, exchanging fire with Pakistan's army and terrorists on the border. Suppose these unpleasantries escalate into a full-scale war, the government may then have to spend without regard to the deficit. It can be argued that the economy is suffering from inadequate demand and that the government should reflate it by spending more or taxing less; that too would raise the deficit. So there will be times when the government spends too much, and other times when it should run surpluses.

The general practice of Indian finance ministers has been to satisfy the demands of their political friends and masters without regard to fiscal balance. They have largely ignored the need to restrain inflation or rebalance the economy; in most years they have run enormous deficits. Such recklessness could lead to hyperinflation or chronic stagnation. It has not done so in India because of the basic dynamism of its economy: private entrepreneurs have kept on investing irrespective of finance ministers' follies, and kept the economy growing. They may continue to do so; but one should not bet on it. It would be a good idea to introduce responsible, long-sighted fiscal management. That becomes even more important if long-term planning is transferred to the finance ministry.

The finance ministry is also a financier of the state governments. It transfers vast amounts of money every year to them. The Planning Commission used to supervise these transfers, and relate them to the states' plan expenditures. With its abolition, the task will devolve on the finance ministry. State governments are formed by various parties, some of them hostile to the one ruling at the Centre; not all will be happy with the finance ministry's distribution of favours. Some body is necessary for this function that the states will regard as neutral.

In my column of September 3, 2014, I had suggested a replacement for the Planning Commission. The Research Papers in Economics (RePEC) lists 139 economists in India whose work is of international standard. I suggested that the government should recruit and house in Yojana - sorry, Niti - Bhavan 139 research assistants. Each of them would be attached to one of the economists, and the 139 together would constitute a group that would answer questions of any minister, member of Parliament or bureaucrats of the rank of joint secretary and above. It would be an answer tank, not a think tank.

We need something more. For its model, the government should look at the British government's Office for Budget Responsibility. It makes five-year forecasts for the economy and the budget, which go into the annual budget. It judges how well the government is doing against its own target of balancing the budget over five years and bringing down public debt. And it analyses the health of the public sector's balance sheet.

The object of the Office for Budget Responsibility is to ensure the long-term financial viability of the government. The government of India would have broader objectives, such as preventing downturns, ensuring high growth, correcting regional imbalances, integrating the states, developing international trade and investment, or making India an economic superpower. It may also need to work out the economic costs and consequences of its ministers' foibles, such as replacing German with Sanskrit, or banning the use of English in government. For each of these issues, it should appoint three economists, as different from one another as possible, and ask them to prepare a study within six months. They may bring or recruit research assistants. The Niti Aayog would serve as their secretariat.

The prime minister wants a muscular, active government. All action embodies the possibility of error; governments' errors affect millions of people for no fault of their own, and hence must be avoided as far as possible. Churning the issues amongst thoughtful people is a way of identifying such errors, as also a way of achieving objectives more quickly and economically. It is understandable that the prime minister hates planning. But if he wants to perform, achieve and leave a mark, he will need to look ahead and allocate scarce resources; some professional advice in doing so may make him a better prime minister. 

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