Economic Survey 2017 : Chapter 2: The Economic Vision for Precocious, Cleavaged India

Economic Survey 2017 : Chapter 1: Economic Outlook and Policy Challenges
July 14, 2017
Economic Survey 2017: Chapter 3: Demonetisation-To Deify or Demonise?
July 14, 2017

Q: Why India is called a ‘Precocious, Cleavaged’ democracy?

Because India started out as a poor democracy with deep social fissures.

Q: Why there is ambivalence in property rights and private sector in the government policies?

India’s first economic policy was socialism, where guiding principles were economic nationalism and protectionism. This framework was rejected after 1991 reforms; but even now it is unclear of the new economic vision.

Q: What are the four standard measures of openness of an economy?

  1. Openness to trade
  2. Openness to foreign capital
  3. Extent of domination of public sector enterprises in commercial activities
  4. share of government expenditure in overall spending

Q: How openness to trade is measured?

It is measured as the Trade-to-GDP ratio. Here Trade is exports + imports.

Q: How open is India to trade?

Generally large countries trade less. But India’s trade is far more than expected for a country of its size. Pre-1991, India was an under-trader. India’s trade-to-GDP ratio was rising sharply particularly over the decade to 2012, now India’s ratio surpasses that of China’s.

Q: How open is India to foreign capital?

India’s FDI has been rising sharply over time. Last year it was $75 billion.

Q: How much is the share of PSUs in total economy?

India’s PSUs were exceptionally large in the past. Now private sector is allowed into many sectors, which have reduced the share of public sector, even though there has not been much exit of PSU enterprises.

Q: How much is the size of government sector in the economy?

When the size of government expenditure is compared with per capita GDP, Indian government spending is not high. Rather it spends as much as can be expected for its level of development.

Q: What are the features of Indian model economy?

India is now a normal emerging market. It is pursuing the standard Asian development path of open foreign trade and capital; with government not domineering either in micro entrepreneurship or in macro fiscal scenario. India’s pursuit of the standard development started in around 1980. The average growth rate was about 4.5% since 1980 to 2017. This is an impressive achievement considering a democratic political system. Indian model of being a perennial democracy and a fast growing economy is rare in post war economic history.

Q: Is India really following the standard development model?

Practically India is not yet following the standard development model. Because there has been hesitancy to embrace the private sector and to protect property rights. And there is continued reliance on state to undertake activities. Moreover the state capacity have remained weak. Redistribution has been simultaneously extensive and inefficient.

Q: Why there has been hesitancy to embrace the private sector and protect property rights?

The basic objective of private enterprises – maximising profits – does not coincide with the social concerns of public. Indians have relatively high anti-market believes.

Q: How the ambivalence in approach towards private sector and property rights affected the economy?

The following are some examples where the incomplete transition to a market economy has generated certain challenges.
1. Difficulty in Strategic disinvestments
Strategic disinvestment means changing the ownership of the public sector undertakings. Still the government has not privatised loss making enterprises like civil aviation, which could be well managed by the private sector.
2. Indebtedness in corporate and banking sectors could not be solved
The problem emerged in 2010, but the political difficulty in restructuring the private sector debts have worsened the situation.
3. Retroactive taxations
Downgrading of fundamental right of property to legal right has reduced the protection of property and income, which can be seen in many litigations where tax is applied retrospectively (it means that Govt. has brought in an amendment in the Income Tax Act and made it effective from a back date)
4. Defective agricultural marketing policies
There is over regulation in agricultural marketing through the APMC(Agriculture and Produce Marketing Committee) act which curtails the freedom of the farmer and Essential Commodities Act that controls the trade. Both have exacerbated the agrarian crisis.

Q: What are the weaknesses in state capacity?

In India state capacity did not improve even as overall economy grew. High levels of corruption, clientelism, rules and red tapes may be the reasons. The weakness in state capacity can be seen in
1. Non-Delivery of essential services like health and education
Competitive service delivery has not yet been taken up by the states, instead they compete on populism. Delivery of essential services like health and education are not seen as attractive political opportunities.
2. Constrained policy making
Strict adherence to rules is followed, which may not be always optimal. For example in spectrum auctions, to avoid blame of favouring particular interests, the floor prices were held high, which can in turn affect the expansion of telecommunication services.
3. Risk averse bureaucracy
The cautious approach in fear of institutions like CVC,CBI,Court and CAG, bureaucrats prefer status quo. This approach has postponed solutions of many problems.

Q: What are the defects in redistribution in India?

Redistribution is important because, it decides how the resources of the nation are shared among its people. The problems in redistribution in India are
1. Ineffective targeting
There is Misallocation of funds, ie the poorer district gets lower share of spending than comparatively well off districts in the welfare schemes. There are exclusion errors(deserving poor not included) and inclusion errors(non-poor receives larger share of benefits)
2. Inefficiency
There exists Leakage of subsidies and goods.

Q: Why Indian model is different from others?

India began as a poor democracy. At the same time, Indian was highly cleavaged society in terms of language, caste, religion, gender, region, class etc. There was distrust on private sector to build a new India. India started redistribution early in the development process when the state capacity was very weak. So India could not invest sufficiently on human capital.
         But the issue is India could not graduate towards more efficient systems with development. This may be because of the social fissures, vested interests, weak institutions and ideological challenges.
As a result of the inefficiency of state, the well off sections started exiting from the state which is reflected as the lesser tax base of India.
        So the state is in a self sustaining spiral of inefficiency, reduced legitimacy, reduced resources, poor human capital investments and weak capacity.

Q: What is the way forward?

Further reforms are not just a matter of overcoming vested interests, but need a broader societal shift in underlying ideas and vision.

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