Needed: A white paper on the Indian economy

The Indian economy is going through a phase in which it is difficult to spot a piece of good news. Economic growth is slowing. Exports continue to decline. Retail inflation is on the rise. Jobs are not growing. Bank credit growth has decelerated. Electricity use has dropped. Tax revenues are growing at a slow pace — much less than what the Budget had projected, making the government’s target for fiscal deficit in the current year unachievable.

The sentiment, a key factor in an economy, is also on a downswing. Of course, a few steps have been taken by the government in the past few weeks like the cut in the corporation tax rates and the announcement of packages for reviving housing, real estate, automobiles and exports. But there has as yet been no respite from economic distress.

What should the government do? Different proposals to revive the economy are reportedly under consideration. They range from a package of additional investment for infrastructure, changes in income-tax rates, policy reforms and privatisation. These measures will help, but their impact would not be immediate. Before even ensuring an improvement in the key economic growth numbers, it will be important to address the current downbeat mood in the economy. Economic sentiment is as important as the actual data on the economy. So, here is an attempt at listing out a couple of measures that the government should examine to start the process of reversing the downturn in the current mood.

The first big step that the government must consider is to come out with a white paper on the state of the Indian economy. Various members of the government and several other institutions, including think tanks and rating agencies, have made different comments on the nature of the problem and the challenges that the Indian economy faces at present. The markets and industry are not sure which narratives they must accept and which ones they can reject. This uncertainty has also helped fuel the negative sentiment on the economy.

Therefore, this is the ideal time for the government to come out with a status paper revealing what it believes to be the Indian economy’s actual condition and prospects. Such a document can be prepared quickly and its credibility will be enhanced if the task is given to an independent economist who could prepare a report with the help of government economists, experts and officials in the finance ministry. Remember the report by Vijay L Kelkar on the state of the economy during the winter of 2012! The Indian economy needs something similar.

Such a report should help the government manage  people’s expectations from the Budget, due to be presented in less than 11 weeks from now. These expectations are running high and it would be good to place these expectations in the context of the current state of the economy. A report on the economy by an independent expert will help present the current scenario and the challenges that lie ahead. The pre-Budget Economic Survey, to be presented just a day or two before the Budget, will be a bit too late for managing such expectations.  

The report will also help the government to take the country into confidence as far as the problems its own finances are suffering from are concerned. Its revenue flows so far in the year do not inspire anybody’s confidence about the government’s ability to meet its fiscal deficit target of 3.3 per cent of gross domestic product (GDP) for 2019-20. Different estimates on the government’s revised fiscal deficit number and the extent of extra-Budget borrowings are doing the rounds.

A status paper on the economy would be able to end all such speculation.  Instead of the Budget revealing those numbers, it would be advisable to let the white paper on the Indian economy bring out the bad news. That will also allow the Budget to focus more on the policies that need to be reformed and the new expenditure packages that are necessary. The finance minister could even supplement the efforts of the white paper by acknowledging the stress in the fiscal system and reiterating the government’s resolve to fix the economy.

The second step that the government must take is not to turn away from such data that indicate an economic downturn. Some months ago, a government survey showed that employment growth in the economy had seen a huge decline. The immediate reaction of the government was to describe the report as only a draft finding of the surveyors. A few months later, the government accepted the same report as final. That was a welcome step, just as the earlier attempt at denying the report was problematic.

A few days ago, the government decided to junk its own survey on consumer spending, which showed a decline, because of data quality issues. Such steps undermine the confidence of people and industry in the state of the economy. If there are data quality issues, the survey need not be junked, but supplementary efforts can be made to plug the data gaps if any.

An economic slowdown cannot be addressed only by increasing investments and introducing policy reforms. Equally important is the role of transparent communication to the people about the nature of the economic slowdown and the challenges arising from it. The goals of transparent communication can be achieved if the government comes out with a white paper on the current state of the economy and accepts economic data as well as survey findings.

At the start of the first term of the Narendra Modi government, Arun Jaitley, finance minister at that time, had dropped the idea of bringing out a status paper on the economy’s problems for fear that it would undermine the investor’s confidence in the Indian economy. That was a wrong move. Investors always like clarity and transparency about the state of an economy. Today, they will welcome any move that results in Finance Minister Nirmala Sitharaman producing a white paper on the Indian economy.

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