Innovative Policy is the Growth Watchword
After a rather unprecedented electoral sweep, the incoming Narendra Modi government needs to frame and implement a set of innovative policies to boost investment, improve economic sentiment and proactively step up the growth momentum. We need innovation in policy design to rev up enterprise, shore up markets and enhance overall growth. The objective needs to be to purposefully augment the jobs scenario, promote well-being and raise output. And in a fundamental sense, there are only two ways of increasing output. One way is to increase the inputs that go into the productive process. The other is to think through new innovative ways to get more output from the same number of inputs. Now, several decades ago, the mavens abroad, in the US, decided to find out which of the two ways of increasing output had been more important, and specifically by how much. The exercise involved two steps. The first was to measure the growth in output of the US economy over a considerable length of time. Next, the growth in inputs, of capital and labour, was taken into account for the same period. And it was found, back then, that the measured growth in inputs, between 1870 and 1950, could explain only about 15% of the actual growth in output of the economy. So, the unexplained residual factor of no less than 85% was the actual reason for the hike in output. Following that path-breaking insig- ht into growth accounting, there have since been scores of similar studies, including on other economies and for different time periods, and the results have all been roughly the same, namely, that an increase in inputs accounts for just a small fraction of output, with the large “residual” element the deciding factor in growth. Fast forward to the here and now, and in today’s parlance, the residual factor is known to include technological, managerial and social innovation. The new government needs to overhaul the policy framework with stepped-up innovative reforms right across various sectors, to arrest inflation, revamp and streamline the various opaque processes — and quite needless uncertainty — routinely involved in governmental approvals for new projects, and actualise big-ticket investments. One key reason for the economywide price spiral of the last 10 years has been the hardening trend in petroleum prices. Now, it is entirely possible that global crude oil prices could well ease going forward, on the strength of improved hydrocarbons supply in the US, and generally weaker demand in the main markets.
All the same, the way ahead for the Centre is to keep the ball rolling and continue with the ongoing retail price revision of diesel, which is the most-used petroleum product by far, and follow through with attendant reforms long on the back burner, for instance, decontrol of automotive fuel prices and the ending of the elaborate ring-fencing of retail sales of oil products, which should competitively add to efficiency gains and productivity improvements in the vast oil economy, as has indeed been the case in the mature markets abroad.
Plus, we need renewed emphasis on modern public transport. The fact is that open-ended consumption subsidies on oil products account for a large and rising part of the Expenditure Budget, and do need to be phased out to better allocate resources for much-needed social and physical infrastructure. The stated under-recoveries in oil products have led to thoroughly overextended government finances and loose fiscal policy, which, in turn, has fuelled inflation.
In parallel, the mechanics of price rise in cereals and the so-called superior foods do need much closer policy attention. We clearly need to better manage our huge buffer stocks of cereals and rationalise the massive carrying costs involved, which inevitably translate into dearer food prices.
The Centre needs to get the states involved in policy-making to better address the manifold supply rigidities pan-India that keep hardening prices of vegetables, fruit and other protein foods. The watchword, again, needs to be innovative policy solutions. There are very many other policy areas that need attention, for example, legal reforms, improved connectivity and urban renewal. But to begin with, inflation control and tighter fiscal policy do need focused attention.