In­no­va­tive Pol­icy is the Growth Watchword

The Economic Times - - The Edit Page - Jaideep Mishra

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.

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