A new fix for economic decision-making | Business Standard Column

Well into its sixth year of rule at the Centre, the Narendra Modi-led government’s economic policymaking style reveals a trend that is as problematic as it is puzzling. It is problematic because it fails to recognise the inherent weaknesses of its decision-making process and therefore fails to address them to minimise or eliminate their adverse consequences. It is also puzzling because these weaknesses are there for all the government’s top political leaders to see and yet nobody as yet seems to have got down to the obvious task of removing the shortcomings.

At the heart of this problem lies the Modi government’s inability to put in place an effective economic advisory and policymaking team. Its absence is increasingly being felt as the Indian economy is facing the challenges of a slowdown. Not that the Modi government has no economic advisory council or it does not have the benefit of a chief economic advisor in the finance ministry or the secretaries in its key economic ministries are not up to the mark. The advisory offices do exist and the officials in charge of economic ministries have the necessary experience and competence to oversee economic policy implementation.

But the problem is that these advisors and officials have been rendered largely ineffective. The reason for their ineffectiveness is that the Modi government is not generally inclined to heeding the advice offered by those who are entrusted with the task of monitoring the economy and suggesting economic policy measures. What has complicated the matter more is that the decision-making process has largely remained centralised. Even when top civil servants in important economic ministries are consulted, the environment is not conducive to debating or disagreeing with what has been proposed. Instead, the tendency among senior officials of the line ministries is to endorse whatever has been proposed from above.

Not surprisingly, the government has seen the departure of a few of its economic advisors. Of course, the government cannot be faulted for not replacing those who left it. But the effectiveness of the advisory apparatus at the government’s disposal has not seen any improvement. Presumably, the new advisors are aware of the limited role they are expected to play: Simply offer your advice and do not worry about whether that advice is heeded or not. Quite naturally, such a scenario will not attract the best minds to offer economic policy advice to the government. A similar mindset prevails among many senior secretaries in key economic ministries.

Mind you, such a state of affairs with regard to the economic policy making space is in stark contrast to the government’s ability to understand its political mandate and implement its political agenda through necessary policies with a dexterity that is almost unmatched in recent years. The manner in which the government went about amending the scope of Article 370 for Jammu & Kashmir and bifurcating the state into two Union territories is an example of the government’s advance planning, preparation for containing the fallout and management of the system. You may not agree with the manner in which the whole idea was executed or the system was managed, but the government never lost the central focus of its political mandate. A similar approach can be seen in the way the government is planning the implementation of its other ideas on amending the citizenship law or the introduction of a national register of citizens in other states.

Compare this with the way the government implemented its major economic policies, and you will see the difference. The launch of the goods and services tax (GST) is proving to be a big economic mess as neither can the new taxation system be touted as a “good and simple” tax, nor has it been able to generate higher revenues for the Centre and the states, as was expected. A bigger challenge that arose out of the GST was the compliance burden it imposed on millions of traders and small businesses, which were never used to the idea of recording all their transactions.

More than a reform of the taxation system, the GST was expected to usher in a major behavioural change among the taxpayers. The jump in the compliance level that the GST wanted from Indian traders and small enterprises was too ambitious an expectation. An additional stress factor came from demonetisation, unleashed on them just eight months before the launch of the GST. Looking back, the government’s expectation that players in the unorganised sector would switch over to a 100 per cent compliance regime was misplaced. The transition to the GST required a longer time frame, given the poor compliance level that existed among Indian traders and small enterprises.

Even before the economy could stabilise after the GST disruption, the government has indicated its plan to ban the use of single-use plastics. In recent days, the government seems to have reviewed that plan, but the disruption caused to a large number of small enterprises, dependent on producing, supplying and using single-use plastics, is already huge. Thousands of small units in Halol, for instance, are facing uncertainty arising out of the fear that single-use plastics may soon become a prohibited item.

It is not that the government should avoid bringing about major economic policy changes to improve the taxpayers’ compliance level or reduce the use of plastics to minimise the damage to environment. These changes are needed and the objectives are equally laudable. But economic policymaking is not just about bold announcements. It also requires sufficient advance planning and consultation among stakeholders, including experts and the government’s own advisors and the bureaucracy.

The first step towards that direction would be to reduce the preponderance of centralised decision-making. Encourage the government’s advisors and bu­reaucracy to offer their frank views on proposals even if they differ from what has been suggested from above. Let the line ministries play a more effective role in policymaking, which could then give its feedback to the Cabinet, for it to take a considered view on any economic policy package. With the economy facing the pangs of a slowdown, there is no sc­o­pe for making mistakes in deciding on the remedies. A more participative decision-making process will reduce, if not eliminate, the chances of such mistakes.

via A new fix for economic decision-making | Business Standard Column

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