GROWTH AND SOCIAL DEVELOPMENT SHOULD GO HAND IN HAND’

‘GROWTH AND SOCIAL DEVELOPMENT SHOULD GO HAND IN HAND’
The Economic Times, May 19, 2009, Page 14

M K VENU & T K ARUN ARGUE FOR THE NEED FOR REFORMS IN THE POLITICAL AND ECONOMIC SPHERES WHILE C RANGARAJAN & KAMAL NATH SHARE THEIR THOUGHTS ON THE AGENDA FOR THE GOVERNMENT

NOTED economist, former chairman of the Prime Minister’s Economic Advisory Council, Rajya Sabha member and former governor of the Reserve Bank of India, DR C RANGARAJAN has a deep understanding of the Indian economy. He believes the primary goal of economic policy should be growth, and poverty reduction. Dr Rangarajan, who at present heads the New Delhi-based think tank National Institute of Public Finance and Policy (NIPFP), outlined to Gireesh Chandra Prasad the challenges before the economy and the immediate priorities for the nation. Excerpts from an interview:

What should be the guiding principle for economic policy at this stage and what are the challenges ahead?

Growth and reducing poverty are the major objectives of economic policy. Economic development and social development need to go hand in hand. It is like walking on two legs. Ignoring any one of them will make the country limp along. Therefore, the focus of economic policy must be to simultaneously accelerate economic growth and ensure that the basic minimum requirements are provided to everyone. The major challenge before the country is to come out of the impact of the economic crisis, which had originated abroad. We should be able to move to a higher trajectory of economic growth soon. We have, in the past, demonstrated our potential for high growth. The challenge before us is to realise this potential.

What should be the immediate economic agenda for the nation?

Over the medium term, there are mainly two areas that require focused attention on the real side. These are agriculture and infrastructure. Within infrastructure, power sector is very important. A substantially large segment of our population depends on agriculture for their livelihood. Improving farm productivity is important to raise their income levels as well as to ensure food security. Foodgrain production should exceed the population growth rate. Agriculture growth is a prerequisite for bringing about significant reduction in poverty. Growth in infrastructure is fundamental for maintaining a sustained overall growth. Infrastructure sector needs to grow at a rate higher than the overall growth rate in the economy. The eleventh five year plan has set high targets for capacity creation in infrastructure. It is important that we achieve this. In the social sector, the most important area that requires attention is health. Making available basic health facilities to everyone is an important way by which we can reduce the impact of poverty. The National Rural Health Mission (NRHM) needs to be strengthened and implemented efficiently.

What should be our priorities in the financial sector?

India’s financial sector has shown great resilience in the current period of global financial meltdown. The twin problems faced by financial institutions abroad were of liquidity and solvency. India’s financial system, on the other hand, does not suffer from a solvency problem. It should become more efficient and should reach out to all productive sectors of the economy. Some reforms in this area are pending in the form of legislation.

We need to get the pending pieces of legislation in the insurance and banking sectors passed. Another important aspect of reform is that the regulatory framework should encompass all segments of the financial system. The biggest failure in the developed world in the recent years has been regulatory failure. We, in India, have succeeded in putting in place a good regulatory frame work. We must ensure that the regulations are followed in letter and in spirit by all financial institutions. The reform process is a continuous one. Its objective is to improve efficiency in the system. Therefore, the process should continue. But it is important to recognise that the emphasis on efficiency does not mean that we ignore considerations of equity. Efficiency and equity must be taken together and weaved into a coherent pattern of growth.

What should be the approach to the high fiscal deficit?

It is estimated that the fiscal deficit of the Centre and the states put together has touched 10% of the gross domestic product (GDP) in 2008-09. Perhaps next year, too, the overall fiscal deficit may be around that level. Such a deficit is warranted in the circumstances faced by the country. However, this level of fiscal deficit is not sustainable over a long period. We should take the Fiscal Responsibility and Budget Management (FRBM) targets as a cyclical average. That is, a level to be achieved over an entire cycle. There may be high fiscal deficits in periods of recession but it should be reduced in periods of boom. We should focus on meeting the FRBM targets once the economy starts achieving higher growth. Keeping the FRBM target as a midterm goal would be good for the country.

What are the benefits of a near majority for the Congress party?

We can look forward to a strong and stable government at the Centre, which is essential for taking appropriate decisions with respect to the economy. It also means consistency in policy formulation. The government will also be able to take strong decisions, which sometimes is difficult in a coalition government.