Economic Survey 2014 is strong & innovative but silent on few issues, says T K Arun

NEW DELHI As might be expected from a document emanating from the finance ministry, the Economic Survey 2012-13 calls for a “further shift in the policy stance of the RBI” on the grounds that there has been some moderation in inflation in Q3 of FY2012-13. The decline in wholesale price inflation (though not in consumer price inflation), combined with the expected fiscal consolidation, creates room for a more accommodative monetary policy, says the survey.

The Economic Survey this year is a technocratic document with a vengeance. Its expectation of 5%-plus growth this fiscal and for the fiscal deficit, current account deficit and inflation to improve are par for the course. But it approaches problems with such academic detachment that it gives the UPA government fulsome credit for macroeconomic management last year and criticises the Essential Commodities Act, deployed by the present government as a major inflation fighting tool, as a perverse market distortion that contributes to food inflation. It repeats the usual reform prescriptions on labour laws, creating a bond market, cash transfer for subsidy and fiscal consolidation. But then, it comes up with some new proposals.

It calls for a new fiscal responsibility law with teeth, a new central GST as a precursor to a nationwide GST, a new system of budgeting that dispenses with the role of the Planning Commission, a new system of accrual-based accounting to replace the existing one, enactment of the report of the Financial Sector Legislative Reforms Commission, a new Direct Taxes Code, a new central law to replace and override all state-level agricultural produce marketing committee laws and an inflation-targeting approach to monetary policy based on the Consumer Price Index. These generally make sense, except for the endorsement of the cack-handed Urjit Patel report. After the global financial crisis, regulatory regimes around the world want monetary policy to watch out for multiple sources of macroeconomic disruption, not just inflation.


The survey is spot on when it calls for reforming agricultural markets and transforming the administration of all kinds of subsidy by instituting cash transfers to the intended beneficiary while the product markets are left to function without distortion. The changes it calls for in the food economy are radical and will call for enormous political courage to implement: removal of subsidy on inputs, pricing freedom for producers who will, however, have to benchmark themselves against imports even as they access export markets, subject to taxes.

Removing fertiliser subsidy has been on the reform agenda since Manmohan Singh presented his first budget under Narasimha Rao, but the subsidy has now burgeoned to over `100,000 crore. Similarly, to remove the subsidy on power and water that farmers consume, enormous institutional and political changes are called for, to meter power and water, and stop patronising power theft and give-aways.

The survey calls for ending financial repression, ie sharply lower pre-emption of the loanable funds available with banks by the state. This calls for lowering the statutory liquidity ratio. Government’s borrowing costs, which nudged up to 8.3% last fiscal, could go up if the reform is pushed through before inflation is tamed. The survey’s major suggestion on coal is to end price control. But that leaves the major reform of ending state monopoly unaddressed. Similarly, the survey is silent on the how, why and whereof of price revision in gas even while noting the sharp decline in production of gas and gas-based power.

The survey is strong and innovative, if overly academic, in its macroeconomic prescriptions and vague on sector-specific issues.