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5th November – Editorials/Opinions Analyses

Contents

  1. Fixing the rules of the economy
  2. The financial capacity of States is being weakened

Fixing the rules of the economy

Context:

India has an incomes crisis: incomes of people in the lower half of the pyramid are too low. The solutions economists propose are: free up markets, improve productivity, and apply technology.

Relevance:

GS Paper 3: Indian Economy (issues re: planning, mobilisation of resources, growth, development, employment); Inclusive growth and issues therein

Mains questions:

  1. Comment on the challenges for inclusive growth which include careless and useless manpower in the Indian context. Suggest measures to be taken for facing these challenges. 15 marks
  2. The trickle down approach has failed in its desired effects in the socio-economic development of India. Redistributive policy is suggested to be a part of inclusive growth development programs. Comment. 15 marks

Dimensions of the Article:

  • Status of growth distribution in India.
  • What is inclusive growth?
  • Dimensions of Inclusive growth
  • Issues related to Inclusive growth
  • Measures to bring Inclusive growth
  • Way forward

Status of growth distribution in India:

Oxfam International’s report titled An Economy of the 99 percent , released at World Economic Forum 2017, brought to light the income inequality issue in India. According to the report, India’s richest 1% holds 58% of the country s wealth and that 57 billionaires in India have the same wealth as that of bottom 70 percent of the population. The statistics show the status of inequality in India.

See the source image

What is Inclusive Growth?

UNDP’s definition of the Inclusive Growth underlines production and income as the components of Inclusive Growth: “Inclusive Growth is the process and the outcome where all groups of people have participated in the organization of growth and have benefited equitably from it. Thus inclusive growth represents an equation – with organization on the left-hand side and benefits on the righthand side.”

World Bank defines the  Inclusive Growth as follows: “Inclusive Growth refers both to the pace and pattern of growth, which are interlinked and must be addressed together.”

Thus, in broad sense,  Inclusive Growth means the inclusion of all sections of society in the process of economic development and sharing of its benefit. Therefore,  Inclusive Growth is not only an outcome or end but a process or a mean in itself.

Dimensions of the Inclusive Growth

These are the pillars of the building block of Inclusive Growth, or in simple terms, these are the ideals on which Inclusive Growth is based. Without these ideals, the Inclusive Growth remains superfluous in its merit.

  • Equality: Equality of opportunity in terms of access to markets, resources, and unbiased regulatory environment are the ends to mean of equality. In-equalities exist in various manners which are social inequalities, rural-urban divide, regional disparities, digital divide etc. To realize the Inclusive Growth in its ultimate form, equality is the most fundamental criteria. Inclusive Growth and equality impact each other. Without equality, Inclusive Growth can’t be achieved and lack of Inclusive Growth may lead to in-equality in real or perceived forms. Thus, Inclusive Growth and equality are mutually reinforcing.
  • Good Governance: Governance relates to the management of all such processes that, in any society, define the environment which permits and enables individuals to raise their capability levels, on one hand, and provide opportunities to realise their potential and enlarge the set of available choices, on the other. Therefore, Good Governance is foundation to Inclusive Growth.
  • Decentralisation: Decentralization is a bottom-up approach which empowering local self-governing institutions is one of the delivery mechanisms of the Inclusive Growth.
  • Accountability and Transparency:  Accountability is answerability towards performance of service delivery. It sets in the responsibility towards the assigned tasks in terms of results and outcome. Transparency is necessary for efficient delivery of essential public services; it acts as an enabler for citizens in accessing information on demand which helps them in reinstating their claims on government endowments and entitlements meant for them.
  • Sustainability: Sustainability and Inclusive Growth can’t be achieved in isolation and they supplement each other. Without adopting a sustainable practice in Inclusive growth, the implementation of Inclusive growth policies is bound to falter. Sustainability is required at the following levels when charting out the policy framework for Inclusive growth:
    • Financial Sustainability: The Inclusive Growth programs and projects of the govt. should be financially viable. It may be noticed that excess of subsidy and lack of outcome orientation is causing a problem of increasing fiscal deficit. 
    • Social Sustainability: Social sustainability means the need to maintain and sustain specific structure and culture. This type of problem is typically prevalent in tribal areas where the development programs for economic growth come in conflict with the cultural sentiments of the tribal population.
    • Environment Sustainability: In long-term, the environment standards must not be jeopardized while in pursuit of IG. By excess use of fertilizer is a diehard need of the moment, at the same time it has led to is unique problem of depletion of soil productivity and technology fatigue.
See the source image

Issues related to Inclusive growth

  • Growth vs Development: A research study carried by Indira Gandhi Institute of Development Research, an autonomous think-tank under Reserve Bank of India find out that economic growth has “trickled down” in both rural and urban areas; it has not been in favour of the poor. In urban areas, growth has been “anti-poor.”
  • Defining Poor: Who are poor and who should be the beneficiaries of the welfare schemes? Without a proper criterion of poverty, proper policy framework for inclusive growth cannot be developed. The lacuna of poverty definition also impacts the other associated areas such as employment schemes and subsidies for the poor.
  • Fiscal Deficit: Development schemes run by the govt. have created a dilemma of expanding fiscal deficit. India’s current fiscal deficit situation has limited the prospect of development schemes. India has significantly high debt to GDP ratio, balance of trade (negative) and current account deficit (CAD).
  • Ill-effects of LPG: Liberalization, privatization and globalization of Indian economy has ushered the poor to vulnerability and irony. Liberalization and privatization have particularly suited to the Indian private corporate, elites and rich. Globalization has created a question of existence in-front of small and medium enterprises (SMEs).
  • Infrastructure: Infrastructure is fundamental to the economic and inclusive growth. In budgetary allocations, Infrastructure is assigned the highest expenditure. Major proportion of this allocation goes to large projects such as power generation, freight corridors, and airports etc while rural infrastructure is immensely neglected.
  • Low Technology and Innovation: Indian economy is suffering from a technology-lag vis-a-vis developed economies and other industrialized economies. Poor rate of technology and innovation creates a burden on capital and resource base. Inclusive innovation means the creation and absorption of product and services relevant to the poor.

Measures to bring the Inclusive Growth

Policy Approaches for Inclusive Growth:  According to World Bank’s review of India’s Development Policy, Inclusive growth policy implementation is facing a dilemma of improving the delivery of core public services, and maintaining rapid growth while spreading the benefits of this growth more widely. The strategy for the inclusive growth per se needs to be an integrating strategy comprising state, market, civil societies and common man.

  • Free up Markets: Economists say markets should be freed up for agricultural products so that farmers can get higher prices; and freed up for labour to attract investments. Human rights must prevail over economic considerations. Good markets enable smooth transactions between buyers and sellers of commodities. However, humans are not commodities, like agricultural produce and minerals are. Humans must not be put up for sale to the highest bidders which was the practice in slave markets.
  • Improve Productivity: Improvement of ‘productivity’ is key to economic progress. Productivity is a ratio of an input in the denominator and an output in the numerator. The larger the output that is produced with a unit of input, the higher the productivity of the system. Economists generally use labour productivity as a universal measure of the productivity of an economy. Companies can apply two broad strategies for improving their productivity.
    • Capital-rich enterprises and countries: Focus more on upgradation on technology which help to reduce the manual labour for high production but it is not suitable for labour intensive countries like India.
    • Total quality management: The employers can enhance their workers’ skills and create a culture of continuous improvement in the factory, whereby workers and managers cooperate to improve the capability of their system, and squeeze more output from limited capital resources.
  • The social contract: A good job implies a contract between workers and society. Workers provide the economy with the products and services it needs. In return, society and the economy must create conditions whereby workers are treated with dignity and can earn adequate incomes. Good jobs require good contracts between workers and their employers.
See the source image

Way forward:

As understood from above, Inclusive growth is of vital importance to fight inequality in all aspects and promote holistic development of individuals in the country. Digital technologies like mobile phones, the internet can be harnessed for financial inclusion to address social-economic challenges of the country.


The financial capacity of States is being weakened

Context:

Through various means the Union government has substantially reduced the fiscal resource capacity of the States.

Relevance:

GS paper 2: Functions & responsibilities of the Union and the States; issues and challenges of federal structure;

GS Paper 3: Government Budgeting

Mains Questions:

  1. State governments drive a majority of the country’s development programmes. Greater numbers of people depend on these programmes for their livelihood, development, welfare and security. Discuss in the context of the financial capacity of the States is structurally being weakened. 15 marks

Dimensions of the Article

  • What is fiscal federalism?
  • Causes of reducing the fiscal space of the state governments
  • Fiscal shortfall and developmental activities
  • Way forward

What is fiscal federalism?

Fiscal Federalism refers to the division of responsibilities with regards to public expenditure and taxation between the different levels of the government. The Government of India Act 1919 and 1935 formalized the tenets of fiscal federalism and revenue sharing between the Centre and the states. It allows the government to optimize their costs on economies.  The Fiscal Federalism in India gives more financial power to central government and more socio-economic responsibility to the state government.

Causes of reducing the fiscal space of the state governments

  • Declining devolution: Finance Commissions recommend the share of States in the taxes raised by the Union government. Their recommendations are normally adhered to e.g. the 14th Finance Commission recommended to increase the tax devolution of the divisible pool to states to 42% for years 2015 to 2020. However,  Between 2014-15 and 2019-20, the States got ₹7,97,549 crore less than what was projected by the Finance Commission. This is an undeniable and substantial reduction of the fiscal resource capacity of the States.
  • Shrinking the divisible pool: Various cesses and surcharges levied by the Union government are retained fully by it. They do not go into the divisible pool. This allows the Centre to raise revenues, yet not share them with the States. Hence, the Union government imposes or increases cesses and surcharges instead of taxes wherever possible and, in some cases, even replaces taxes with cesses and surcharges. Between 2014-15 and 2019-20, cesses and surcharges soared from 9.3% to 15% of the gross tax revenue of the Union government.
  • GST shortfall: Shortfalls have been persistent and growing from the inception of GST. Compensations have been paid from the GST cess revenue. GST cesses are levied on luxury or sin goods on top of the GST. Such cesses have justification independent of compensation needs. However,  Of the nearly ₹3 lakh crore GST shortfall to the States, the Centre will only compensate ₹1.8 lakh crore. The States will not get the remaining ₹1.2 lakh crore this year.

Fiscal shortfall and developmental activities

Due to the combined effect of cutbacks in devolution, the shrinking divisible pool, failure to pay full GST compensation this year and fall in Central grants, the States may experience a fall of 20%-25% in their revenues this year. It has following consequences:

  • To overcome such extreme blows to their finances and discharge their welfare and development responsibilities, the States are now forced to resort to colossal borrowings.
  • Repayment burden will overwhelm State budgets for several years. Because paying loans and interest, salaries and pensions, and establishment expenses.
  • The fall in funds for development and welfare programmes will adversely impact the livelihoods of crores of Indians.
  • The economic growth potential cannot be fully realised. Adverse consequences will be felt in per capita income, human resource development and poverty. This is a negative sum game.

Way forward

Background

Finance Commission of India

  • Finance Commission is a constitutional body for the purpose of allocation of certain revenue resources between the Union and the State Governments.
  • It was established under Article 280 of the Indian Constitution by the Indian President.
  • It was created to define the financial relations between the Centre and the states.
  • It was formed in 1951.
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