Home Politics Experts and economists contribute to India’s policy mess

Experts and economists contribute to India’s policy mess

Ritesh Kumar Singh
India’s policy mess is often blamed on its politicians, but its experts and economists should be held accountable for their poor and unrealistic advice too
Chief Economist of Indonomics Consulting and Former Assistant Director of the Finance Commission of India
A group of migrant workers seen walking on the road

Political executives in India are often criticised for disregarding advice from experts and professionals, and for not making the right decisions or implementing the right policies, particularly in times of crises such as during the ongoing pandemic and the ensuing economic downturn.

But the decision-making on their part is just one part of the story. One must empathise with politicians who are flooded with often confusing and contradictory prescriptions from various experts and economists. The lack of neutrality in an ideologically polarised world is another serious issue that clouds expert opinions.

If something goes wrong, however, it’s mostly the politicians who face the ire of the public, while experts get away with little or no repercussions of any kind. It is time experts were made accountable for what they advocate. 

Expert opinions that tank

Consider the sheer mismanagement of the current public health crisis. Despite the world’s most stringent lockdown, India is in second position globally in terms of the number of coronavirus infections.

The prolonged lockdown resulted in India’s GDP contracting 23.9% in the second quarter of calendar year 2020 and 7.5% in the third quarter. It is increasingly clear that the sharp differences in COVID-19 mortality rates across different geographies are not reflected in similar differences in the decline in economic activity. While mortality rates in India are lower than in many countries, its economic contraction is comparatively greater.

Compounding problems in India was the sudden, unplanned implementation of the lockdown, which forced millions of Indian citizens—including migrant workers and small entrepreneurs—into economic misery from which they will take time to recover. Today, however, no one seems accountable for all the expert views that argued that India’s healthcare infrastructure is so inadequate that a stringent lockdown is the only way to contain the spread of the coronavirus. 

That is not all. 

With increasing inequality of income and wealth, one of the common expert prescriptions to address India’s economic woes has been to tax the rich more and to spend the proceeds on the poor. However, this viewpoint overlooks that India’s top income earners’ tax rate— including cess and surcharge—is already very high at 42.78%. Further increasing the rate will only penalise those who pay taxes honestly, and induce others to hide their income and dodge taxes.

In fact, given the intense global competition to attract the wealthy, higher taxes may drive the super-rich to migrate to tax havens, which will be an even bigger hit for India’s economy. It will adversely impact India’s savings, and in turn, its ability to invest, as rich people have higher marginal propensity to save.

It is clear that many experts are borrowing ideas from advanced economies that may sometimes not be suited to India’s socio-economic realities. Any recommendation or policy advice must be mindful of the specific circumstances of a market where it is to be implemented.

Notwithstanding the growing inequality in society, India needs its rich to ramp up investment and to create jobs. The answer lies not in increasing tax rates, but in increasing the number of people who actually pay taxes. In other words, India needs to expand its tax base, and keeping tax rates low helps do that. Fortunately enough for India, the government has ignored such flawed advice in its latest budget proposals.

Another expert prescription is to lower interest and corporate tax rates. While lowering interest rates bring down the cost of capital, hence helping improve margins, lower corporate taxes allow investors to retain a larger proportion of profit, and thus incentivise private investment. Lower interest rates also support credit-financed demand for goods and services. Yet private investment continues to remain muted and most consumer facing industries—from automobiles to real estate—are reporting poor sales numbers despite interest rates adjusted for inflation now at an all time low and corporation tax rates being halved. It is clear the prescription is not working.

Understanding the real problems

It is important to realise that the cost of capital is one among many factors influencing investment decisions. A far more pressing concern could be growing regulatory uncertainties and policy risks, especially those related to taxation that deter investors.

Moreover, cuts in corporate taxes or interest rates do not address the problem of the demand slump. Very few people will be incentivised to buy a property simply because the Reserve Bank of India has cut the interest rate by 25 basis points.

With the lack of demand a major constraint to India’s economic growth prospects, many economists prescribe hikes in minimum wages. However, if wages are raised in a slowing economy, businesses might choose to retrench workers to rein in wage bills and protect margins. Moreover, it’s not difficult to understand that a forced hike in wages in a high unemployment environment and ultra-low and decreasing interest rates, will result in greater attempts at automation. That could deter an increase in employment and run counter to the objective of boosting consumption.  

The improvement in the purchasing power of the poor is, no doubt helpful, but it will mainly support the demand for essentials such as food and clothing. That is needed, but is not enough. It is the relatively affluent households that drive demand for high value discretionary goods such as cars and homes. Unless they get relief on direct taxes or on indirect taxes they are required to pay on their consumption, household demand will remain capped, and that in turn will cap private investment and GDP growth.

Similarly, stringent labour regulations may protect workers in India’s formal sector, but they don’t help four-fifths of the workers employed in India’s large informal sector. In fact, a large share of workers employed by large Indian corporates are on contract too, implying they get lower wages than permanent workers and have limited or no social security benefits. 

That restricting the imports of goods into India hurts the affluent more is another popular fallacy. A former member of the Prime Minister’s Economic Advisory Council argues in this piece that India’s imports from China—which by the way include plastics, smartphones, automobile parts, FMCG and toys—essentially cater to the Indian rich.

This couldn’t be further from the truth. Increasing import duties on popular consumer goods such as mobile phones will hurt the poor more, and not the rich, since the additional cost they will pay in the form of duties will account for a much bigger share of their disposable incomes.

Contrary to widespread belief, the rich didn’t have to stand in queues to withdraw currency notes after the ill-advised imposition of demonetisation on 8 November 2016. Similarly, they will not be hit by increased tariffs on mobile phones or toys or plastic bottles. It is the relatively poor who will be hit hardest by the restrictions on imports from China.

But political convenience always trumps economic logic.

Expert opinions need to suit the local context

It is clear that many experts are borrowing ideas from advanced economies that may sometimes not be suited to India’s socio-economic realities. Any recommendation or policy advice must be mindful of the specific circumstances of a market where it is to be implemented. For example, increasing floor wages can have very different implications in India as compared to the US.

Moreover, experts need to cut their obsession with complex mathematical models, which are often based on unrealistic assumptions and cannot capture reality, such as in the case of predicting COVID infection trends.

When something goes wrong, it’s mostly the politicians who face the ire of the public, while experts get away with little or no repercussions of any kind. It is time experts were made accountable for what they advocate.

Consider individual income taxes again. Raising income tax rates disincentivises income disclosure and encourages tax evasion. A far better approach, suited to an economy such as India, would be to lower taxes and expand the tax net. Given that just about 1% of Indians pay any income tax at all—either because of evasion or because they work in the informal sector—this might work better in terms of increasing government revenue.

Rather than working in silos, experts in one area need to collaborate with those from others to analyse and find solutions for complex policy problems. For example, combatting the pandemic calls for collaboration among not just health workers and government officials, but also labour economists and NGOs who could have pointed out that a sudden nation-wide lockdown would force millions of poor migrant workers to their hometowns in desperation—even if on foot—thus contributing to the spread of the infection, rather than containing it.

With growing complexities in the world around us, it is not surprising that experts—who possess specialised knowledge or skills—are playing an important role in policymaking. However, being technically sound is not enough – local nuance cannot be ignored.

If experts want their recommendations and advice to make a real difference, they should attempt to provide practical suggestions that can easily be understood (and implemented) by the administration of the day, which is accountable to voters. Experts aren’t accountable, but that doesn’t mean they shouldn’t be responsible either.

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Chief Economist of Indonomics Consulting and Former Assistant Director of the Finance Commission of India

Ritesh Kumar Singh is a business economist and currently the CEO of Indonomics Consulting Private Limited, a policy research and advisory startup based in India. He was a former assistant director of the Finance Commission of India.

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