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Fiscal Policy, Decentralization and Economic Growth in India A basic test of a good or bad economic policy is to check if it clearly spells out how its different components are expected to achieve the goals and targets of growth and stability. Fiscal measures taken by the government are necessary but not sufficient to achieve its own objectives and targets. To make it sufficient for the sustainability of economic growth, there is a strong case for fiscal policy in coordination with monetary policy and other physical controls in the federal economy of India. We have to understand, analyse and interpret the constraints, weaknesses and limitations of the Indian economy and its policies for implementation
The 224-page book, divided into eight chapters, with special emphasis on decentralised initiatives, is thought provoking and worth considering by policy makers. Pradeep S. Chauhan has worked on stability and growth pact (SGP) of EMU for fiscal discipline, in collaboration with the European Union during his stay at Oxford. This book is the outcome of that study to drive out its relevance for the Indian economy. The author has attempted to give the readers a mix of thematic framework and the empirical understanding of fiscal policy and decentralisation in this book. The division of fiscal policy- making into three hypothetical but independent branches of allocation, distribution and stabilisation, first formalised by Musgrave (1959), Solow and Swan, Kaldor and then J.M. Keynes, remains this day a useful conceptual framework, even though the world today is much more complex than that existed at the time these economists wrote on the subject. In spite of the lack of robust results in the empirical literature, the conclusion of the first two chapters have been that, when interpreted from the perspective of the new endogenous growth theory, the fiscal policy could play a fundamental role in affecting the long-run growth performance. The author is right in suggesting that the economists should not hesitate to recommend changes in the instruments of public finance in the direction in which the theory has deemed it fit for enhancing economic growth, such as policies to improve the neutrality of taxation, promote human capital accumulation and lessen income inequality. The author has evaluated recent policy reforms and structural changes in the Indian economy. The positive impacts of the these reforms are discussed in terms of gains in labour productivity as main driver of growth, effects of total factor productivity and human capital formation, sterling performance of services and the IT sector, special economic zones (SEZ), etc. The author has also recommended many policy implications such as the need for further deregulation of product market, employment aspect of accelerated growth, need for enhanced efficiency of the financial system, reorientation of public expenditure, modernisation of tax structure, Centre-state financial relations, high demand for infrastructure services, urban renewal and development and changes in the SEZ Act. Infrastructure development can prove to be the panacea for overall economic prosperity by removing poverty, unemployment and boosting the agriculture, industry and service sectors. The total area for proposed SEZs is 1,750 square km, almost 0.11 per cent of the total agricultural land. But this percentage is much higher for the small state like Haryana, which is one of the two states that have approved much larger size (greater than 100 square km). To save Indian economy from the fiscal crisis of today, caused by sops due to FEAR, (false evidence appearing real), it would be relevant to adopt the canons of public expenditure advocated by Dr B. R. Ambedkar in terms of the faithfulness to the intentions of the will of the people, wisdom as provided by the professionals in the field, coupled with well-considered and honest judgement, and economy in execution. The allocation of public expenditure among competing demands and the manner of utilisation fall within the domain of Ambedkar's canons, which can be seen as a touchstone to see whether a particular items of public spending is necessary or not. The canons of public expenditure advocated by Ambedkar in 1949, while discussing the functions of the Comptroller and Auditor-General during the framing of our Constitution, Ambedkar said the governments should spend the resources garnered from the public not only according to rules, laws and regulations, but should also see that "faithfulness, wisdom and economy" are adhered to in the acts of expenditure by public authorities. The remarkable thing about Ambedkar's canons of public expenditure is that they are ism-neutral. One can follow a policy of a large or small public sector and yet the principles behind these canons are applicable. To move up the economic ladder, we need to change the gear of the Indian economy by increasing investment in human resource development activities with political will for inclusive growth in the real sectors of the economy.
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For meeting any
eventuality caused by the global economic crisis, we need to adopt a
preventive and promotive health approach to the economy in place of
curative, which is possible by accepting "needonomics" instead
of "greedonomics," confining to needs, not greed which is the
root cause of the crisis. We need good governance at all levels of
operation in the economy, starting from those at the international level
(World Bank, IMF, and WTO) to those governing social and economic
relations in the family and the neighbourhood to minimise the impact of
the new economic reality of the global economic crisis.