Context
Article reflects on themes that should guide the economic policy
Guiding themes
- Focus on Market failures: The policy should focus on market failures. Free markets work in enhancing prosperity but there are areas where state intervention is needed. However, in India, the state is dominant in sectors where it is not required and lacks capacity in areas where the intervention is actually desired. It often intervenes with no evidence of market failure, which affects resource allocation. This needs to change
- Policy intervention should be seen from a long-term perspective. Often, policy changes are made with narrow objectives, focusing on one sector or area. Government should avoid such ideas
- Efficient government spending: The government should spend more efficiently. There are demands for increasing spending in various sectors of the economy and they are often legitimate as India needs improvement in a number of areas
- Cost of public spending: Public spending has a cost. Kelkar and others have calculated that the marginal cost of one rupee of public spending to society is around Rs3. Therefore, the government should spend carefully as the cost to society is much higher than what gets recorded in the books
- Factoring in the change of behavior: Individuals, including politicians, are driven by incentives. Policy changes should factor in the possibility that people can change their behaviour. Insights from public choice theory (a body of theory developed by James Buchanan and Gordon Tullock to try to explain how public decisions are made. It involves the interaction of the voting public, the politicians, the bureaucracy and political action committees) show that politicians and bureaucrats also work in self-interest
- Reducing fiscal profligacy: Fiscal profligacy is termed as a fiscal policy characterized by higher government spending in short-term which results in higher growth but is unsustainable in the long run. What is needed is an agency like the US Congressional Budget Office which independently reviews government finances so that the public in general is better informed. This will help reduce fiscal profligacy.
- Policy should promote competition. A high level of competition is desirable in a market economy as it leads to efficient allocation of capital (i.e. a competitor who yields best returns will receive the capital)
- The government has done well by getting the bankruptcy code passed as it will facilitate the closing of firms and the shifting of capital to more productive sectors of the economy
Conclusion
Author concludes his article by stating that following these broad principles in policymaking will help build credibility and lead to better economic outcomes in the medium to long run.
