A new economic order is rising

The National Democratic Alliance (NDA), under the leadership of Prime Minister Narendra Modi, appears to have its ears to the ground when it took the first bold step of dismantling the Planning Commission founded way back in 1950.

Several governments in the past have debated the existence of Planning Commission and its five-year Plans as they hardly made any significant transformation to India's growth story.

The NDA was the first government to take a tough stand and replace it with NITI Aayog, an advisory panel to the government headed by an Indian-American economist Arvind Panagariya.

Introducing Planning Commission was seen as a requirement when young India of the 50s needed the much required funds for industrial growth from the government. The first Prime Minister Jawaharlal Nehru adopted the Soviet Union's path to industrialisation where the onus of huge investments vested with the state. For India, private sector participation then was miniscule and investments were difficult to come by. But the scene has reversed today where a policy direction is required from the state as private sector players have turned major contributors of growth and can access cheaper funds from markets across the globe.

Whether the Commission—that played a dual role of being a think-tank to the government and routing planned funds towards developmental expenditures to states— was well-conceived or ill-conceived can be judged by the contribution it has done to improve Indian economy.

Since the first five-year plan in 1951, the social as well as physical infrastructure of the country has remained in dire straits. This has only proved the previous governments significantly erred in spending resources on a Commission that has failed spectacularly.

The only regret is that it took 66 years to be convinced that the Commission was a blunder and the deed was finally executed by the first-time absolute majority, BJP government, to axe it. The government has been complimented by the industry as well as economists for initiating the step.

"It is ridiculous for a country to have inefficient bureaucrats who have the power to allocate funds to states instead of playing an advisory role," said a senior economist at a foreign bank.
Noted economist, Ajit Ranade, prefers to term it "revamping".

"We are now going back to the conceptual role as a think-tank and fund allocation will go back to the ministry. But how much of the (NITI Aayog) advice will influence the government needs to be seen," he said.

In the past there have been embarrassing moments for India as well as the government by the Commission findings. In March 2012, the Commission's definition of 'below poverty line' was down to a ridiculous Rs 28.65 per capita consumption in cities and Rs 22.42 in rural areas, a smart way devised to downplay India's growing numbers of the poor.

By the new definition, India's poor population stood revised downward to 33.5 crore from 40-odd crore. Two months later, under the right to information, it was revealed that the cost of renovating two existing toilets at the plan panel's office was done at a whopping Rs 35 lakhs! Even more embarrassing was the cost of foreign trips of the then deputy chairman of Planning Commission, Montek Singh Alhuwalia, a bureaucrat who enjoyed the rank of a Cabinet Minister. Between May and October 2011, his foreign trips were at a staggering cost to the exchequer at Rs 2 lakh a day and his total travel costs between June 2004 and January 2011 stood at a whopping Rs 2.34 crore.

Though NITI Aayog has now replaced the Planning Commission, the nature of its role is not yet out in public domain. From the face of it, the government has rightly defined its role as one that would recommend policies or play an advisory role.

According to Ranade, since the past two decades, private-sector's role has dominated the market economy. The new role in 2015 will be of a government that provides strategic direction.

"Today 75% of the Indian GDP comes from the private sector which works on market principles and not on planned expenditure. The private sector has resources to funds," says VK Vijayakumar, investment strategist, economy and markets at Geojit BNP Paribas.

With Panagariya, a well-acclaimed economist who has been arguing for diminishing roles of the state, the country seems to be in the right path," said Vijayakumar. Most bankers and economists are a relieved lot on the dismantling of the Planning Commission. "At the moment, the government is improving its coordination between the states and centre," said Gaurav Kapur, senior economist at RBS on the role of NITI Aayog.

To add strength to the government's team are Arvind Subramanian, the chief economic adviser to the government, a former economist with the IMF is considered an expert on economics of India and China and the former chief economic advisor now Reserve Bank of India governor, Raghuram Rajan.

External global factors have come as a boon to India and the country seems well poised to exploit the situation in its favour. Brent crude that has fallen from $115.07 on June 19 to the current levels of around $49 has shrunk the import bills -- the benefit estimated to be in the region of $50 billion annualised.

Through partial passing on of benefits of the crude oil slide to the consumers and hiking excise duties, the government has stemmed the tendency to import petro-products beyond requirement, improve forex reserves and tried to address inflation as well as fiscal deficit concerns.

Foreign exchange reserves have been bulging to new peaks. Last week the reserves surged to a new high of $322 billion.

Raghuram Rajan is a veteran economist, well known for his independent thought of maintaining firm interest rates to tame inflation, make government to address supply side constraints that hit inflation and act in accordance to what his predecessors has rightfully done to tame inflation. Under his governorship, the rupee that had hit 69 to the dollar in August 2013, the biggest fall in 18 years, was quickly stemmed by a series of measures undertaken subsequently. Today, rupee is around 62 to a dollar and is seen as the most stable currency amongst emerging economies.

Despite being under pressure by the government, he maintained a hawkish stance on lowering rates. Eventually, he announced a cut of 25 basis points in key repo rate to 7.75% on January 15 this year based on data that showed a sustainable drop in inflation levels.

With a team in place led by stalwarts like Panagariya, Subramanian, and the RBI chief Rajan, the finance minister Arun Jaitley has the intellectual power to lead India back to double-digit path, though it may take some time.