If the Indian economy is likened to an aircraft in midair, the Department of Economic Affairs (DEA) is the cockpit. Economists and bureaucrats at the department monitor macroeconomic indicators and propose policies and measures. Each year, in February, DEA puts together the Union Budget, which is presented by the finance minister to the Parliament amidst media frenzy. This gently nudges the economy onto a trajectory the government deems fit.

Prior to 1991, the government maintained a planned socialist economy. Self-reliance was the objective, the people having suffered at the hands of colonists for centuries. The country’s socialist founders settled for a “Hindu rate of growth.” An artificially overvalued currency kept away foreign investors while myriad licenses introduced by the government discouraged private investment.

In July 1991, however, the nation’s crippling foreign debt forced then prime minister, PV Narasimha Rao, to approach the International Monetary Fund (IMF) for a loan. The IMF encouraged India to devalue the currency, and gradually allow the market to determine exchange rates and open up the country to foreign investment, among other reforms in the financial sector. DEA was one of the key bases of operations for this economic overhaul. Rao handed key posts to trained economists, one of whom was then finance minister Manmohan Singh.

The Economic Division brings out the Annual Economic Survey and the Monthly Economic report. It has different units monitoring key elements of the economy — from balance of payments (BOP) accounts and financial markets to industry and infrastructure, and agriculture and food management. The division’s assessments form the underpinning of the annual budget prepared by the Budget Division. Among areas assigned to other divisions are capital markets, infrastructure and investment, integrated finance and currency. Reforms and new legislations in the capital markets are a priority, so are foreign direct investment in most sectors and public private partnership in infrastructure projects. The Integrated Finance Division monitors and manages expenditure for both the Department of Economic Affairs and Department of Financial Services. The Directorate of Currency keeps abreast of the best technologies used in other countries in printing notes and minting coins, and collaborates with foreign firms on security features while also developing its own security features.

The Department of Economic Affairs also has divisions that engage with multilateral donor institutions such as the International Monetary Fund, World Bank and the Asian Development Bank and international working groups for economic cooperation such as the G20, South Asian Association for Regional Cooperation (SAARC) and the World Trade Organization (WTO).

India is a member of several of these donor agencies and receives assistance against its contribution to their funds. Still other divisions are involved in processing grants and loans from countries such as Japan, United Kingdom, United States and the European Union in extending lines of credit to many needy African and Asian nations. The department also manages the recruitment and training of the cadre of Indian Economic Service (IES) officers, the bureaucratic corps that runs this department. 

Autonomous Bodies

Reserve Bank of India

Reserve Bank of India is the country’s national bank, serving the central government and state governments with whom it has an agreement. The Reserve Bank is also the guarantee bank for all the banks in the country and their regulator. It issues currency, keeps the prices stable, secures credit flow to the productive sectors of the economy and ensures financial stability. Among its other functions are to put in place secure and efficient payment and settlement mechanisms, to continue to build the country’s financial infrastructure and to increase access to affordable financial services. The Reserve Bank is headed by a governor and a board of directors, consisting of the governor, deputy governors and nominated directors.

Comptroller and Auditor General of India

The Comptroller and Auditor General (CAG) of India audits the money spent by government departments and government-owned companies. It seeks to promote transparency in the governance and holds the government accountable when the public funds at its disposal are misused. The present CAG, Vinod Rai, a former secretary at the Department of Economic Affairs, has been particularly scathing about the government’s misuse of funds in the lead-up to the Delhi Commonwealth Games, ill-conceived purchases of aircraft by state-owned Air India, fraudulent sale of 2G spectrum licenses to mobile phone operators, and violation of contract between the Ministry of Petroleum and Natural Gas and Reliance over excavation of natural gas in the Krishna-Godavari basin.

Public Private Partnerships

The 2011 National Public Private Partnership Policy’s draft (Ministry of Finance’s dedicated website on Public Private Partnerships in India) defines a Public Private Partnership (PPP) “as an arrangement between a government/statutory entity/government-owned entity on one side and a private sector entity on the other, for the provision of public assets and/or public services, through investments being made, and/or management being undertaken, by the private sector entity, for a specified period of time, where there is well-defined allocation of risk between the private sector and the public entity and the private entity receives performance-linked payments that conform (or are benchmarked) to specified and pre-determined performance standards, measurable by the public entity or its representative.”

The government envisages a larger role for PPPs in the 12th Five-Year Plan that will take effect during 2012-13 and beyond. The Approach Paper of the upcoming five-year plan states that PPP will account for 50% of investment in infrastructure compared to 30% in the present five-year plan. What some find worrisome, though, is that the government also intends to use the model — which rates efficiency above serving the public good — in delivering necessities such as drinking water, healthcare and education.

A New Mantra for Human Development? (by Richa Singh, Mint)

Arunachal Adopts PPP Policy (Zee News)

Roche Diagnostics India Looks at PPP Model for Maternal Health (by Gouri Agtey Athale, Economic Times)

Public Private Partnership in Health — What is it all about? (by Alexandra Humme, World Bank Institute Office, New Delhi)

Public Private Partnership Should Not Reflect Crony Capitalism: PM (Indian Express)

Public Private Partnership in Education (by Jandhyala BG Tilak, The Hindu)

At a time when there was a unprecedented public outcry against corruption in the government, CEA Kaushik Basu posted a paper, Why, for a Class of Bribes, the Act of Giving a Bribe should be Treated as Legal, on the website of the Ministry of Finance on legalizing bribe-giving when it is a case of a “harassment bribe.” These are bribes, according to Basu, that are paid to obtain what one is legally entitled to. Bribe-taking would remain illegal. His reasoning was that bribe-givers would then blow the whistle on the bribe-takers, leading to a sharp decline of the practice. As a reward for blowing the whistle, the bribes could be returned to the bribe-givers, he wrote. 

Noted economist Jean Dreze was critical of the paper and noted that it is “symptomatic of a common disease in the economics profession: the tendency to make sweeping policy recommendations based on analytical models that have a very limited domain of validity.” Dreze held the view that bribe-givers would still exercise the easier option of paying the bribe and not blowing the whistle. However, NR Narayana Murthy, founder of information technology giant Infosys, was convinced with Basu’s proposal and even suggested implementing it.

Foreign Direct Investment in Retail

With food prices threatening to get out of hand and public resentment mounting, the Congress-led United Progressive Alliance (UPA) government came up with a solution in November 2011: It would draft a bill to allow foreign investors up to a 51% stake in multi-brand retail trade — an attractive proposition for retail giants like Wal-Mart, which already has a limited presence in the country’s retail sector. The opposition parties sided with the traditional retailers, who feared they would lose their jobs once the large supermarkets eat into their share of the market. One of the parties in the ruling coalition was also not in favor of the move. So, it was put on hold, but foreign direct investment (FDI) in retail, as it came to be known, still remains on the government’s “things to do” list for the next few months.

.

Pro FDI
Advocates of FDI say that farmers will get better prices and that consumers will pay less due to the improvement in the supply chain with increased efficiency and reduced wastage. Middlemen will benefit due to the expansion of the retail sector, according to Kaushik Basu, chief economic advisor (CEA) in the ministry of finance. The Federation of Indian Chambers of Commerce and Industry (FICCI) termed retail FDI a “game-changer like telecom.” The Confederation of Indian Industry (CII), though, was in favor of a more cautious, “calibrated” approach.

Small farmers, proponents say, will benefit most. India is the world's second largest producer of fruits and vegetables after China, but 25% of this produce is wasted en route to the consumer. With multibrand retailers like Wal-Mart and Carrefour investing in distribution and storage, a drastic reduction in waste is expected. While farmers will see most of his produce reach the consumer, he will also get better prices from the buyer. At present, Indian farmers get a third of the retail price for their produce compared to two-thirds in countries with a higher share of organized retail. The farmers will also have access to foreign markets through the retailers, which could export a part of the produce to their outlets in other countries. All of this is expected to bring down the food prices for the consumer and lower inflation.

Retail FDI to Benefit Middlemen, Says Basu (Wall Street Journal)

FDI in Retail: India Inc Speaks in Different Voices (by Sanjay Mehdudia, The Hindu)

Anti-FDI

Small farmers constitute a large segment of the farming community. They stand to gain little as the retail giants prefer farmers with bigger plots and larger supply. The opponents of the move cite the experiences of other countries like Indonesia, China and Thailand that have allowed FDI in retail — supermarket food prices have been found to be higher than those in traditional markets and prices have continued to rise. The lack of “adequate institutions and effective governance mechanisms” to regulate the retail giants is another area of concern. International trade agreements, such as those brokered by the WTO, are also likely to come in the way of the government’s efforts to protect its interests.

FDI in Retail — UPA ‘Retired Hurt’ (by P Sainath, The Hindu)

R. Gopalan

R. Gopalan served as secretary of the Department of Economic Affairs until his retirement in July 2012. A 1976-batch IAS officer, Gopalan has a master’s in public administration and management from Harvard University (1990) and a master’s in economics from Boston University (1994). Apart from serving in the Tamil Nadu Government in various capacities (1977-2000), he has been special secretary, additional secretary and joint secretary in the Ministry of Commerce and Industries and has been involved in WTO negotiations (2000-06, 2007-09). In October 2011, Gopalan was one of the officials from the Ministry of Finance to appear before the Joint Parliamentary Committee looking into the irregularities in the sale of 2G spectrum licenses to explain why a controversial memo on the scam sent by the ministry to the prime minister’s office was not shared with the committee.

Official Biography