The Economic Advisory Council, constituted by eminent economists and under the aegis of the Planning Commission, functions as a sounding board for the government’s economic policies. It tracks the macro economy and prepares periodic reports on the state of the economy. It also advises the government on specific economic issues either on its own or if the prime minister assigns it a task. In addition, it prepares a monthly report for the prime minister on global and national economic trends and suggests suitable policy measures. The financial press regularly reports the viewpoints of the council and the speeches of the chairman.

The council is set up for a term of five years and the present council has been functioning since 2009. It consists of eminent economists of the country and the chairperson holds the position of a cabinet minister. The importance of the council may be gauged by the fact that Prime Ministers Manmohan Singh and Atal Bihari Vajpayee have held the chairman’s post at some points of time.

For the purpose of budget, logistics, planning and administrative roles, the Planning Commission is the nodal agency of the council.

The current chairman, Dr. C Rangarajan, is a prominent economist and a former deputy governor of the Reserve Bank of India.  The other members of the council are Dr. Saumitra Chaudhuri (Economic Adviser, ICRA), Dr. M. Govinda Rao (Director-General, National Institute of Public Finance & Policy) and Dr. Vijay Shankar Vyas (President, Asian Society of Agricultural Economists). The members of the council hold the rank of minister of state.

Since the 1950s, the Planning Commission has been developing five-year plans for the Indian economy, setting up expenditure targets and estimating resource availability. Both the Planning Commission, which set the expenditure targets, and the Finance Ministry, which had to raise the resources, conducted macroeconomic modeling with international support. Since the mid-1960s, when major weaknesses began to grow in the Indian economy, academic literature began to raise doubts about the mixed economy, import substitution model for the Indian economy. This subsequently led to the structural reforms and liberalization of the economy in 1991.

It was the Economic Advisory Council, although it functioned under the Planning Commission that was the first official organization that proposed liberalization of the Indian economy in the 1980s. Chairman of the council then was Sukhomoy Chakraborty, Professor of Delhi School of Economics, member of the Planning Commission and chairman of the Economic Advisory Council since 1983 until his death in 1990. In its reports during 1987-89, the council pointed out various weaknesses of the economy like growing pressure on balance of payments, mounting foreign debt, structural imbalance in the pattern of industrial growth, persistent fiscal imbalance, stagnation in the overall savings rate, pressure on the price level and vulnerability of the economy to external shocks like the Gulf crisis.

Prime Minister Manmohan Singh, before becoming a politician, was a member of the Economic Advisory Council during 1985-90 and had been instrumental in suggesting liberalization policies. The Report of the Economic Advisory Council on the economic situation and the priority areas of action, published in 1989, proposed various specific steps to liberalize the economy.  (It was prompted by threats from the International Monetary Fund and the World Bank to cut India’s line of credit.) The proposals were subsequently followed up since 1991 after Manmohan Singh was appointed the Finance Minister by the then Prime Minister Narasimha Rao and the landmark liberalization of the economy was set in motion.

Rangarajan, the present chairman, is a long-time confidante of Prime Minister Manmohan Singh. He is also one of the top three economists in the country, along with Montek Singh Ahluwalia, deputy chairman of the Planning Commission, and Kaushik Basu, the former Chief Economic Advisor whose term expired in July 2012.

Rangarajan was the Deputy Governor of Reserve Bank of India in 1991 and announced two rounds of rupee depreciation and introducing current account convertibility of the Indian rupee when Manmohan Singh, as the finance minister, took a number of steps to liberalize the economy.

However, Rangarajan has been repeatedly quoted of late as saying that days of big bang reforms are over and the RBI has little role to play to boost the economy in the current scenario of globalization and global meltdown. But, he continues to propose a number of steps to boost investor confidence and attract foreign investment.

Among the mostly widely read reports of the council are the Economic Outlook and the Review of the Economy, both published annually. Besides, the council prepares periodic reports on growth, inflation and other macroeconomic issues. The media regularly follows statements of the council chairman that are often taken as precursors of impending policy initiatives by the government.

In the latest Economic Outlook, 2012-13 reported in August 2012, the council reduced India’s GDP growth estimate from 7.1% as estimated in the Review of the Economy, reported in February 2012 to 6.7% on account of the global financial meltdown.

The council regularly meets delegations from industry associations and bankers, consults with officials from the Reserve Bank of India and with other ministry officials for the purpose of policy formulation and advising the prime minister on economic issues. For example, members of industry associations have met Chairman Rangararajan a number of times over the last few months demanding economic packages to deal with the recession. The major issues that have been raised by the industry are rate cuts by RBI, liberalization of foreign direct investment, implementation of the Good and Service Tax and sort out land acquisition issues. The chairman has also met bankers and members of financial companies to discuss ways to revive the mutual fund industry. The council takes inputs from the business sector to advise the prime minister on policy issues.

The council does not have a separate budget and functions under the overall budget of the Planning Commission. All the members of the council are representatives of research organizations. The council does not outsource any of the research work and all the activities of data collection, modeling and report writing are conduction in conjunction with the Planning Commission.

Do Regulators’ have Real Autonomy?

The current chairman, Rangarajan, a former deputy governor of the Reserve Bank of India, has been vocal about autonomy of financial regulators. There have been instances when the finance ministry has overruled suggestions by the council regarding appointments in financial institutions like Securities and Exchange Board of India (SEBI). The issue is raised time and again over RBI’s monetary policy to control inflation while the government wants to use the policy to give momentum to economic growth.

Debate Sebi’s Autonomy, Not the Appointment Process (Mint)

Tackling Inflation Should Be the Immediate Focus: PMEAC (Business Standard)

PMEAC Chairman Backs Regulators' Autonomy (Economic Times)

Sugar Price Decontrol

The Rangarajan committee on sugar decontrol has proposed the abolition of levy price, deregulating distribution, allowing export of sugar and compulsory storage of sugar in jute bags. It has, however, not accepted the demands of scrapping of the state’s right to fix a price for cane and reserving cane areas as it will deny the central government’s share of the revenue. At present, sugar mills have to sell 10% of their production to the government at prices lower than the cost of production. The growers argue that this artificially depresses prices.

UP to Sweeten Demand for Sugar Decontrol (Indian Express)

Pricing Policy for Medicines

The council has proposed a hybrid drug pricing mechanism that protects the interests of both producers and consumers. For medicines facing “insufficient competition,” it suggested that retail price is fixed based on the cost of production with a mark up for companies to make reasonable profits. If a drug is widely purchased by the government through bulk procurement, the MRP should be linked to the price the government pays. For the remaining drugs, it has been suggested that retail price be fixed at either 1.25 times the median price of a particular drug or the price that 80% of the consumers are paying, whichever is less. The Indian Pharmaceutical Association is demanding a market-based pricing mechanism.

Drug Pricing Policy: IPA Agrees to PMEAC's Hybrid Formula (Economic Times)

Cotton Export Policy

The council had advised the government to ban cotton exports to protect the domestic industry, which is a large employment generator. But the government gave in to the pressure from some government coalition partners as well as from global traders and allowed cotton exports once again. China, the biggest buyer of cotton, as well as Bangladesh and Pakistan protested against India’s policy of banning cotton exports, arguing that it violated norms of global trade.

Anti-Banning Exports

Politicians from cotton producing states like Minister of Agriculture and former Maharashtra Chief Minister Sharad Pawar and Gujarat Chief Minister Narendra Modi argued that banning cotton export would depress prices for cotton farmers.  

Government Allows Further Export of Cotton (Times of India)

Pro-Banning exports

The economic advisory council had argued that since the garment sector employs about 105 million Indians, banning exports of cotton to keep prices low would ensure the Indian clothing exporters could remain competitive. Some experts, however,   believed their protestations were mere politics since a ban on cotton wouldn’t affect prices all that much since many Indian middlemen had hoarded cotton in warehouses.  The price benefit, they argued, would go to the middleman.

India Unpicks Cotton Shipments Ban (by James Fontanella-Khan, Financial Times)

Diesel and Liquefied Petroleum Gas Subsidies

Most Indians do not have access to gas that is piped into the home and instead purchase their cooking gas from local agencies in metal cylinders that they carry to their homes. The council has suggested raising diesel prices and restricting the subsidy to LPG four cylinders per family in a year. The council feels that reducing the subsidy burden on diesel and LPG is essential to reduce the fiscal deficit.

For Fuel Price Hike

The proponents of diesel price hike maintain that the subsidy burden on account of diesel is raising the fiscal deficit beyond safe limits. The council chairman, Dr. C Rangarajan has said that there is a ‘dieselization’ of the economy as the subsidized price is leading to an increase in diesel consumption as passenger vehicles switch over to diesel fuel, power deficits lead to increased use of diesel generator sets and farmers use diesel pump sets for irrigation.

Prime Minister's Economic Advisory Council Suggests Hiking Diesel Price, Cut in Subsidised LPG Cylinders (Economic Times)

Against Fuel Price Hike

There is intense political pressure against diesel price hike from the coalition partners of the government. Diesel is the main fuel used by commercial vehicles, railways and many industries. The LPG subsidy is very politically popular, especially in poorer districts. The use of diesel, which is also subsidized, is very popular with middle-class voters, who often need the fuel to power generators during frequent blackouts.

For the Govt, It’s Diesel Price Hike or Fiscal Ruin (Business Today)

Protests on Petrol Prices May Delay Diesel Reform (Reuters)

Suresh Tendulkar

Suresh Tendulkar (1939-2011) was a member of the council from 2004 to 2008 and its chairman during 2008-2009. Tendulkar earned his PhD in economics from Harvard University and was a professor at the Delhi School of Economics. He is most known for his work on the method of estimating poverty and the number of people below the poverty line in India. He headed the government committee for estimating the Below-the-Poverty-Line. He was also a member of the the Fifth Central Pay Commission (1994-1997), the first Divestment Commission (1996-1999) and the National Statistical Commission (2000-2001).