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Business Commentary/Dilip Thakore

Last chance for Sinha to right economic blunders

Conventional wisdom, especially in the developing countries of the Third World, is that government knows best and that there is a great deal lay citizens can learn from the utterances of the great ones in government. Therefore, on the nation's speakers' circuits and the assemblies of business organisations such as the Federation of Indian Chambers of Commerce and Industry, the Associated Chambers of Commerce, the Confederation of Indian Industry, the individuals who get star billing are politicians and bureaucrats.

Yet it is useful to bear in mind that the track record of post-Independence India's politicians and bureaucrats is appalling. During the past 50 years, since Independence they have run government, the public sector and indeed, the nation into the ground. Today, by almost any yardstick -- education, literacy, per capita income, ownership of consumer durables, calorific intake -- India is among the 20 poorest nations in the world.

Therefore, the conclusion is inescapable: the nation's politicians and bureaucrats who have been calling the shots in the national development effort for the past half century have proved to be abject failures. Nevertheless, the nation has survived; a large new middle class has emerged in spite of the best levelling down efforts of the neta-babu (politician-bureaucrat) combine.

So maybe the people -- especially the middle class -- are wiser than politicians and bureaucrats. And maybe the time has come for the netas and babus to learn a few lessons from the people rather than the other way round.

Less than four weeks from now, Finance Minister Yashwant Sinha will present his second and surely the incumbent Bharatiya Janata Party government's last Union Budget. At this time, the always-wrong babus of the finance ministry are giving the final touches to the Union Budget for 1999-2000.

If Sinha does not want to end up in the footnotes of Indian history, he would do well to learn a few lessons in Budget management from the Indian middle class which has survived the best efforts of successive governments to beggar it. It's still not too late.

The first priority of a typical middle class family is the education of the children. The rise and relative prosperity of post-Independence India's 200 million strong middle class which has attracted the attention of the world's premier transnational companies, is mainly attributable to its investment in education. A typical middle class family will save, scrimp and even sell the family silver to pay for the education of its children.

And sustained investment in education has paid off handsomely for this class. For example, all the infotech companies which are riding high in the stock market and which are the only Indian companies capable of competing in the emerging global market of the new millennium, have been conceptualised and promoted by children of post-Independence India's new middle class. With very little, if any, help from the babus in the nationalised banks or in government.

That's the first lesson which Sinha and the babus of the finance ministry can usefully learn from the people: invest heavily in education for prosperity. One of the items at the top of the BJP-led coalition government's National Agenda of Governance when this thus far disappointing coalition government assumed power a year ago, was a promise to increase the national outlay for education from the current 3.5 per cent of GDP to six per cent. If at all Sinha wants to be remembered as a great finance minister, this is his last chance to redeem this promise.

But with the fiscal deficit out of control and headed towards the danger mark of seven per cent of GDP, the finance ministry will inevitably plead lack of resources to invest in education. Here again the finance minister can take a cue from the average middle class family: sell the family silver. And for government, the equivalent of the family silver are the dead and/or under-performing assets of the public sector.

True, a disinvestment programme under which small percentages of the shares of public sector companies are being sold to public sector financial institutions has been going on for some time. But such a fudgy and pusillanimous effort is not likely to help raise the resources which could eradicate illiteracy from the Indian landscape within the next decade. What's required is a global auction or fire-sale of public sector enterprises which will raise a few hundred billions quickly..

Once again, Sinha has a great opportunity to present a Budget which will acknowledge and address these two root causes of post-Independence India's wretchedness -- mass illiteracy and an under-performing public sector. By auctioning PSEs lock, stock and barrel to finance education, he will also give a decisive thrust and impetus to the faltering economic liberalisation and industry deregulation programme which seems to be running out of steam.

It would be appropriate for a BJP finance minister -- because once upon a time the BJP used to champion orthodox, free enterprise economics -- to acknowledge the linkage between the wastefulness of India's massive public sector and the widespread illiteracy and poverty which blights the contemporary Indian landscape.

The aggregate investment in the central government-owned commercial public sector enterprises adds up to a massive Rs 3 trillion (1,000 billion = 1 trillion; 1,000 million = 1 billion). And if to this amount one adds to the investment made in the state government-owned PSEs the aggregate investment in the nation's PSEs grosses up to a colossal Rs 4 trillion of the citizenry's savings.

Unfortunately this massive investment in poorly conceived and worse managed PSEs has seldom earned a reinvestible surplus ('profit' is a dirty word for most Indian intellectuals) of more than Rs 30 billion per year, that is, a return of less than one per cent. And even this embarrassingly modest profit has been earned largely by the monopoly petroleum exploration and refining companies which charge well-above international prices for their products.

So, the greatest favour Sinha can do to the nation and ensure himself a place of honour in the history books when he rises to present the Union government's Budget for fiscal 1999-2000 to Parliament, would be to set in motion the process of the global auction of the nation's unproductive PSEs to raise the urgently required resources for investment in education and start retiring the public debt.

Through the prudent global auction of several PSEs lock, stock and barrel, the finance minister could easily raise Rs 200 billion per year.

Of this impressive sum, Rs 100 billion could be allocated for retiring the government's massive public debt which makes the Union government's annual interest payment burden of Rs 750 billion its largest item of non-plan or non-development expenditure.

And the remaining Rs 100 billion could be allocated to building a contemporary, fully equipped primary school in each one of the 10,000 administrative blocks in the country. If this strategy of the reduction of the public debt and the creation of a primary education infrastructure is adopted for five years, it would radically transform the shape and structure of the Indian economy.

The major failure of the post-Independence Indian state has been that its priorities -- unlike those of its metropolitan middle class -- have been misplaced. This explains why though India is one of the world's poorest nations, it boasts a prosperous metropolitan middle class.

By learning from the people -- and especially from the relatively prosperous middle class -- Sinha can use a great chance to write himself into the history books and catalyse the long-dormant creative and productive energies of the long-suppressed people of India.

Dilip Thakore

Budget 1999-2000

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