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'The Kesri factor was a major speedbreaker in the reform process'

It will be six years since Dr Manmohan Singh launched his economic reforms. However, after six years down the line, many areas which were supposed to have been liberalised by Parliament remain under state control. A classic example was the manner in which the government was forced to retract the Insurance Regulatory Authority Bill two weeks ago. This puts a question mark on how serious the 14-party ruling United Front were about the reforms.

Rediff On The Net will carry a three-part series on the future of economic reforms. In the first part, Syed Firdaus Ashraf speaks to S S Bhandare, economic advisor, Tata Services Limited. Excerpts:

What message will the withdrawal of the Insurance Regulatory Authority Bill send to investors? How much will it affect the liberalisation process?

The first message which comes across is that the United Front government has not been able to make any progress in the areas of economic reforms. It is also very clear that some of the economic reforms, which are of a core nature, cannot be realised unless there is a broad consensus in all the 14 parties which comprise the Front.

Secondly, it reveals that there exists resistance in some political parties with respect to certain areas of economic reforms. The Bharatiya Janata Party wants it in a particular fashion, namely the swadeshi way. In the case of the Communists, they still harbour their age-old fears about multinational companies. This forces important sectors like insurance to be kept out. This sends out the message that unless there is a political stability in the country, a major part of economic reforms cannot progress. To that extent, the decision to withdraw the insurance bill will be seen as a setback to the reforms process.

Can you specify the areas where reforms need to be speeded up?

The areas are clearly identifiable, some of which are in the financial sector. I would list the following:
1. The most important area is the restructuring of subsidies;
2. Second is the administrative price mechanism applicable to the petroleum products prices. The present cross-subsidisation is hurting the future growth of the oil sector. It is also an area where opposition is going to be very strong;
3. Next is the one we have been talking about since the beginning of the reforms -- a labour policy. An exit policy is still hanging in the air. Therefore, nothing has changed in the Industrial Disputes Act which was to be amended;
4. The fourth concerns land -- the Urban Land Ceiling Act. An change in the rent control system has to take place. However, this policy concerns not the central government but the state governments;
5. And last is the entire social sector reforms.

Do you think we can maintain the present growth rate of 7 per cent in the next fiscal year?

Absolutely not. It is unlikely that we will maintain it this year, 1997-98. Though in April, industrial growth was 10 per cent, I am doubtful about the overall growth rate. I believe that in the first four months of the current financial year, the overall GDP growth, including industrial, will be somewhere at 4 per cent. Which means we will have to make up for the decline in the remaining part of the financial year. But that is unlikely to make up for the earlier slackness. So I doubt if growth rate can go beyond 6 to 6.5 per cent for the year 1997-98.

It costs the government about Rs 300 million per day to subsidise petroleum products. By the end of this year, the oil pool deficit will amount to Rs 240 billion. What should be done?

There are two aspects to the deficit. Many political parties claim there is nothing wrong with the present petroleum products pricing mechanism; it is essentially the tax structure which hurts the petroleum sector. Now there may be an element of truth in that. What they are suggesting is that we bring down the excise duty and the customs duty. But in that case, the sufferer will be the central government which will lose the tax revenue. Moreover, the money from the taxes go to the petroleum companies. Also, suppose we cut down Rs 100 billion by way of reducing customs and excise taxes; that in turn will increase the fiscal deficit. So you are not really solving the problem.

Secondly, to what extent can you cross-subsidise? Nobody says that there should be no subsidy for kerosene if it goes to meeting the needs of the vulnerable sections of society. Also, no one wants to remove the subsidy for diesel as it supports the transport sector. But the price difference is too much -- petrol is eight to nine times more expensive than kerosene, and about 3.5 to four times costlier than diesel. These kinds of differences are unheard of. One can have cross-subsidisation up to 50 per cent, but not to the extent of 300 to 400 per cent.

Therefore, I feel that cross-subsidisation must stop. You cannot surrender the tax resources in order to meet the deficit of the oil pool account.

Don't you think the withdrawal of support by Congress chief Sitaram Kesri to the United Front in April hurt the reforms process? Little progress has been made in the "miracle" Budget presented last February.

Absolutely. The Kesri factor was a major speedbreaker in the reform process. And that is why the miracle budget did not hold for very long. Dr Manmohan Singh very nicely put the difficulties in perspective by saying: "One cannot think of economic policies in a political vacuum." That statement has been proven right and today you can see the situation.

What is your opinion of the fast track projects?

In a number of areas, we thought the fast-track projects will really take off, especially in the power sector. About nine to 10 projects had been identified, but in each case, the power purchase agreement did not progress. Till today, our fuel policy remains unclear. In the power sector, generation of power is one part, and transmission and distribution is another. For transmission and distribution, one has to depend upon state electricity boards, which are completely bankrupt. It is very difficult to trust these boards to pay for the power generated. This is a fault in the system.

There is another hurdle: we have been proclaiming that there is a single-window clearance to set up a power plant. However there are 25 steps within that single window! In the case of roads too, 59 steps are needed to get clearance. So, all kinds of problems exist and none of the projects are progressing.

The major constraint is the lack of political will. It is a very sad commentary that the finance minister had to recently say: "Am I the only one who should carry the burden of reforms."

Are you happy with the plan for disinvestment in the public sector units?

I think the Disinvestment Commission is doing excellent work. They have come out with the fourth report now. They have given the guidelines. But they lack the power to go ahead with the actual disinvestment. Decision-making is in the hand of the industry or finance ministry. This, in turn, requires the backing of the entire Cabinet and the support of the other constituents of the United Front government. Simply preparing an academic paper on disinvestment will not suffice.

How far has debureacratisation taken place over the last six years?

Debureaucratisation has taken place up to a certain point. Areas like industrial licensing, the Monopolies Restrictive Trade Practices Act clearance, control of capital issues: these have been debureaucratised. But it has not taken place in other areas like infrastructure management and public sector units reforms. Debureacratisation in terms of downsizing the entire central government machinery also has not happened. We still have 3.8 million central government employees. And the state governments have twice as many.

India's foreign reserves today stand at US $26 billion. What does this imply?

Firstly, in 1996-97, we witnessed a current account deficit of less than 1.2 to 1.3 per cent of the GDP, not a huge one. On the other side, there were huge capital inflows leading to massive surpluses that entered the financial system. Thus, the first positive point is the low current account deficit and high surplus capital account.

Secondly, foreigners, particularly portfolio investors, are still interested in India and still confident to some degree about the country's economic potential. And thirdly, strong Indian companies have been able to raise resources abroad. These are the positive signs.

What, however, is creating problems is from the exchange management side. Because of excessive inflow, there is a supply-demand problem. This is causing the Reserve Bank of India difficulty in maintaining the exchange rate. The real problem is that we have not been able to utilise this foreign exchange usefully. We should have spent our excess capital, particularly on the major infrastructure and industrial projects.

Why did this not happen?

Because we do not have adequate policies in the case of roads, power, and industry. Secondly, while the public sector units have withdrawn from capital expenditure programmes, the private sector has not taken them up due to the inadequate policies. For the same reasons, foreign investments have not come in these areas.

Isn't it true that while many projects have been approved, actual investments remain limited.

You are right. Investment approvals, both by domestic and foreign companies, are sizeable. But actual investments are very low. In fact, foreign direct investment is as low as 25 per cent of approvals.

How do we improve upon the above figure?

The whole process can be improved and speeded up by making sure the reforms process does not go through chequered positions. At one point of time, the finance minister says we will open up the insurance process and then he goes back on his word. The whole system needs to be streamlined. Another area concerns public litigation and environmental issues. In some of these areas, debates must take place beforehand because many of the public litigation filed later on hinder the investment process.