First things first: I would like to join millions of fellow citizens in conveying best wishes to India's new prime minister and his government. This is both heartfelt and selfish, for on his success and that of his government will hinge the welfare of all of us.
What about economic reforms? India's 'miracle-maker' of the early 1990s is now the prime minister. Can we expect reforms to go full steam ahead?
Or will the constraints imposed by the Left parties and others throttle progress? What do we mean by reforms anyway? Such issues will engage us in the months ahead -- and lots of trees will be felled to feed the printing presses.
In an important sense, only time will reveal the answer to the questions of how fast and how seriously will the new government proceed with economic reforms. But it's too tempting not to indulge in some initial speculations on the subject. And, to anticipate the conclusion, don't let your expectations run ahead of the political realities!
The phrase 'economic reforms' is much abused. Like the elephant in the Sufi parable, it means different things to different people.
Often, confusing ends with means, 'reforms' are held to connote higher growth, more employment, less poverty, better education, health and safety nets, et cetera.
Everyone favours such goals. The hard questions of policy relate to how we attain them. For our purpose, let's define 'economic reforms' as those changes in economic policy which will hasten the achievement of these goals, especially faster growth of national output and employment.
What are the key policy thrusts that need to be pursued? I would suggest the following seven priorities.
- First, the current massive level of government dissaving (revenue deficits) has to be reduced so that private savings fund more of productive investment instead of government consumption.
- Second, the climate for industrial investment (domestic and foreign) has to be improved so that manufacturing recaptures the dynamism of the mid-1990s.
- Third, we need policies to increase the job content of output growth.
- Fourth, to get better returns from savings and investment, the banking sector has to become more modern and efficient.
- Fifth, we urgently need a policy package to revitalise agriculture.
- Sixth, policies must focus on reversing the neglect of primary education and primary health care.
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Finally, transformation of our very inefficient electric power sector is long overdue.
Based on statements by the United Progressive Alliance leaders and reports on the Common Minimum Programme, how much forward movement can we expect in each of these areas?
Reduction of revenue deficits will happen only through increase in the tax-GDP ratio and containment of current government expenditures. At the Centre, the 2003 Fiscal Responsibility Act provides a framework and incentives to move in the right direction.
The Left parties usually hail revenue increases (though please remember West Bengal's very low tax ratio). It will be up to the finance ministry to secure more of the necessary revenue increases through modernising tax administration and less through increases in tax rates (though the latter should not be ruled out of court).
The prospects for containing current government expenditures are considerably dimmer given the early clamour for state-specific expenditure 'packages' and the known difficulties of imposing the necessary hard budget constraint on ministries and states in a weak, multi-party coalition.
The modest uptick in industrial output and investment in 2003-04 may have some momentum, especially from the buoyancy of agriculture, unless investor sentiment has been weakened by the political uncertainties of the last two months.
The possible stimulus from a strong privatisation programme, further dereservation of more SSI sectors and labour reforms is unlikely to transpire, given the UPA's early policy statements. So what will invigorate industrial output and investment?
There is huge consensus that economic growth has to be far more 'jobfull,' not jobless as in the 1990s. But there is far less consensus on reforming the labour laws which have depressed the growth of modern factory employment in India for decades.
The NDA government's proposals of early 2001 remained stillborn. And it's hard to see the Left (or even a public-sector oriented Congress) being farsighted enough to champion such reforms.
But without such reforms, it is equally hard to envision jobfull growth. How then will the burgeoning labour force of the oft-touted 'demographic dividend' be accommodated?
The prime minister seems to have already announced that public sector banks will remain in the public sector. From a reform perspective this is clearly a backward step from the NDA Bill of 2000 (since stuck in parliamentary limbo) to reduce government equity in banks to 33 per cent. At the same time, the manifestos promise building a modern financial sector.
Looking around at global experience, it's impossible to find a serious country where financial modernisation has occurred in a predominantly public sector banking system. There is the additional serious risk of heightened pressure for directed and behest lending by government-owned banks. We have paid the costs of such misdirected lending before.
Revitalising agriculture will require much greater investments in (and maintenance of) rural infrastructure of irrigation, roads, soil conservation, etc and reinvigoration of the present systems of agricultural research and extension.
While the new central government can play a significant role in revamping systems, the main responsibility for strengthening rural infrastructure lies with the states.
And their finances are under such stress that it is difficult to see how they will find the money, especially if (as in Andhra and Tamil Nadu) hard won gains of partial cost recovery (for power and other services) are squandered overnight.
The primacy of the states' role holds true also for education and health. As does the pervasive problem of stressed state finances.
Still, the central government can play an important supporting role through various channels, including strategic centrally sponsored schemes and dissemination of successful lessons in enhancing accountability of teachers and improvements in curricula and examination systems.
It can certainly discharge this role more effectively if the concerned central ministry is not preoccupied with revision of history books, reducing the autonomy of institutions of higher learning and labouring over schemes to hugely increase subsidies to richer students in management institutes!
Every Indian (outside Lutyens Delhi!) knows about the disgraceful state of our electric power sector. A significant portion of our GDP comes form the production of generators, inverters, stabilisers and other paraphernalia which are unknown in more 'normal' countries!
The NDA government's recent new Electricity Act has wrought a major improvement in the policy framework for electricity generation and distribution. Optimists say that it will usher in a new era for this sector. I hope so.
But I also hope that the new government will undertake the follow through necessary to realise this new potential. As for states which revert to dispensing free power, I hope that neither the central government nor the Finance Commission will underwrite their profligacy.
So what does the above review of seven policy thrusts necessary to accelerate growth of output and employment augur for the enterprise of economic reforms? Not, I fear, a resounding clarion call for resurgent reforms.
Interestingly, the new government seems to have much more enthusiasm for forging ahead in areas (such as agriculture, education and health) which are mainly in the domain of the states.
Conversely, it shows a decidedly more lukewarm approach to fiscal consolidation, industrial climate, privatisation, banking and labour reforms, areas where the policy levers are more in the centre's ambit. It does seem that the spirit of the CMP (or is it LCD?) might dampen that of the 'Good Doctor.'
The writer is a professor at ICRIER and former chief economic adviser to the Government of India. The views expressed are strictly personal.
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