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Go with gusto

Published in The Week, August, 23rd, 1992

Let's face it: the economic reform process launched by the Narasimha Rao government is unstoppable. No matter what the politicians, trade unionists and left-leaning pundits say, the Indian economy is being changed in a manner that is fundamental and long term. However, just as a nuclear reaction can, in the twinkling of an eye, spin wildly out of control with fatal consequences, the process of economic transformation needs to be managed and monitored on a real time basis if we are to improve the standard of living of 900 odd million Indians.

Now that globalization and integration are widely accepted, India's compatibility with the economic systems of other countries is of paramount importance. It is beyond doubt that only if such a congruence is attained will the flow of financial, manpower, technological and information resources be free and unimpeded. Arguably, world trade today is more free than and at any time in the recent past (though high tariffs and non-tariff barriers are still visible). In country after country, the evidence points to a clear conclusion: redistributive economics has not succeeded in bringing prosperity to impoverished people. The classical economic theories of Adam Smith and David Ricardo had always indicated the path to well-being; now they have been vindicated after the failure of 50 years of central planning in various parts of the world.

If the Indian economy is to develop and grow, it must mesh with the global economy. This it can do only of policies and attitudes match international standards. To overcome our technological and investment constraints, we must not only welcome foreign participants but also permit the free play of market forces. It is a painful fact that our transition will need the support of multilateral agencies if it is to succeed.

Under the circumstances, it is interesting to look closely at the finance minister's letter of June 2 and his Memorandum of Economic Policies for 1992-93 addressed to the IMF managing director. One is immediately struck by the approach of the finance minister. Notwithstanding all the brave talk of national sovereignty, economic (neo) imperialism and MNC skulduggery, the letter and the memorandum convey a simple truth: India is a borrower seeking to conform to the stipulations laid down by a very watchful and stringent lender.

The memorandum could well be an extract from the IMF and World Bank policy manuals! It lists clearly the steps that have already been taken and the steps that are to follow. Further, it commits the government to time frames and periodic performance reviews. Overall, the memorandum reveals a pragmatic understanding of the economy (and the mess it was in by July 1991) and the acceptance of inescapable accountability to the IMF.

There is no room for doubt at all: India's economic transition is proceeding on the basis of performance targets set and monitored by the IMF and the World Bank. Any additional financial and technical support is contingent not only on the achievement of these targets but also on the adoption of freer, market-oriented policies. Therefore, viewing the economy with ideological blinkers is obsolete and also impractical given the present realities.

Where then are the reforms headed? The government willy-nilly is committed to the easing of controls in every sector of the economy. Broadly, the focus will henceforth be more on private initiative than on public intervention. Consequently, subsidies will evaporate.

Forecasting the ultimate, logical end-state of the reforms is quite easy. The prescriptions have been know for many years. As Herbert Stein, the eminent economist (who has advised several US Presidents during his 52 years of experience in Washington), notes, the elements of economic policy are rooted in basic economics.

Therefore, given the irreversible nature of our reforms, the end-state includes downsizing of government (and consequent reduction of government's role as employer), large-scale disinvestment of public sector (with shares available to the public), all-round reduction and rationalization of direct and indirect taxes (consequent to tax reform), improvement of infrastructure with participation of private sector, and the entry of foreign investment and technology (with attendant improvement in quality).

Along with this, the rate of return on agriculture (now lower compared to industry) will increase and 'agri-business' will emerge as a strong contributor to enhanced rural income levels. Perhaps the traditional dependence on the monsoon will be diluted.

The contribution of the tertiary sector will surpass that of industry and agriculture and the economy will attain annually an overall growth between 6 and 8 per cent.

Structural economic reform is hardly confined to India. Governments across the globe are rapidly ushering in new policies designed to unlock the economic potential of individuals. Interestingly, much of the economic reform is also accompanied by a drive to democracy.

Eastern Europe is of course the showcase for the new economic dispensation. At the Salzburg seminar in Austria on 'Economies on Transition', ministers and economists were in total agreement that eastern Europe is a seething mass of confusion. Since the entire economic system is being recreated, so to speak, the prospects for macro economic stability in the near-term are very unclear, to say the least. In any case, the transition process in east Europe will be extremely painful over the next three years. Not necessarily so in India.
First, the political and legal foundations are much stronger. Secondly, we have the internal market size, resource base and technological capability to shrug off inhibitions quickly and scamper on to a higher growth path. Provided, of course, the government, quickens the pace of reform and attains more conceptual clarity. Though it seems to have appreciated the necessity and inevitability of reform, political compulsions are apparently putting pressure on it to run with the (IMF) hare and hunt with the (socialist) hound! There is no escape: the government must minimize its role in economic activities.

But it is disconcerting to note that the same bureaucrats and politicians who for decades have been engaged in designing new and complex controls have been entrusted with dismantling them. It is unrealistic to expect credible responses from these policy-makers.

Secondly, the entire issue of black money needs to be reviewed. There is no argument that the parallel economy may rival its over-the-ground counterpart in size and strength.

The underground economy was created primarily by the unconscionably high tax rates, acting in concert with the license-permit raj. Since controls are now seen as undesirable, can black money be viewed as less undesirable under the changed rules of the economic game? Can an across-the-board amnesty bring more productive resources into the economy? These are questions that need to be pondered at length.

Considering our evolution into a market-oriented economy, central planning is hardly relevant. What exactly then is the role of the Planning Commission? Nobody seems to have a clear idea about what Yojana Bhawan should signify. If the market mechanisms are to dictate the ebb and flow of investment, demand, supply and savings, the hitherto all-powerful planners with their sectoral targets seem to be not only redundant but also irrelevant. Instead of the Planning Commission, the government could set up a nodal agency to manage, coordinate and monitor the process of economic transition.

Though the policies are in the right direction, when it comes to privatization, the government seems to blush like a bride! Partial disinvestments, phased approach, selective unloading are all phrases that crop up frequently now-a-days. Instead of a piecemeal approach, the government would be better advised to call in privatization professionals and draw up a comprehensive blue print for action. Assuming of course that there are no political inhibitions, to full-scale privatization. The partial disinvestment, while having succeeded in raising some resources, has definitely left a poor impression on the public given the unsavory linkage to the securities scam. Also, whether such an approach was successful is doubtful.

Though reams and reams have been churned out on the securities scam, it is worth considering some basic aspects.
First, the entire episode is the classic result of imperfect financial markets in which information was available to a select few. Obviously therefore the financial sector is in urgent need of transparency seasoned with close monitoring both of which are only possible with the large-scale infusion of information technology.

Secondly, the involvement of banks can be traced directly to their low profitability-caused primarily by the impounding of unduly large chunks of lend able resources and secondarily by sectoral lending (including loan melas) compulsions. Banks must therefore be set free to pursue profit subject to prudent norms.

Thirdly, a significant part of the recent accretions to forex reserves is contributed by scam-tainted funds recycled into India Development Bonds and amnesty schemes via hawala operations. Therefore, there is no room for complacency; exports must increase by improving competitiveness (and productivity) of Indian companies.

The lessons relating to financial sector reform, bank profitability and trade policy seem to have been learnt. However, the role of the information technology industry does not seem to be appreciated at all. Though sporadic mention has been made about the need to computerize the banking and financial system, a proper debate or decision is notable by its absence.

The information technology industry has had the mortification of depending on the Union budget every year. A cogent national Information Technology Policy (ITP) has yet to see the light of day. An ITP spelling out the crucial nature of information technology is of critical importance. In fact, the growth and evolution of information technology is vital if India is to improve its productivity and thereby become more competitive.

The reform process is undeniably on the right path. However, the speed of reform is painfully slow. Caution and hesitation seem to be the salient features of the program. In its pronouncements, the government has conveyed a sense of reluctance in approaching reform with gusto. Ultimately, our economic uplift depends on the withdrawal of the government from many, many years. Over the last 40 years, the government, has crowded out private investors, appropriated scarce resources and produced low returns. The opportunity costs, if ever they are calculated, will be staggering. Whatever the costs and privations that flow from the reforms-they are bound to be lower than the opportunity costs of 40 years of central planning in India. It is time for the Prime Minister and the finance minister to go beyond the IMF timetable and accelerate and broaden the program. In the past we have been chained to ideology. Now, fittingly, we have nothing to lose but our chains!

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V.K.Madhav Mohan - The Leader : Mentoring Services, Mentoring Workshops, Mentoring products- Articles / Audio / Video/ Posters, Lectures