The Hindu Business Line : Time to idle in the economy bus even as drivers change

BOOKS on accounting used to be passed on from grandfather to father and so on till accounting standards and disclosure requirements in company law upset the equilibrium. Similarly, economics literature about India was for long updated only for statistics purposes, and lecturers could bank on dog-eared notes, till things started happening at such political pace that economic editors began to look at a year as sufficiently long term.

Thus, when Oxford University Press (www.oup.com) brings out this year a book titled Reforming India's External, Financial, and Fiscal Policies, edited by Anne O. Krueger and Sajjid Z. Chinoy, bunching papers of a conference held in June 2001, it becomes necessary to dust it up to factor in new realities. "The current tension between India and Pakistan is likely to impact fiscal decisions going forward, which will affect the economy as a whole," states the preface, and you scratch your head to remember when was it the last time that you saw something about the border strain gobbling up front-page news.

Rather, what comes to mind is that titbit about Shoaib getting a bone scan. "There is also wariness about further integration into the global economy," it continues, but we only know of doors getting shut through visa restrictions for Indians catching the global bus, or international traffic destined for India curbed by outsourcing backlash.

In the intro, the editors point out how we squandered many significant gains of the early 1990s. "It is critical for policy makers in India to jumpstart the reform process so that India can attain annual rates of GDP growth of the order of 7-8 per cent — as it is desperately needed to improve the living standards of a largely impoverished populace." If the currently bandied about rates are close to reality, then we are already cruising at a good speed.

Well, T. N. Srinivasan's piece in on three Ps — progress, problems and prospects — and he concludes with a `sombre, if not altogether pessimistic, note': "Political uncertainties, particularly after the recent state elections, suggest that the reform process (privatisation and disinvestment, reforms of labour and bankruptcy laws, and fiscal consolidation — including elimination of subsidies, reform of State electricity boards, and so on) is unlikely to gather steam." Would it true once again?

Shankar Acharya argues for three things with regard to exchange rates: First, learn to live with greater volatility in a market-determined exchange rate system; second, nurture the development of forex markets; and, third, expand convertibility of the capital account for residents.

When dollar couldn't hold its value recently, there was so much clamour for RBI intervention, calling the bluff of non-interventionists. "Indian exchange rate policy" is a separate chapter in the book, where it is suggested that we could let the currency depreciate significantly in real terms to improve our competitive position. Real exchange rate should be permitted to adjust to a level "providing more stimulus for tradable goods in the Indian economy" — because "the current policy may be erring on the side of an appreciated real exchange rate."

Naushad Forbes simulates a scenario with a question: "What if the rupee dropped 25 per cent against the dollar?" But those were days when forex reserves were not swelling in the Guv's strong-room.

K.V. Kamath, commenting on Indian banking, draws attention to problems other than NPAs : "Paradigm shifts in the way technology is used in the banking sector appear to be a more tangible threat."

He then touches other topics such as brand, consolidation and speed capital. Similarly, Raghuram Rajan comments on a paper by Ajay Shah on securities market. "Additional rules can be very counterproductive, more so if they are not enforced," writes Rajan.

"How does one proceed against a crime where everyone but the law recognises the perpetrator? The regulator's strongest weapon is fear... The regulator has to cultivate this weapon by acting infrequently but with great effectiveness. The regulator cannot be seen to fail." And the more daring bit: "It would do wonders for the Indian markets if regulators could get together and go after the major players in previous scandals, figuratively hanging them from the highest pole for all to see."

Sebastian Edwards talks about a continuing problem — public sector deficits. "The type of imbalances that India is running can lead to a severe currency crisis, with its concomitant costs in terms of reduced economic activity," he warns. But Arnold C. Harberger, while commenting thereon, introduces the concept of `parking places' — avenues that help in financing fiscal deficits in non-inflationary ways.

He wonders if Indian authorities have understood the problem well and "today's deficits are being placed in convenient parking lots that still have plenty of unused capacity?" To end, there is a paper by N. K. Singh on tax reforms where the focus should be on "creating an information-rich environment, rather than hiring more inspectors." Some historic and policy inputs to reminisce and chew over while we wait idly in the economy bus even as drivers change.

Economics@TheHindu.co.in

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