The Hindu Business Line : Return of the reformers

THE reformers are back in power. The original reformers are back in place of the erstwhile converts, who apparently had taken their new religion too seriously and believed, wrongly though, that it was they who had brought the shine to parts of India. The polls have, however, cast the reformers in their true roles. Dr Manmohan Singh and Mr P. Chidambaram have returned to their old posts, to continue the good work which they are good at.

But there is a difference. While it is true that Dr Manmohan Singh had his own problems when he became Finance Minister in 1991, he had paradoxically the "advantage" of coming to that office in an economic crisis.

The fact that in 1991 India had been through a trauma of near default and had already gone to the IMF gave Dr Manmohan Singh a big tactical advantage. There were also the "external" agents of change, the gurus of Brettonwoods, who were urging with all their powers of coercive persuasion various reforms, most of all fiscal reform, devaluation and import liberalisation at the time.

Today, Dr Singh is facing a different scenario. He has inherited an economy which faces a flood of forex, an admirable growth rate and a generally comfortable economic situation on the whole — except in patches. The trauma of 1991 is fortunately behind us, although we still need to reform.

The push, which a trauma can give a nation to bring about change, is missing today. Dr Singh will need all his persuasive ability to convince his colleagues, both within the Party and the coalition, to keep on the reform track.

Given the (false) air of complacency and absence of trauma, the task before the Singh-Chidambaram duo is, therefore, truly daunting, albeit not impossible.

Danger lies, in particular, in trivialising the problems of managing a coalition so diverse as the present United Progressive Alliance (UPA) on important issues.

The Left may want to change the economic policy of the Centre at its root. Mr P. Chidambaram himself has worked in coalition governments before and managed a Common Minimum Programme (CMP). Dr Manmohan Singh had also to work out a consensus of sorts when in 1991 he had to convince various elements of the ruling party, itself a coalition in reality if not in form.

The task of fiscal consolidation is, no doubt, one of the most challenging faced by the good doctor and his team. The populist demands from various members of the coalition, including the demand for free or cheap power from certain critical partners, will make this task more arduous.

The spokesman of the new government including, in particular, Mr Chidambaram, have emphasised the provisions of the Fiscal Responsibility and Budget Management Act.

The reality of the deficit-GDP ratio will sink in only if it is translated into specific actions on subsidies and provisions for various schemes. Dr Manmohan Singh will, no doubt, recall his experience with fertiliser subsidies when he attempts to frame new policies that address the goal fiscal deficit reduction. All in all, coalition management is going to be a grand educational experiment in the sense that the constituent members of the UPA — who have discordant ideas of fiscal responsibility — have to be educated about the need for fiscal sobriety. The fact that a reformer like Mr Chandrababu Naidu was routed at the polls will always be cited as a powerful argument against those who preach fiscal austerity and charging for power and water. The good academic that Dr Manmohan Singh is, he may have to hold many seminars on fiscal reform once again, both for his Party and his coalition partners.

The difficult challenges that the new Government faces include a redefinition of privatisation. While there is an arguable case for the Left position that profitable PSUs should not be privatised, there is an equally strong case for those who argue that the need for fiscal balance means those units should be privatised first which are most easily saleable.

Loss-making units have few takers and do not bring in the dough that the fiscal balancing act needs. It is, however, a different matter if the Government takes the ideologically purist position that proceeds from sales of PSU equity should not be counted towards reduction of fiscal deficit — a position that is advocated by fiscal pundits of the IMF. As matters stand today, the Government's fiscal balance depends on privatisation proceeds and any hiccup in this exercise will hold up the achievement of fiscal deficit targets.

There is also need to address the issue posed by the mega announcements made by Mr Jaswant Singh in regard to the infrastructural investment needs. He had announced the creation of funds in excess of Rs 50,000 crore for infrastructure. How are these funds to be found? If they are to be met from the Budget, the Budget will be totally broke.

This is a Hobson's choice for the Government. It cannot resile from Mr Jaswant Singh's generous announcement on infrastructure, except at the cost of attacks on its whole pro-development stance. It has, at the same time, to find means to give flesh and blood to the Jaswant Singh initiative, which may be appropriated by the Manmohan Singh Government.

The key to success of the new Government, as part of management of coalition contradictions, is the introduction of a human face to reforms. That Dr Manmohan Singh has always been a votary of reforms with social justice is obvious. It has, however, a cost. The alleviation of poverty primarily depends on how far the Government is able to address the problems of agriculture, small and medium industries.

This, in turn, calls for both increased investment and changes in policy. The increase in investment for rural infrastructure was initiated by Mr Chidambaram with his rural infrastructure funds. But, they have become a pale shadow of their original intent. There is need to focus the flow of credit and investment to these sectors because it is there that the Achilles' heel of the economy lies. The CMP rightly refocuses policy on this issue.

The paradox of India is that in the midst of growth there is poverty. The sheen of India's urban elite is not evident in the villages. The human face of reforms has to be seen primarily in the provision of jobs and opportunities to earn a livelihood. This is the challenge of recast reforms, which have so far provided an unimpressive record of growth in jobs. This problem is addressed in the CMP.

The public image of the new leadership is its great strength. Dr Manmohan Singh and Mr P. Chidambaram have both done well to make statements that have comforted the markets and reversed the trend that last week's political events unleashed.

That markets matter is well-recognised by the new dispensation. They also recognise that markets alone should not matter. They have to be servants, not masters. But, in the current cast of characters, the Prime Minister and the Finance Minister are the two personalities that the nation and the economy trust. They are also the recipients of votes of confidence by the international investor community. The fear, however, is whether they will be independent operators, given the shackles imposed by the CMP.

The Common Minimum Programme is a triumph of hope over experience. But, like all compromises, it has the disadvantage that the main thrust of policy is hobbled by too many giveaways. The many additional revenue commitments imposed by the CMP will affect the resolve of the Government to meet the difficult goals. The dithering on disinvestment and labour reforms reflected by the CMP will have an impact on FII flows no less than on FDI.

It is time for the leaders of Government to explain not only to their Indian public but the international community that they are continuing on the path of reform, notwithstanding the CMP. On their success turns the prospect of continuing forex flows, which are key to the confidence generated by the abundance of forex, which frees India's perennial constraint.

There is need for a new charm offensive by India's new leadership directed at the global investor network. If that may itself spell changes in the CMP, so be it. It will then be the result of a consensus, both external and internal.

The task before Dr Manmohan Singh is, indeed, forbidding. He has to please many masters — his own Party, his coalition partners, the foreign investors. He has, however, the great advantage of being a wise leader, who is aware of his strengths and his weaknesses. He is a leader whom the country trusts.

Here is to wishing Dr Singh and his team a glorious innings, for the greater good of India.

If anyone can overcome the various problems that India faces, it is this man on whom Destiny has entrusted the responsibility of leading India into the 21st century. India and the world watch with hope and faith — and a prayer.