The Hindu Business Line : Debate on reform and development

Reforms in India have failed to focus on the end objectives of development, namely, reduction of poverty and improvement in the quality of life of bulk of the population.

THE verdict of Election 2004 has triggered a fresh debate on reforms and economic development. While there is a general consensus that the reform process should move forward if the economy is to grow at 7-8 per cent per annum, there are serious differences over the emphasis of reforms, their pace of implementation and sequencing. This is because of the overwhelming mass perception that the reforms pursued so far have bypassed the poor and benefited mostly the rich and the middle-class segments.

The Left parties, which are supporting the Government from outside, also have reservations over the privatisation of profit-making public sector undertakings and labour market reforms. This is clearly reflected in the Common Minimum Programme (CMP) drawn up by the coalition partners in the new Government.

There are concerns over the slowdown in agriculture and employment generation, post-reform, as also the growing regional disparities and the rural-urban divide. The impoverishment of rural India is largely attributed to the big decline in public investment in agriculture as also the flow of institutional credit to the sector. There is no doubt that the economic reforms so far pursued have helped the country to overcome the severe foreign exchange crisis it faced in 1991 and gain significant resilience against any external shocks. The country's foreign exchange reserves have crossed $120 billion.

Similarly, Indian industry has improved its productive efficiency and quality of products significantly and is today better prepared to face international competition. Quite a few Indian companies have joined the billion-dollar club in terms of sales and market capitalisation and are all set to become multinational companies by setting up shop abroad. However, the fiscal situation has witnessed a deterioration after some initial success, and employment growth has decelerated. The state has failed to protect the interests of the socially disadvantaged and weaker sections of society by empowering them through active intervention in social sectors to improve the rate of literacy, public health and nutrition. Consequently, some political parties have wrongly interpreted the election verdict as a denouncement of reforms.

While market-oriented economic reforms are no doubt important to step up the rate of growth of the economy, as the Nobel Laureate Prof Amartya Sen has pointed out: "The markets can be used by all fruitfully, rather than by a few selectively, if general healthcare is good, if land reforms have occurred, if micro-credit is widely available, and if initiative is encouraged even from underdogs of society."

In this context, the recent Asian experience suggests that to ensure increased social welfare along with economic growth, the major thrust will have to be on the development of human capital. India's record in this regard continues to be dismal.

Against this backdrop, the recent book brought out by Academic Foundation, New Delhi — Economic Reforms Sans Development (2004), containing an anthology of 33 articles by Dr N. A. Mujumdar (former Principal Advisor, Reserve Bank of India), most of them published earlier in this newspaper, should prove a useful and timely contribution to the ongoing debate on economic reforms and their role in the course of India's economic development. The underlying theme of Dr Mujumdar's articles is that reforms in India have failed to focus on the end objectives of development, namely, reduction of poverty and improvement in the quality of life of bulk of the population. Dr Mujumdar is highly critical of the emphasis of reforms in India so far and says: reduce state intervention and involvement in economic activities, abolish all subsidies, including food and interest rate subsidies to the poor, and let the poor fend for themselves, and so on.

He says that in the hierarchy of priorities of contemporary Indian policy-makers, for instance, privatisation has gained ascendancy over poverty reduction. Measures to encourage savings and investment and to promote employment have been relegated to the background. There is no denying that the steps towards liberalisation and globalisation were obviously designed to enhance the rate of growth of the economy. However, Dr Mujumdar argues that growth alone is not enough. There is need to ensure that the fruits of growth are equitably distributed. Attention must be paid constantly to the social dimensions of growth by expanding social services and building a strong social infrastructure.

The priority should be eradication of illiteracy and covering the country with primary health care centres and access to safe drinking water. Evidently, all this cannot be done by the private sector; it would require active state intervention and state funding.

Dr Mujumdar, of course, agrees that economic reforms were `indeed' critical at the first phase of transforming the economy. However, he has consistently maintained that neglect of agriculture during the reform period has resulted in an erosion of the growth base of the economy. During this period, public investment in agriculture declined, net addition to irrigated area decelerated, and the flow of institutional credit to the sector suffered a setback. Not surprisingly, in the 1990s the annual average growth rate of agriculture decelerated sharply to 2.6 per cent from 5.2 per cent in the 1980s and the share of agriculture and allied activities in the country's GDP declined from 32.2 per cent in 1990-91 to 24 per cent now. However, since 70 per cent of the country's population continues to depend on this sector for livelihood, reforms have failed to make a dent in rural poverty. If at all, the rural-urban divide has only widened because of the failure to create job opportunities outside agriculture both in rural and urban areas.

Dr Mujumdar goes a step further and says, in our priorities, we should aim at elimination of hunger first and poverty later and suggests utilisation of surplus foodgrains with the Food Corporation of India for undertaking massive food-for-work programmes.

The most suitable programme for the purpose could be micro-watershed development, which could be undertaken on a massive scale throughout the country and the bulk of the wages could be paid in kind, namely, foodgrains. The CMP announced by the new Government has also included this in its agenda.

On the question of privatisation of public sector units, Dr Mujumdar advocates a systemic approach instead of being unduly obsessive about it. According to him, the question to be posed is: Would privatisation in a particular segment lead to greater efficiency in the use of resources and promote faster GDP growth?

Further, what you do with the proceeds of privatisation is as important as why you need to privatise a particular unit or segment of the public sector. The real economic issues are obfuscated because of the emotional and political undertones the debate has acquired.

So far, the Government has been using the proceeds from privatisation to reduce fiscal deficit. This, according to Dr Mujumdar, is counter-productive. In his view, fiscal profligacy per se needs to be condemned. But the suggestion that such profligacy be balanced by using the proceeds of privatisation needs to be condemned severely.

Instead, he supports the proposal made by RBI in 1995-96 that all proceeds of sell-offs of public sector units be pooled and put into a "consolidated sinking fund" earmarked for the redemption of government debt. As for the financial sector reforms introduced in India in the 1990s, Dr Mujumdar calls them largely mimetic; they were based on "Basle Norms" and IMF/World Bank prescriptions and were not attuned to the India-specific socio-economic milieu.

In an effort to replicate an American-style financial system in India, there has been mindless pursuit of a soft interest rate regime that may eventually affect the savings rate.

He is particularly critical of the gross neglect of agriculture by the public sector banks, post-reform and says: 1990s was a lost decade for agriculture and rural development generally, with shrinkage of the flow of resources to the rural sector, a misconceived interest rate policy which discriminated against agriculture. The rural credit delivery system became a victim of the emergence of a new banking culture and rural development and rural employment suffered a setback.

The casualties of the new banking culture also included the small borrowers, small-scale and tiny industries, micro businesses and the whole range of institutions involved in rural credit. If the reforms in the economy in the post-1991 period have come to acquire an anti-poor image, the way the financial sector reforms were implemented are also to be blamed for it.

For the banks now prefer to lend to corporate elite and high worth individuals and park huge amounts in government securities rather than lend to farmers and small and tiny industries.

More important, Dr Mujumdar refers to the moral pollution in contemporary society, which adversely affects economic development and calls upon social scientists to address this issue. He emphasises the need for incorporation of a `development conscience factor' in growth models aimed at improving the quality of life of the bulk of the population. He advocates the need to sensitise the youth to the abject poverty, the squalor, disease, ignorance and illiteracy that surround us.

At times, one gets the impression that Dr Mujumdar's indictment of the reform process is too severe and unfair. But in the prevailing India-specific situation, unless the country succeeds in eliminating hunger and large-scale poverty within a reasonable time-frame, the reforms will get a bad name.