Financial Daily from THE HINDU group of publications
Monday, Jan 31, 2005
Financial Daily from THE HINDU group of publications Monday, Jan 31, 2005 |
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Opinion
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Interview Industry & Economy - Economy `Coalition politics has slowed reforms' — Lord Meghnad Desai, former professor, London School of Economics M. Ramesh
In his own words, Lord Meghnad Desai, a former professor at the London School of Economics and British peer, is "a professional ruffler of feathers". A keen watcher of Indian politics, it is no surprise that he seems to find it difficult to keep politics out of a discussion on economic issues. The synthesis of plain-speak and insights into politics and economics helps the 64-year-old economist run interesting conversations. In a recent interview to Business Line, Lord Meghnad Desai spoke of the problems facing the ``core economic team'' of the present government, comprising mainly Dr Manmohan Singh, Mr P. Chidambaram and Dr Montek Singh Ahluwalia. He also spoke of where the Congress went wrong and why he expects another Lok Sabha elections this October. Excerpts from the interview: What is your reading of the Indian economy as it is today? There is so much euphoria around. Do you see any negatives at all? The major negative is the fiscal deficit. The Government has done nothing about it seriously. Mr Chidambaram says, "everything will be under control by 2009", but that is what everybody says. If he really meant it, he would have to set out a time-frame. The (problem is that the) compulsion to spend money on rhetorical projects such as employment guarantee scheme is not going away. I am sure the core economic team knows that it is a political gesture. It is not going to tackle poverty. The only thing that can be said about it is that there are so many wasteful projects in the country. Why not waste money on another — some of it may go to the poor. Yes, the government ought to create employment opportunities in the countryside, but the guarantee scheme is not the way to do it. That is not a really serious proposition. You cannot say, "if you can't find employment within ten kilometres of where you live, we will create an infrastructure for you." But, I think, the government is backtracking. It is not going to legislate the Employment Guarantee Act. In my view, they ought to reduce the indirect taxation on the poor. The poor pay the bulk of the taxes in India, which are collected in the form of commodity taxation. Instead of adding on subsidies, they should reduce it and cut taxes. Not personal income-tax, but commodity taxes. But one has to be aware that the current fiscal system is anti-poor. And these kinds of programmes do not tackle the problems of the poor. Another negative is that the reforms are not going ahead as they should. Privatisation, for example. Mr Arun Shourie got some success, but (now) privatisation is off the agenda. The reform of the labour markets is not even being tackled. I think it is only quite shocking that the CPI(M) only cares about the interest rates on the employment provident fund. It is not a pro-poor gesture. Do you see any external threats coming? Say, commodity prices or appreciation of the rupee... I have always believed that the oil prices will not stay up. I predicted last September that oil prices would come down because, structurally, there is no reason for the rise. The oil market is already over-supplied. I think even $30 a barrel will be too much. The steady-state price of oil is around $25. The dollar depreciation will happen. It will go down much further. The Americans have decided that they are not going to solve their trade deficit; the world can solve it. Continental Europe is stuck with a very bad central bank; the European Central Bank is constitutionally incapable of doing anything about exchange rates. It is only committed to fighting inflation. In the midst of that, the US is going to sit back and let the dollar go. What the Indian government will have to worry is whether we go with the dollar depreciation, which could be slightly inflationary, or take courage and say, "let the rupee float". I think a managed upward float will be perfectly all right. I think the Chinese are doing a very wrong thing. China has been wrong, stuck in a variety of low-tech exports. And they are not moving fast enough as the exchange rate pegging led them to a number of wrong decisions. Let the rupee float up a little. It will be advantageous in terms of capital flows. But how much pain that will be on the trading side, one has to see. But China's pegged currency policy has certainly helped its exports... That is a short-term thing. Eventually, it will lose its advantage rapidly. The Indian economy is not really derived from the external economy. The latter is not currently raising any sense of anxiety. If the rupee is pegged to the dollar, monetary policies can help; sterilisation can be done, but there are inflationary consequences of a peg. My main concern is that India should be ready to take advantage of the WTO changes coming up. It should accelerate reforms. Where I see the weakness of this government is that the needs of coalition have slowed down privatisation and labour market reforms considerably. But coalition governments seem to be here to stay... I have always thought that only a BJP-Congress coalition can really work. All economic newspapers and journals should be advocating a BJP-Congress coalition government... a grand coalition. Then, the regional parties can be told to get lost. Only then can you get 8 per cent growth. I am not saying coalitions cannot work, but they cannot work when the ruling party has just about half the seats. The BJP, in its coalition, had two-thirds. The Congress(I) has 145 seats. What kind of power is that? Though the Nationalist Congress Party will, by and large, play with the Congress, it is not sufficient. And not going in with Mulayam (Singh Yadav) because the Congress thinks Rahul Gandhi can be the Chief Minister of UP, has cost it dearly. Had they made peace with Mulayam, they could have marginalised the CPI(M). Mulayam wants his own little cut, but if (for example) the Congress wants to privatise the public sector, he will not mind. But the CPI(M) is going to be really an obstacle. I do not think those issues of reforms can be postponed right now. The BJP was coming to labour market reforms. Then, the Tehelka scandal broke. The Government spent a whole year dealing with this and did not regain the momentum. The labour market policies currently are anti-employment. India has got to go on, not worrying about job security, but employment security. As some jobs are being preserved, more are not being created. Nobody has explained this simple thing to the CPI(M) — that hanging on to certain jobs is an anti-employment recipe. It has nothing to do with the poor because those with jobs are not the poor anywhere. The whole defence of the public sector is inimical to poverty removal. Anybody who wants to have an anti-poverty policy has to have a pro-growth policy. You could say that growth is not required for reduction of poverty; you could try re-distribution, which the Indian State has never attempted. Fifty years of redistribution has taken place only for the middle-classes and rich farmers. What do you think of using reserves for infrastructure development? Today, you have excess reserves because you do not have active investment policies. Infrastructure is where they should use the money to pump prime and attract technology. The consequences are monetary expansion. You have to completely sterilise (dollar flows). Just as you need a time-path for deficit correction, you need one for spending out of the reserves. What do you think of the core economic team? They are all good friends of mine. They are not getting complete freedom to do what they want. It is the politics of coalition. There is no clear image of a radical reform in government. But capital market is pleased, so are foreigners. But the coalition could fall apart. I expect elections in October 2005 and that Ms Sonia Gandhi will be fed up and say, "I want elections; I want 180 seats". And the BJP will not still be a force. So, there is still an opportunity. That is the only hope left for a stronger and more effective UPA coalition. Dr Manmohan has been very lucky so far — seven months and no major problem.
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