The Hindu Business Line : On the eventful year that was

The year just gone by has been one of tremendous promise but also of problems. While the economy is booming, with the soaring Sensex and a strong financial scene, the shortages have not disappeared, except for forex. The world has been impressed by the way India has handled the series of natural disasters, but will we show the same efficiency in tackling problems of development, infrastructure and poverty reduction, asks S. Venkitaramanan, stressing that growth is the magic mantra to mak e our dreams come true.

THE New Year is an occasion both for looking back as well as ahead. The year just gone by has been one of tremendous promise but also of disappointments and problems. The world in all its richness, represented by the likes of Bill Gates, has come calling. It has promised to open its purse and its heart to India. The resulting vision of greater economic and job growth comes along with disappointments arising from bottlenecks faced by reformers in crucial areas, particularly infrastructure.

While the economy is booming, shortages have not disappeared, except for forex. To give only one instance, the number of diesel-powered generators that dot the urban and rural landscape, are testimony to our power situation.

They are also signs of a shortage economy, which the best efforts of Government have not been able to dispel. The economy shows signs of inadequate response to various challenges of growth — what with problems of pothole-ridden roads in IT destinations, such as Bangalore, and airports shutting down at the least sign of fog.

One observer mentioned that if Europe can manage its flight schedules year on year notwithstanding six months of cold weather and accompanying fog, it ill-behoves our airport authority to disrupt air schedules every winter.

All it needs is a bit of better governance — including a show of steely determination to force the airlines to train their pilots to learn the management of special control systems to land in low-visibility conditions. These are only a few instances to show we have still to face the reality of remaining a third world country, although with aspirations to join the first world.

Tackling natural disasters

The year gone by was unusual in that it saw a series of natural disasters. By and large, Governments, both at the Centre and the States, rose to the challenge. International observers have been impressed by our capacity to manage disasters, although not to anticipate them, which is always and everywhere difficult. We have come through a tsunami, a clutch of floods and an earthquake fairly well, albeit with huge loss of life and property.

A reflection on this comparative success is in order. A system of governance that is able to handle the problem of relief and rehabilitation in disasters, such as tsunami, floods and earthquake, is surely something to be proud of. But, whether that same system of governance will be able to handle problems of development, infrastructure, industrial growth and poverty reduction is a different question.

We have, however, to make do with the same administration and adapt it for different jobs. There is no use wishing for a separate set of administrators and administrative processes to tackle for different challenges, although that may be a luxury we would wish for.

A generalist-dominated administration that can handle tsunami, floods, quakes and the like with quiet competence may not be the best suited for meeting the challenges of infrastructural development, educational innovation and management of research and development while accommodating the needs of industrial expansion.

We have to have specialists in charge of these activities, and the sooner we realise that the better. A purposeful change in the administrative system in this direction is what the Union Government under the leadership of Dr Manmohan Singh has decided on. It may take time to realise this objective fully, but the first steps seem to have been taken.

A difficult balance

The year 2005 saw Government and its leadership struggle with policy choices ranging from privatisation to foreign direct investment. Hobbled by a motley coalition with often divergent views, Dr Singh has walked a difficult path, trying to balance the imperative of growth with the different political aspirations of various groups.

The need for reform is not questioned by any of the members of the coalition. It is only the direction and the pace of change. Fortunately, the reformers seem to be winning, what with the West Bengal Chief Minister, Mr Buddhadeb Bhattacharya, leading the enlightenment in a liberal direction in West Bengal.

Stock market boom

Meanwhile, the stock market has been registering a record rise, reminiscent at times of earlier booms, which were soon dissipated. Hopefully, the rise in the Sensex this time is grounded in fundamentals, above all the growth of the economy, the rise in corporate profits and sustained by large inflows of funds, both from foreign and local institutions. The Government and the market regulators have played a sensible role, trying not to interfere, except when an irregularity threatens to block the orderly movement of and confidence in markets. No sign of the Prime Minister or Finance Minister losing sleep over the market, while at the same time the regulator is up and watching.

The finance scene

One of the most heartening aspects of the year gone by is the manner in which the central bank has gone about its task, handling its multiple responsibilities with quiet competence. Inflation has been managed, so has the rupee, not appreciating too much.

Disorderly movements have been avoided, both in the exchange and money markets. A benign interest rate regime has, of course, helped spur investment both in the private and public sectors, apart from helping rein in the revenue deficit.

What is impressive at the time of writing is the way State Bank of India has been able to manage the redemption of India Millennium Deposits amounting to $7 billion. This is symbolic of the distance we have travelled from the traumatic days of 1991, when we had to pledge gold to get a loan from international banks of less than half a billion dollars.

In contrast, there was not a whiff of concern in the markets in the recent IMD episode when $7 billion flowed out from our reserves. This outflow is being handled competently both by the central bank and SBI, the exchange rate fluctuation kept within reasonable limits and liquidity pressures met by adequate flow of rupees to the market. India has truly come of age, financially speaking.

The year 2005 has thus ended on a note of quiet confidence. IMD outflows have not impacted the rupee or the interest rate overmuch. Surely, a central bank with than $100 billion in its kitty could be expected to do no less. That the RBI and SBI managed the challenge efficiently is a credit to their maturity!

There remain many challenges to be met by the political leadership and the country as a whole. Not the least of them is to maintain the growth impetus that has fortunately been shown to be alive in the economy. There is grave danger that in its pursuit of inflation management the central bank may take on the role of an inflation hawk and raise interest rates in an inappropriate response to price indicators.

One has to learn from our own experience of the mid-1990s when an incipient boom was choked off by an inopportune tightening of liquidity and interest rates.

Similarly, one has to hope that the Finance Minister in his enthusiasm for fiscal balance does not become a fiscal fiend, raising new and irritating forms of taxes.

The question is one of letting existing tax laws work. Better compliance is a safer bet for higher collections than restructuring a tax system that seems to be working as effectively as can be expected, given the limitations of a litigious public and activist judiciary.

Growth with social justice

The Finance Minister had himself compared an effective tax system to a honeybee that sucks the honey out but does not destroy the flower. Hopefully, he will remember his own parable when he frames his Budget for 2006-07.

In spite of all our achievements in terms of economic growth, foreign exchange reserves and the like, let us remember that India still remains a poor country, especially in terms of human development, perhaps because we are still low in terms of the absolute level of GDP.

We have a long way to go before we can reach the levels of even the poorer of our South-East Asian neighbours, let alone China, Taiwan or South Korea. Above all, the number of Indians who live below the poverty line is still quite large.

We have many mountains to conquer, many miles to travel before we can say the job of economic and social transformation is done. Growth is the only magic mantra to make our dreams come true.

Growth with social justice — that is the task to which we should rededicate ourselves in 2006. May 2006 be more prosperous, less risk-ridden and less disaster-prone than 2005 has been. Here is wishing all readers a happy New Year!