The Hindu Business Line : Need for speed on the reform road

There are still many areas where reforms have to be pursued or furthered. The team at the helm is surely up to the challenge. Only, it must pursue reforms openly and inclusively, says A. VASUDEVAN, in the context of the divestment debate and on the threshold of the Eleventh Plan.

India's various problems need to be solved by further opening up the economy, though this will throw up both opportunities and complex challenges.

Slogans such as `Roti, kapda aur makan' (food, clothing and housing) or, more recently, `Bijli, sadak, aur paani' (electricity, roads and water) are freely used by candidates during election time but are not followed up by strategies to make them a reality. Indeed one is not sure how many of the elected representatives who coin these slogans understand the complex economic issues of the day.

India's infrastructure is woeful and poverty and unemployment are at high levels. These problems need to be solved by further opening up the economy, and not through isolationism. The opening up would, however, throw up both opportunities and complex challenges.

The cushion of openness

The openness provides a cushion to any slack in domestic demand. The cushion, however, would be relevant only if the country's competitiveness is sharp. In the current context of the high economic growth and the potential for reaching still higher levels, such a cushion would help firms that use resources efficiently, minimise costs and enhance profits.

Public sector firms have not shown the grit to operate at peak levels of efficiency. The private sector or the public-private partnership model are likely to provide the necessary incentives to compete and flourish.

India has become more open in the last 15 years but, measured in terms of overall net balance of payments position, at $26-28 billion, it would be hardly 0.06 per cent of the world GDP, estimated at about $ 44,500 billion.

If, instead, one measures openness in terms of both current and capital account receipts and payments, the percentage would be only about one. This measure in relation to India's GDP would be as high as 60 per cent.

India's growth story, in this backdrop, cannot be divested of external influences. Prices of critical traded items such as crude oil and metals, external borrowing costs, currency valuations and risks, and investor confidence, both foreign and Indian, are all linked in complex relationships, posing challenges to policy-makers as the economy opens up further. Understanding these relationships is critical to shaping India's future.

The trusted trio

Fortunately, we have at the helm of affairs a triumvirate that not merely understands the emerging problems and their complexities but also formulates policy responses. In the Prime Minister, Dr Manmohan Singh, India has a distinguished economist who masterminded the economic regime shift in 1991. Dr Manmohan Singh's sense of development is obviously born out of his experiences and his understanding of what is happening elsewhere in the world backed by an inherent commitment to making India an economic power-house.

The Finance Minister, Mr P. Chidambaram, is known for his clarity of understanding business, law and good market practices. The Planning Commission Deputy Chairman, Dr Montek Singh Ahluwalia, is an articulate economist who has made considerable contributions to issues of income distribution and poverty and development economics. The triumvirate is supported by Dr C. Rangarajan, one of the best macro-economists India has seen in the last 40 years or so.

Business and industry trust them. Their continuance in office is vital to boosting investor confidence. More important, their contribution would help fashion policies to accelerate not mere growth but inclusive growth on a sustained basis; avoid market failures; and reorient reforms, if need be, and advance them. This team of professional policy strategists is, surely, not unaware of the social and political realities.

Those who advocate a large role for the state and question the reforms framework know that the whole of agriculture and much of the services sector are in private hands.

What they are opposed to is public sector divestment in the manufacturing sector, even where this does not lead to loss of majority stake of the state in the relevant public sector enterprise.

The divestment debate

The opposition to public sector divestment is driven by a number of considerations — ideology, unwillingness to part with trade union power in the day-to-day operations of public sector enterprises, and fear of non-residents' taking control of the management of state enterprises.

A caveat, however, is necessary. Most Marxists have agreed in principle to some divestment of unprofitable public sector enterprises whereas almost all other parties are opaque on the issue.

The recent episode of putting on hold public sector divestment due to the demands of coalition politics is an unfortunate instance of negating economic logic.

The episode signifies the fear that labour market reforms would be ushered in enacted through legal enactments, post-divestment, in the name of enhancing efficiency gains.

The episode also gave rise to a cynical view of the ability of coalition governments to (a) proceed with sharper reforms in other areas of economic activity, and (b) ensure macro-economic policy stability so essential for providing certainty to private investment decisions.

There are still many areas — for instance, the judicial system, or the prudential supervision of a number of financial activities, such as derivatives trading — where reforms have to be pursued or furthered. Besides, conceptual clarity is necessary on the ongoing reforms in macro-policy areas.

For example, one may need to revisit the medium-term targets of fiscal and revenue deficits in the light of the state's commitment to inclusiveness, to fighting terrorism and to improving overall governance.

Focus on deficit

The Approach Paper to the Eleventh Five Year Plan, questioning the commitment to fiscal responsibility in the light of the large demands for social sector expenditure, suggests adopting the international practice of monitoring primary deficit. The Paper could have gone further. Assuming this stance to be correct, it could have given some insights into how other reforms can be shaped and implemented to achieve the various development objectives.

Such an exercise, one must concede, is not easy. Besides, it may not be possible to set the reform agenda for all areas at the very start of the Plan period. Reforms must be assumed to take place at different times over the next five years, and thus make the entire exercise complex. This is especially so when one is faced with a variety of uncertainties such as those relating to the size of shocks, the effects of policy actions, and information and data infirmities.

Nonetheless, it would be useful, as a clarifying benchmark exercise, to put out, if need be through a technical paper, the implicit policy model of the Plan together with the criteria required to be used for choosing policies out of the menu.

(The author, a former Executive Director of the Reserve Bank of India, can be reached at asurivasudevan@hotmail.com)