The Hindu Business Line : Economic consequences of the CMP

THE Common Minimum Programme of the United Progressive Alliance is admittedly a successful exercise in political compromise, reflecting the complex, but ideologically compatible, composition of the coalition that the Alliance embraces.

There had been some concession to the pressures of the Left on the formulation of CMP, but broadly the impression is one of a Congress manifesto with a few indirect bows to the pressures of the Left and regional allies.

The CMP is on the right lines even when it incorporates the concerns of the Left parties insofar as it stresses the priority of rural investment and job creation — which, no doubt, are shared by the Congress.

It does not sacrifice the objective of fiscal stability where it adheres to the goals of the Fiscal Stability and Budget Management Act.

Nor does it surprise one where it states its preference for privatising PSUs that are loss-making. That is the position taken by Prime Minister, Dr Manmohan Singh, himself for a long time and the Congress from early on.

The CMP may be idealistic when it wishes to limit privatisation to loss-making enterprises and when it refers to the need for a case by case analysis of the others. The need for privatisation is not so much based on ideology as the appetite for resources.

The question remains, "Who will bid for the PSUs which are loss-making?" It is even more intriguing that the CMP is defining the target units for privatisation as those who have settled their dues to labour. This will itself mean a burden on the fisc before even starting to privatise. It must be conceded that the door is kept open for the "navaratna" PSUs of this category raising funds from the capital market, presumably through equity offerings.

The CMP is a wish-list of various goals — all good and desirable in themselves. But the CMP also turns out to be a costly minimum programme. The costs of reaching the goals set have not been fully worked out, but that is a task of the budget-makers.

At least in respect of one of them, the increase of expenditure on education to 6 per cent of GDP, the CMP outlines a proposal for a cess on existing revenue receipts. This is not such a bad idea, especially if one considers that the previous Government had resorted to such a cess for funding road development.

The education cess is not an unbearably high levy and it is to be welcomed as a measure to find the funds for a very desirable activity — that of expanding the spread of education

The CMP ventures boldly into the field of rural infrastructure. It has suggested a number of initiatives in irrigation and roads. It has also indicated that the flow of credit for infrastructure will be enhanced.

At the root of this problem is the ignored question of recovery of user charges. Irrigation systems have suffered in the past for want of funds. But this is because adequate user charges for water were not being levied and the system of governance in rural areas was breaking down.

Improved maintenance of irrigation systems is at least as important as higher investment outlays. More investment is purposeless if existing facilities are allowed to fall into disuse. All this calls for a continued focus on both maintenance and investment in irrigation.

Time was when State governments used to spend considerable resources on maintenance of irrigation sources, especially minor irrigation. This emphasis needs to be recaptured if the rural economy is to prosper.

The CMP has excited considerable attention in respect of its proposal for guaranteed employment. Obviously, the CMP bases itself on the example of the Employment Guarantee Scheme (EGS) of Maharashtra.

The presence of a clutch of possible public works which can be offered to jobseekers in the countryside demands considerable preparation by the State Administration. The success of the EGS in Maharashtra was also due to the full-scale involvement of local organs of democratic decentralisation, such as Zilla Parishads, in the selection and implementation of the EGS.

The introduction of the EGS on an all-India basis would call for a careful study and follow-up of the lessons of the Maharashtra experience. The guidelines for an all-India scheme should allow for local variations on a State-wide basis but, above all, care should be taken to ensure that EGS does not deteriorate into a programme for private profiteering by local bureaucracy and the political class.

The CMP's announcements in regard to the critical areas of public finance are not as radical as apparently feared by the "markets", which tended to demonise the Left. It is comforting to know that it repeats the usual ideas regarding foreign direct investment and portfolio investment. It makes some noises about rectifying abuses on double-taxation front, but that is not anything new.

The Government has always been keen on plugging the loopholes. The question, however, is whether the "markets" — meaning the investors, like what they see in the CMP. It behooves the Finance Minister to set at rest their imaginary grievances, not to threaten them with fire and brimstone.

The dithering on labour reforms is not so alarming, as is made out by pundits of the markets. After all, India has achieved a comfortable rate of economic growth — including a robust boom in the markets and that too with a measure of FDI in spite of existing unmodified labour laws.

The plea for instant labour reform is perhaps overdone. Existing foreign investors, like the Korean and Japanese auto majors as well as American corporates, have not so far made any serious protests about the present state of labour law implementation.

The right to close a unit after giving due compensation to workers has been exercised in actual fact by many investors, both in the domestic and foreign entrepreneurial community. The promise in the CMP of a further dialogue with trade unions and industry is a welcome indication of a flexible approach without abandoning the rights of labour to security.

The CMP falls into error when it offers to increase interest rates to favour the savers.

This is inconsistent with the analyses that various Committees have made in regard to the interest rate structure that obtains in India. It has been clear that high interest rates hurt investment and the Government's fisc.

The reason why many sectors of India's economy have boomed in recent times has been because of low interest rates. It is inconsistent to offer high interest rates to savers while persisting in the regime of lower interest rates for borrowers. It is for the Chidambaram-Reddy duo to work out this conundrum.

The CMP has addressed the issue of poor credit flows to small and medium industries. Unfortunately, for this long persistent problem, the remedy is not too obvious. The situation of small and medium industries and their credit flows have been gone into by a number of committees and task forces.

SIDBI was created to address the question of small industries. Whether it has failed for reason of non-cooperation of SFCs is a matter for debate.

Unless and until the issue of sick small industries is handled through a proper Bankruptcy Act or a version of corporate debt restructuring, SFCs cannot become viable. They become a perpetual drain for resources into a bottomless pit.

The Government and the RBI have to address the task of reviving SFCs and putting them on a legally and financially sound footing so far as clearance of SSI dues is concerned. A comprehensive approach to the reorganisation of SSI finance is absolutely urgent if the CMP's expectations are to be realised.

Critics abroad have been quick to point out that the CMP is a triumph of hope over experience. The Financial Times of May 28, 2004 editorialises: "The CMP errs not because it is a minimalist platform which all nine members accept but because it verges on optimistic fantasy." This is a fear that lurks in most Indian minds as well. Can the Government find the resources and the managerial skill to implement what the CMP visualises?

The goals are ambitious and the path to reach them is full of hurdles. Let not the CMP become a costly and muddled project. The legendary wisdom and patience of Dr Manmohan Singh will be sorely tested by the problems that the CMP presents. But India will be a better country if and when its goals are realised.

The CMP provides a reasonable roadmap for the country. It is to be hoped that the coming budget will indicate how the UPA Government proposes to meet its desirable but costly goals. Common maximum performance is, however, an uncommon feature of coalition politics!

It is also essential that UPA Government retains the flexibility of revisiting the CMP in the light of experience.

sIt should not be treated as cast in stone. It has to be a living document, which can be revised in the background of problems faced in its actual execution.