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Politics of debate on reforms

G. Thimmaiah

What is disturbing is that even economists have begun taking the sides of political parties, at times losing their professional objectivity.

Against this background, the NDA Government sponsored half-a-dozen seminars in major cities to generate public debate on the appropriateness of past reforms and their consequences on the different sections and the nature of desirable reforms to be introd uced in future. Economists of all ideologies have been participating in the seminars. Obviously, no consensus has emerged on the appropriateness of the reforms process so far or desirability of their future direction.

THOUGH the economic reforms of the 1990s were forced on India by the foreign exchange crisis of 1991, the political parties have not yet digested the consequences of the economic reforms that made liberalisation, privatisation and globalisation respectab le words.

The Congress (I) is divided on whether the reforms introduced by Mr P. V. Narasimha Rao's government were desirable from the point of view of its political fortunes -- the redundant Communist parties still think that the reforms should never have been in troduced. Surprisingly, the BJP seems to have hijacked the reforms, though the swadeshi group within that party wants to push Bharat back to the Stone Age. The other splinter parties do not seem to have an independent opinion of the reforms process as th ey have mushroomed only to serve the political interests of individual leaders or to target certain sections of society.

Even so all political parties are debating the alleged adverse impact of the economic reforms.

The first issue debated was whether the Indian economy had escaped the Hindu rate of growth of 3.5 per cent and whether it was possible to aim at a higher rate of growth, of 8-9 per cent. While the data published by the Central Statistical Organisation ( CSO) does indicate that the Indian economy has escaped the Hindu rate of growth trap and notched a 6 per cent plus growth rate in GDP in the last decade of the 20th Century, some economists feel that the trend rate of GDP growth has not been more than 3 per cent over the entire planning period.

This is nothing but playing with statistics. It is true that in the 1970s the economy achieved a higher rate of growth, and in the 1980s it achieved an average of 5 per cent plus. It cannot be denied that in the 1990s, particularly after 1993-94, the eco nomy moved on to a higher growth path of 6 per cent plus. This higher rate of growth was spurred by the services sector more than the agricultural or the industrial sectors. Agriculture did not perform consistently well in the 1990s. The industrial secto r, except for 1993-94 and 1994-95, was not able to reach the 8 per cent rate of growth achieved in the Eighth Plan period.

The reasons are obvious. The industrial sector flourished under the protectionist regime of the Eighth Plan, though domestically it was constrained by the licence raj. In the 1990s, both the licence raj and the protection regime were dismantled and the i ndustrial sector has not been able to face foreign competition with improved productivity. Besides, the policy of reducing the fiscal deficit lowered public sector investment, acting as an assured effective demand for the industrial sector. As a result, the industrial sector is struggling to escape from the 6.5-7 per cent rate of growth.

Agriculture is dominated by small and marginal farmers and the decline in government investment in irrigation and other infrastructure, consequent on the diversion of money meant to provide input subsidies, has made this sector struggle for survival. In addition, the spectre of imports after the abolition of quantitative restrictions is staring Indian agriculture in the face.

The unimpressive performances of agriculture and industry have been offset by the expansion of trade, commerce, banking and IT sectors. The IT industry, counted under the services sector, contributes about 3 per cent of GDP, employs about 0.07 per cent o f the workforce, and its exports constitute 13 per cent of the total. It is this sector that actually created export-led growth impulses in the economy and saved it from another oil shock by earning commendable foreign exchange in the 1990s.

In this background, the Prime Minister, Mr Atal Bihari Vajpayee's suggestion, and the Finance Minister, Mr Yashwant Sinha's endorsement of, aiming at 8-9 per cent growth of GDP was most unrealistic. It is unrealistic because the economy's savings rate sl ipped from the projected rate of 26.3 per cent to 23 per cent. Following from this, the investment rate is also hovering around 27 per cent, notwithstanding the foreign direct investment flow. Also, the efficiency of capital use has not improved in the e conomy and the Government is not inclined to allow the fiscal deficit to increase. Therefore, there is no way of achieving the 8-9 per cent rate of growth in the near future and no signs of industry improving productivity. There are also no signs of hous ehold savings picking up being affected as they are by the new wave of consumerism emerging in the wake of liberalisation.

Therefore, if the present Government wants to increase the GDP growth rate from 7 per cent to 7.5 per cent, the Government will have to create savings by generating a surplus on the Budget's current account and encourage household savings by allowing pri vate pension funds to mobilise from the new economy. It is possible to generate a surplus on the current account if the Government can raise the tax-GDP ratio from the 14.9 per cent now to 18 per cent, keeping the growth of the expenditure constant. This is possible if the income-tax exemption limit is reduced, the rate is raised to 33 per cent, Section 10 of the Income-Tax Act is overhauled, recipients are taxed on gifts, estate duty is reintroduced and State governments are persuaded to levy income-ta x on commercial crop incomes, and the States are empowered to levy tax on the sale of services.

There is also a controversy on whether gold imports, which were allowed after liberalisation to deter smuggling, and mobilising foreign funds by periodically floating resurgent bonds abroad, which costs the Government much more than the normal borrowing costs, were wise measures. However, the majority of economists agree that capital account convertibility can be shelved and that external commercial borrowings should be regulated properly considering the liberal nature of FEMA, that has replaced FERA.

In monetary policy, while most economists agree that the Reserve Bank of India has been managing the rupee's internal and external value reasonably well by using the bank rate, direct intervention and other selective credit policies, there is an opinion that it should target not only money supply growth but also an inflation rate that would reduce the distortions in the economic forecast and expectations of different economic agents and governmental organisations.

The controversy on poverty has not ended; probably it never will. While there is the general feeling that the percentage of the poor might have fallen, the absolute numbers of poor may have increased because of the rise in population. Once again, doubts have been cast on the reliability of NSS data to estimate poverty. There is the agreement that the human development index, which reflects the quality of life, has not improved substantially because of the neglect of community services such as the provis ion of drinking water, housing, rural roads, sanitation, public health and primary education. While the PDS might have provided food security to a small proportion of the poor, the Government has not bothered to formulate a nation-wide food security prog ramme to eliminate hunger.

Thus, the debate on the consequences of economic reforms have been engaging not only economists but also the political parties. This is because the political parties feel that the old issues have become stale and they cannot find other sensitive issues o n which to mobilise the people. Hence, the consequences of economic reforms have come in handy. However, there are no reliable facts to dramatise the adverse impacts. The frustration of some political parties that have lost power has been mobilised again st the economic reforms. In the process, the data's reliability is overlooked and objectivity sidelined. This is the fate of the Indian debate on economic reforms.

(The author is former member of the Planning Commission.)