A time for reforms, once again

In the English dictionary, the word “reforms” means, “to improve by alteration, correction of error, or removal of defects; put into a better form or condition.” From time to time, large-scale policy changes become necessary for the betterment of the society and economy.

The last such initiative was undertaken in 1991; and, of course, before that, immediately after Independence. We seem to be at the crossroads once again.

What necessitated these changes at each juncture? In 1947, our society was predominantly rural and feudal, with a minuscule urban educated class. Industry was insignificant, barring jute and textiles. Income distribution was skewed.

During colonial rule, the economy was outward-looking, but deprivation, unequal income distribution, and lack of industrial self-sufficiency motivated post-Independence policymakers to adopt an inward-looking socialist model of development.

The Pre-Reform phase

In an effort to equalise income distribution, the government dismantled the feudal system, and doled out subsidies in the form of cheaper fertiliser, while not taxing agricultural income. High import tariffs were put in place, shielding domestic industry from global competition.

These measures, perhaps appropriate to the specific context of post-Independent India, turned into an obstacle to growth and development in the later years. Too much government control and discretionary power for the bureaucracy led to corruption. Large industrialists, making super-normal profits in a protected market, lined the pockets of corrupt bureaucrats and pampered them.

Trade union leaders and government employees neglected performance. Large farmers cared little about increasing agriculture productivity. The result of this government largesse, which did not help enhance productivity, was a high fiscal deficit during the late eighties.

That called for another set of reforms from 1991 onwards — the so-called ‘economic reforms’.

The initial effects of reforms, in terms of the government acting more as a facilitator and allowing active private participation in the economy through liberalisation and globalisation, were beneficial. Banking sector reforms, by bringing down interest rates, led to an increase in private investment and corporate profitability. GDP growth increased to an average of over 8 per cent between 2003 and 2011.

Retrograde steps

Now, the economy has once again started slowing down. Since last October, the Finance Ministry and PMO have initiated steps to bring the economy back on the fast growth track. However, we should be able to distinguish between good and bad measures.

Take, for instance, the new Land Acquisition, Rehabilitation and Resettlement Bill, 2011.

As per this legislation, when it comes to acquiring land, the State has to pay two times the market price if the land is in urban areas, and four times the market price if the land is in rural areas.

In addition, for rehabilitation, a sum of Rs 1.36 lakh has to be given to the displaced household. For sustaining livelihoods, a job has to be provided to one member in the household, or a one-time payment of Rs 5 lakh would have to be made.

So, if a piece of land costs Rs 1 crore in Chennai and the government wants to procure this land, it has to shell out Rs 2 crore plus Rs 1.36 lakh for rehabilitation, plus Rs 5 lakh as a way towards sustaining livelihood for the displaced household.

The calculation gets a little more complicated for displaced people in rural areas. Since the average landholding size varies from one State to the next, the amount the State government would have to shell out will be much more when the landholding size is small, as compared with when it is large. This is because a larger number of people will be entitled to rehabilitation and livelihood compensation.

The average landholding size for farmers in Punjab is around five times than that of West Bengal, which makes land procurement more costly in West Bengal.

This can create problems. If the government wants to build a project on the basis of public-private partnership, the cost of the project goes up in West Bengal, a relatively backward State, compared with Punjab.

Private companies would be reluctant to collaborate with the government for infrastructure development in relatively backward States, leading to further regional disparities.

Small land holdings give rise to coordination problems. In West Bengal, the National Highway Authority of India has been able to procure only 1.93 per cent of the land required for expanding National Highway 34 and National Highway 31. Rail construction work between Nasirpur (a place of historical importance) and Azimganj in Murshidabad district of West Bengal is held up just for seven-and-a-half acres of land.

Scarcity of land not only hampers expansion of industry and tourism, but can also have other secondary effects. Take education, for instance. Despite the success in enrolling students in primary education, there is still a vast pool of the population stuck in the agricultural sector.

In fact, 75 per cent of the unemployed are in the agriculture sector. For the government to promote public-private partnerships in vocational education, say, in the form of polytechnics in rural areas, it would need land. For opening a polytechnic institute, the All India Council of Technical Education (AICTE) requires a minimum of 1.5 acres in urban municipal areas and 5 acres in rural areas.

Last month, the West Bengal government was scouting for land for setting up polytechnic schools, but with no luck.

Positive measures

Not all reforms measures are bad. For instance, the proposal to set up Cabinet Committee on Investment, to fast-track Rs 1,000 crore plus projects on infrastructure, is a welcome move.

Often, construction of railway tracks, roads and power transmission lines is delayed because of environment clearances. The Committee on Investment can now directly intervene with the ministry concerned (in this case Ministry of Environment), and speed up the process of obtaining clearances.

Similarly, the idea of cash transfer of subsidies to beneficiaries’ bank accounts, using Aadhaar cards, is a salutary move.

The administrative cost of running government welfare programmes can be reduced, and all schemes relating to pensions, education and healthcare can be brought under one umbrella.

Direct cash transfer will bypass State, districts and administrative hurdles at the panchayat, and help the government contain its fiscal deficit. The success of cash transfers will depend upon financial literacy and financial inclusion, but it is a step in the right direction.

The author is Professor at Institute for Financial Management and Research, Chennai

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