Where reforms have not worked

The slowdown in the growth of the Indian economy has predictably led to a demand for a fresh burst of reforms. There are clearly steps that need to be taken to break the constraints that have emerged on growth. The specific steps that are being suggested are, however, confined to extensions of the general agenda Dr Manmohan Singh laid out in 1991.

This view of the next generation of reforms has no place for steps to address constraints that have emerged during the last two decades. As a result, it completely ignores the growing problem of transferring economic risk to sections of the society that are least equipped to deal with it. And this transfer has consequences for growth that are far from being adequately addressed.

TRANSFER OF RISK

In a sense, the transfer of risk from the government to private institutions is built into the case for liberalisation. Underlying the reform process was the belief that the private sector is better-equipped to deal with the vagaries of the market than the government. The private sector seeks the large profits the market can offer at the risk of that market inflicting devastating losses.

With time, the more efficient of the private sector units are expected to survive, while the rest fall by the wayside, creating an economy dominated by efficient units. A case can also be made for market-based prices for petroleum products, as this will allow demand to directly adjust to global prices.

A complete transfer of risks from the government to private producers and consumers can, however, have its less-than-ideal consequences as well. The market may dictate that much less food is produced than is needed, leading to food inflation. The worst affected by this inflation would be the poor. The ideal response of the government would then be to transfer risk to private producers and consumers, while building adequate safeguards for the poor, and providing for the availability of essential items.

In reality, though, the Indian liberalisation process has been marked by an unbridled transfer of risk with very few safeguards. This is true even of areas where there is a case for subsidies for the poor. The government proposes to reduce petroleum subsidies this year by as much as Rs 24,901 crore. This is expected to be done by better targeting of subsidies to the poor.

But given the massive decline that is projected in the subsidies, it would be no surprise if a significant section of the poor are left out. And even if the poor were correctly identified, the possible use of fixed cash transfers would mean the risk of price fluctuations would have to be borne by the poor.

ETHICAL ISSUES

What is even more worrisome is that it isn't just the government, but the private sector too, that is seeking to transfer risk to consumers, including less privileged ones. At least one major private sector housing finance corporation, which provides loans for budget houses, insists on having the borrower provide an undated cheque for the entire amount of the loan, besides mortgaging the property for which a loan is given.

Even if the corporation sticks to its promise of only presenting this cheque in the case of a default, it allows the lender to cover for any decline in the value of the property when a loan is foreclosed. The risk of a collapsing housing market is then transferred to the borrower. In addition, the borrower has the take the risk of the cheque being misused in case the corporation goes bankrupt.

In addition to the ethical issues involved in transferring the burden of risk to the most vulnerable sections of society, this transfer has larger consequences for the growth process. Forced to deal with risks that they were earlier protected against, the vulnerable have reacted in a way that is completely consistent with the Indian mindset: they have relied on land and gold. And each of these choices can have a growth-limiting effect.

INDUSTRIALISATION

The risk-sensitivity of farmers in the poorer regions makes them more unwilling to sell their land for industrialisation. They often prefer to migrate seasonally to the richer regions, including urban centres, to earn a living even as they treat their land as a safety net. It is then no surprise that the poorer regions have been marked by greater difficulty in land acquisition for industry.

The shift to gold too transfers a considerable amount of savings to a relatively unproductive asset. Gold and silver now account for 13.3 per cent of India's imports. While a part of this import is re-exported as jewellery, the growth in domestic demand for these precious metals has been significant enough to convince the Finance Minister to hike the import duties on gold.

If the growth-limiting use of land and gold is to be reined in, the government would have to pay much greater attention to the effects of liberalisation on the risk borne by the more vulnerable among the consumers. Reducing the risk to these sections would require a variety of measures ranging from effective futures markets for farmers to a regulation of lending practices that is more sensitive to the risks being thrust on the most vulnerable in Indian society.

The creation of such an alternative reform package will call for a fresh assessment of the nature of the Indian economy, rather than merely going by the picture Dr Manmohan Singh painted two decades ago.

(The author is Professor, School of Social Science, National Institute of Advanced Studies, Bangalore.)

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