'Reforms at a time of fatigue', The Hindu, 3 March, 2002.

On February 28 Mr. Sinha presenting his fifth budget in a row, as the media was quick to remind us, had ended his speech with the affirmation: "This is a budget for consolidating, widening and deepening the reforms. This is a budget for development." One needs not agree with this self-appraisal to find it a useful yardstick by which to judge the Budget. For a start, his is a major claim. It carries the implicit assumption of a connection between development and economic reforms as he has defined them. Among the latter are specific sectoral incentives, the lowering of the tariff barrier, the simplication of tax procedures and capital account convertibility. While some of these are unexceptionable, two points may be made: they constitute a very limited understanding of what drives development and, in any case, the impact of their so-called `first generation’ has been limited, justifying some scepticism as to their potency in the current state of the economy.

            The reforms pursued by Mr. Sinha are all of the supply side. Their impact is conditional upon their ability to ease the existing constraint on the economy. Naturally, they cannot be expected to deliver when the economy is demand constrained. The package announced by Mr. Sinha essentially falls within what someone helpfully pointed out "Washington means by `policy reform’". Of course, not even such a view of reform can be credibly rejected on grounds of provenance as opposed to persuasiveness. Then there is also the question of timing. The Finance Minister (FM) has reiterated that he is carrying out the second generation of reforms. Fine, development is a longer-term affair not bound by the annual cycle of budgetting. However, timing is not irrelevant while evaluating policy, and we might ask if just extending the reform is sufficient as policy right now. I would argue that on the latter count their relevance is limited, even as the FM may be right to want to remain on track as far as deepening the reforms is concerned.

            With the hindsight of over one decade, we are now in a position to say that if the reforms were meant to put India on an higher growth path they certainly have not succeeded thus far. By the second half of the nineties the average annual rate of growth had fallen to less than that recorded in the eighties, a time when, according to many, the economy was crying out for the very reforms that finally got to be implemented in the nineties. This simple fact makes it untenable to argue that what India needs most right now is more of the very same policies initiated by Mr. Manmohan Singh and continued resolutely by Mr. Sinha. Note that I have said "needs most". This is by no means an `anti-reform’ position. However, it does insist that right now the economy may require something missed by this package of `second generation reforms’. And what may this be?

It would be commonplace to argue that growth in the Indian economy is currently constrained mostly by demand. We see signs of this everywhere, from the accumulated food stocks in agriculture and the unutilised capacity in industry to the cut-price holiday packages in the service sector. Only a madman would say that any of this has to do with the international slowdown. Indian industry has in fact slowed steadily from1995-96, in fact almost exactly as the US economy began to surge, propelled by the commercialisation of the internet in 1995. So there’s nothing global about the current slowing of the Indian economy as claimed by one of Mr. Sinha’s ministerial team finessing the shortfall in revenue collection this fiscal on Doordarshan minutes after the Budget Speech. This also brings along the obverse, that it cannot be expected of the Indian economy to revive automatically as the US economy does. We need some surer mechanism in place.

While any economy is a kind of web, the Indian is a little more tangled than any other major one. First, there is the interaction between sectors at different stages of economic development. Next, there is democracy, which implies that there is always room for negotiation. The uneven economic terrain laced with political uncertainty makes it difficult to trace with confidence the impact of economy-wide policy change. However, even within the flux that is the Indian economy it is possible to discern some trends that help us situate its present condition in relation to policy. Prominent among these are declining public investment and rising price of foodgrain, more or less over the past decade. Neither has figured significantly in the minister’s calculation.

It would be indeed be appropriate to query where the resources for higher public investment are to come from. I would say, without hesitation, from the two principal budgetary subsidies, food and fertiliser. In fact, the fertiliser subsidy needs to be phased out altogether. We need to remember it did not even exist at the time of the Green Revolution. As for the food subsidy, it reflects a producer subsidy for which there is little justification where stocks of such a large magnitude exist. Somewhat counter-intuitively, the route to lower food subsidy is via a lowering of its price in the public distribution system (PDS). This may be expected to increase off-take, lowering the holding cost. Of course, for such a mechanism to work there must be a simultaneous lowering of the procurement price. The economics of a move to a lower food subsidy is to substantially lower procurement. Right now the high food subsidy reflects a procurement price too high rather than a compassionate society protecting its poor as is often made out, naively by the naïve and disingenuously by vested interests. The high price of foodgrain has not only blocked up resources otherwise available for public investment but also has stood in the way of an expansion of the market for mass consumer goods originating in industry. A reduction in the price of foodgrain via a lower PDS price would come as a double whammy, releasing resources for public investment from subsidies unrelated to current consumption and stimulating demand for industry more directly by easing household budget constraints. It also alleviates hunger. Nothing less than such a compact can be taken to mean ‘reform of the food economy’, an objective stated in the Budget Speech.

The trajectory of the economy over the past five years signals the impotence of reforming the supply side of the economy alone. The Budget reveals that Mr. Sinha has been unable to read this rightly. What he has now done is give us more reforms at a time when the economy is fatigued, needing a demand stimulus most. However, in evaluating the Budget and the reforms package that it contains we may wish to remember that, at the end of the day, an economy’s response is not independent of politics. This government does little to inspire any confidence in the private sector. It has brought spurious issues to the fore, encouraging the sense of a drift. Political uncertainty is far worse for private investment than the economic. Note that the inflation rate, the academic economist’s favourite index of uncertainty, is close to one percent currently.


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