Are We Missing The Bus?

OF late, there has been a change among New Delhi's economic policy-makers. Until recently, there was much crowing about how India had escaped the East Asian contagion. Nowadays, one hears privately-voiced concerns about whether India is missing the bus. By not reforming fast enough, have we shut the tiny window of opportunity opened by the East Asian crisis? Will we continue to wallow up to mid-1999, when China, Taiwan, Thailand and South Korea claw back to export-driven growth?

Have we missed the bus? Not yet. But we've shown such reluctance to convert this East Asian opening into a goal that we are very close to blowing our chances. East Asia was in the worst throes of its crisis when the BJP-led coalition assumed power in March 1998. In comparison, on March 19, when Atal Behari Vajpayee became the prime minister, the Sensex was at 3821 and rising. Despite Jayalalitha's shenanigans, it continued to rise, peaking at 4281 on April 21. Clearly, industry, foreign investors and the capital market had huge expectations from the new order. In contrast, all East Asian bourses had been hammered to less than 40 per cent of their June 1997 values.

Enter the bomb and the budget. Whatever the geopolitical reasons, Pokhran II created massive international investor uncertainty in an environment when everyone was running scared to emerging markets, and also raised the cost of foreign funds. The Sensex started falling from May 13 and dipped to 3686 by the end of the month—a fall of almost 14 per cent from April's high. Even so, most people believed that we would counter the bomb by a reformist budget.

It wasn't so. To be sure, Yashwant Sinha was beset by constraints and a multitude of protectionist demands. Still, the haphazard nature of the budget coupled with the rollbacks that began even before the ink was dry gave an impression that North Block had forgotten how to do its job. By the end of June, the Sensex had fallen by another 12 per cent to 3231; and by August it had plummeted a further 11 per cent to 2887. September—the magic turnaround month—came and went; October brought with it the news of UTI's fiasco with US-64, and onions took centrestage. It was a vicious cycle. The more people believed that the government was inactive, the louder were the cries of gloom and doom; and the louder this lament, the more defensive the government became. We had wasted six months of the interlude offered by East Asia.

Since mid-October, Sinha has implemented some reforms. Buyback has come to pass, as have provisions for inter-corporate investments. The disinvestment of the Container Corporation of India (Concor) seems to have been successful. Yet, the belief is that while Sinha is reform-minded, his acts are too little, too late. With many sections of industry getting themselves into loss-making corners, nothing short of miraculous reforms is now considered satisfactory. Unfortunately, the miracle index involves regressing to the good old days—greater protection through higher tariffs or specific duties, sector-specific assistance packages, distortionary incentives and astronomical increases in government purchases.

India can't afford this. With an industrial slowdown, the exchequer hasn't the funds to engage in the kind of pump priming that can fill the order books. As it is, Sinha faces the spectre of higher deficits. He can't widen it further without raising either interest rates or inflation or both. So, what can he and Vajpayee do to raise expectations without irreparably damaging the fisc?

First, they must speed up privatisation. Even with Concor's success, it won't be easy to raise Rs 5,000 crore by March 31, 1999. In the next four months, the government has to sell the stocks of the other public sector companies slated for divestment. It doesn't matter how it sells—in India, through GDRs or national trusts. The point is to bring one company into the market every four weeks, irrespective of the going market price or sentiment. Second, it must get cabinet approval for 26 per cent foreign equity in insurance, move the Insurance Regulatory Authority Bill, amend the LIC and GIC Acts, and open up the sector no later than January 1999. At least two joint ventures should get off the ground by the time Sinha presents his second budget.

Third, by mid-December the Centre must prepare transparent norms for foreign direct investment. Once these are approved by the cabinet, it should get rid of the Foreign Investment Promotion Board (FIPB). Investment should be simple: if you meet the guidelines, you are in. There is no need for another layer of intermediation through the FIPB. Fourth, instead of jacking up customs duties on a case-by-case basis, the government will do well to strengthen its anti-dumping mechanism. The European Commission has over 70 professionals looking after anti-dumping and anti-subsidy; the US has 150; our Commerce Ministry has three, of which one is slated to be posted elsewhere.

Fifth, both Vajpayee and Sinha must recognise their limitations. They don't have the funds to spur demand by significantly greater public expenditure. So, the less they promise such things the better. Also, the last four decades have shown that governments haven't succeeded in micro-managing the economy through a deluge of sector-specific interventions. Today's government can engage in policy reforms. The rest is up to consumers, companies, industries and services.

What is suggested is only a minimal package. It isn't as breath-taking as announcing a 50 per cent increase in infrastructure expenditure or giving big tax sops to a dozen industries. But there isn't much point in promising a trip to the moon when the fuel tank is empty. It's better to be realistic; to reform wherever one can; and to do it double-quick. If we do so, there is some chance that we won't miss the bus. It isn't a big chance; but it's all that we've got.