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A Promise Belied

Is the suspension of divestments the beginning of the end of reforms?

A Promise Belied
A Promise Belied
outlookindia.com
-0001-11-30T00:00:00+0553
It was a small stone hurled at the seemingly placid waters of the Indian economy, but the ripples went far and wide. On July 6, the government announced that "taking into account the concerns (of some of the UPA constituents and allies), the prime minister has decided to keep all disinvestment decisions on hold, pending further review". This came just three days after Manmohan Singh said he was "not unambiguously attached to reforms" and we "must compete with the world on our own strength". It was as if the curtains had dropped on economic reforms after two years of flip-flops.

Worse was to come. A whisper campaign that the PM may resign, as he was piqued by coalition pressures and stung by the way his ministers were pursuing independent agendas. As finance minister under Narasimha Rao, Manmohan had offered to resign thrice; so it was easy for the rumour to grow wings. Instantly, markets tumbled, analysts frowned and the world sat up and took notice. Russia’s Pravda described Manmohan as "the boy who stood on the burning deck"; most others said he was "under siege" and helpless. Wasting no time, the BJP called for mid-term polls and a statement on privatisation. Although the PMO clarified there was no truth to the rumour, a big question looms. Is this the death of reforms as we have known it? Will we be stuck at 7-8 per cent growth?

In a curiously prescient way, the situation today is a fast forward of a scenario envisioned for India 2025 at last November’s WEF summit with ‘Atakta Bharat’ or India Getting Stuck as the theme. "It describes an India that lacks unified action and effective leadership, creating a continuous and cumulative source of problems for India," says the background paper. This was why Manmohan as PM, with his reformist credentials and unsullied political record, was the best possible news out of a coalition government of conflicting ideologies.

Yet, the optimism didn’t last. Says Arun Maira, chairman, Boston Consulting Group, and head of the team that wrote the WEF-CII paper: "Many economists and business leaders felt such a situation wasn’t possible. They felt India was grooving nicely and everyone was aligned towards the reforms required. This scenario is Bollyworld—glitzy, unreal, fun while it lasts."

In fact, adds Maira, "the Atakta Bharat scenario was built upon an even earlier work: Buffaloes Wallowing. Many large buffaloes (leaders?) in a pond are unable to move out because they keep butting against each other, while a child is waiting outside to get into the pond to have some water. The child represents the future of India and our demographic advantage. Bollyworld gives rise to Atatkta Bharat and this problem can be solved only by a process of creating alignment amongst several stakeholders and potential coalition partners."

In the absence of which, nine major areas are stymied for lack of action: public sector modernisation and disinvestment, agriculture and land titles, FDI in retail and insurance, pension and banking, urban infrastructure efficiency and user charges, full oil price deregulation, small-scale dereservation, cut in food subsidy and cleaning up pds, higher education and administrative reforms. Apart from the Information Act and the airports modernisation, the UPA has only managed to push through telecom FDI hike and made a start on retail FDI.

After Sonia Gandhi’s statement that "the present government is too preoccupied with foreign investment and disinvestment", divestment and foreign entry in banking and insurance is virtually dead. Organised employment lobbies are too hard to crack; even the BJP balked at it. But, Abheek Barua, chief economist, ABN-Amro, says he is optimistic about labour laws "because with the SEZ initiative picking up, states are likely to vie with each other in offering flexible labour structures". Even if the pension bill is stuck in Parliament, the groundwork can progress easily, says former MoF consultant Ajay Shah. Among the remaining, adds Barua, "a comprehensive blueprint for change is in place in power but it hasn’t been implemented." There is also the issue of improving infrastructure efficiency and support for areas where reforms have worked, says economist S.L. Rao, citing the case of the Delhi power privatisation, which the Congress is now loath to follow up.

In fact, insiders say, with the Sonia-led Congress trying to consciously create a left-of-centre image of concern for the aam aadmi, especially farmers and agriculture workers, and emphasise "employment, (primary) education, agriculture and health" for electoral mileage, policy changes in areas purportedly for the "urban middle class" will be bypassed. Says R. Seshasayee, CII president and Ashok Leyland MD: "The common minimum programme has become the common maximum programme as the government is unable to do anything outside it. But without financial and public sector reforms, there is no possibility of 12 per cent growth." Adds Chetan Ahya, India economist, Morgan Stanley: "One of the most important goals for the UPA is equitable growth and redistribution. For that you need to grow the pie and the lag in the reform process is a drag on that. Policymakers need to realise that they can’t take growth coming from cyclical trends as sustainable."

Is there a need to rewrite the CMP then? Answers NIPFP director M. Govinda Rao: "The government should have charted out where they needed the consensus and where they didn’t. We don’t need consensus for micro-level reforms or for creating the right environment for public-private partnerships in infrastructure. Even fiscal and financial sector reforms can be carried out in ‘stealth’." Former economic affairs secretary E.A.S. Sarma agrees: "The CMP has many positive elements—welfare of workers and tribals, employment, rights of slum-dwellers, rights of project displaced persons, etc. Only an insensitive government will fail to understand the impact of these policies on the people. For instance, during the Narmada controversy, the PM could have announced a tribal development policy, recognising their right to local land, forest and mineral resources to tackle the problem."

Out-of-the-box thinking is what Saumitra Chaudhuri, PM’s economic council member, advises. "The biggest challenge is the execution of decisions involving public funds. It’s true of highways, airports, urban mass transit system, power, urban infrastructure, education, even farm sector." These are the toughest reforms, for there is a huge legacy of weak organisations, pervading corruption, absence of the right incentives (and disincentives) and of a sense of urgency. "The hugely different outcomes in power and telecom shows how severely the differential mess on the ground can aid or impede progress," adds Chaudhuri. This is also a major cause of the PM’s angst—whether administrative reforms will ever happen despite a hyper-active second commission.

The Administrative Reforms Commission has recommended scrapping the Official Secrets Act for greater accountability. It is working on the Rural Employment Guarantee Act (report in July), Public Order and Conflict Resolution (in August) and the civil service (in November). Notes its chairman Veerappa Moily: "The government should function as a service centre, not a power centre." But, says S.L. Rao, "reforms to improve the administration’s capability to spend without theft or waste, speed up approval for investments and give more power to local authorities haven’t taken place."

Instead, there are enough instances of how not to do things. Says Shah: "Exuberant expenditures are shooting up. By 2008-09 the situation could become tough. If the FRBM targets are violated, India will lose credibility. Instead of fundamental reforms in higher education, the protection moves in higher education and private industry are damaging optimism and investment." Arvind Panagariya, Columbia University professor, agrees: "Some critics describe India as a one-trick pony: IT. The turnover rates and wage hikes in the industry tell us that the supply of the highly educated is not infinitely elastic."

The reforms controversy is a self-inflicted wound for the Congress, especially Manmohan. In the ’90s, he reformed the areas that offered the least resistance, as there was weak consensus on tougher reforms. Coalition politics has taken away even the remnants of that consensus. Yet all may not be lost, says economist Meghnad Desai. "Even now the reform process is not dead completely. The DMK would not fight equity sale of PSUs outside Tamil Nadu and so on for each UPA partner. So slowly, stealthily, reform will progress. The best thing is that the dynamic private sector is not waiting for the government to help it. A weak, ineffective government is fine; what is to be feared is a powerful anti-reform coalition. Of that there is little chance." But such consolation is unlikely to get us double-digit growth rates.


By Paromita Shastri with Saumya Roy

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