Inverted Pyramid

The wind slams the window panes The times changeSo does the will to change —From a song by Bengal bard Suman Chatterjee

IT’S that deja vu time of the year again. Lookat the poll promises and then the growing "things-to-do" list and youfeel the economy has stood still in the last three years. But of course, ithasn’t; it only grew worse. Industry stagnates—manufacturing sector outputgrowth quartered in April-September ’97, over the figure of April-September’95. Exporters have given up hope, banks are as tightly sitting on money asthey did after Harshad Mehta, foreign investors are almost scared away and thereal economy is poorer. The NCAER business confidence index has dropped 10 percent from its August level. Everything and everybody seem to be waiting for somegiant kickstart to get it all chugging along again. The billion-rupee question:can the new government pack in the punch?

More important is how lethal thepunch can be. For, the figures are chilling. Says S.P. Gupta, chief executive,Indian Council for Research in International and Economic Relations (ICRIER):"The government is trying to present a rosy picture, but there are clearsigns that the economy is going into a recession. The fundamentals are not goodanymore." Forecasts for 1997-98, pouring in from industrialists, investmentbankers and institutions, point to a fiscal deficit of way above the target of4.5 per cent. Industrial growth is feared to be under 5 per cent—profits fellacross the board last year—and agriculture growth perhaps less than 1 percent. Export growth has been a paltry 3.31 per cent in the first half of thisyear, the target was five times that. Imports? At less than 8 per cent, growthwas half its target. Despite historically low petroleum prices, the tradedeficit nudged $4.5 billion in the nine months of the current fiscal year, 40per cent higher over the same period in 1996.

 Capacity use in the capitalgoods sector, the barometer of industrial activity, is almost negative. At theend of November, foreign institutional investors had actually taken out Rs 412crore. And, year-on-year, bank credit fell over 11 per cent in December. As theimpact of last year’s poor farm output sets in, wholesale prices, caged forlong, are trudging up to touch a close to 6 per cent infla-tion rate inmid-January. True, some money has been prised out of the black economy andthat’ll balance the books this year despite a very poor customs revenue andhuge pay commission payouts. But overall, the GDP will grow far less thanestimated.

Experience has also taughtIndians to view all poll promises with deep suspicion. Ironically, it matterslittle which party combination will grab the hot seat—the Congress with themost reformoriented manifesto, or the BJP with its swadeshi nationalism, or thesocialism-mouthing Front coalition. The new government has very few choices fromamong the many issues on the backburner.

Says Shubhasis Gangopadhyay,professor, Indian Statistical Institute: "The most important issue today isto carry on with the reform process in the right direction. Which meansprivatisation has to be speeded up and infrastructure strengthened so that thestate is left doing what it ideally should—look after the socialsectors." Adds D.H. Pai Panandiker, advisor, RPG Group: "Industrialrecovery is the crying need. Second is laying down a policy road map for thefuture so as to boost infrastructure and investment, private and foreign."

Infrastructure and investment:chicken-and-egg?Is infrastructure really the magic pill for the economy? Yes,because infrastructure is the base for all reforms to work. More important, overtime, it allows reforms to percolate to the needy. Says Gangopadhyay:"Reforms are not aimed at creating jobs or reducing poverty. It’s aboutproviding the right infrastructure efficiently for everybody to work better.Infrastructure is not only what the urban voter looks at: power, telecom, ports.It’s also roads, water and irrigation, rural markets." And all theseareas need huge investment, which a cash-starved government has not been able toprovide for so many years. Making it a vicious circle closely linked with thecountry’s inability to attract foreign investment on at least a medium scale,if not like China.

Carps economist-consultant BibekDebroy: "It is easy to lament the lack of investment but nobody in thegovernment has really talked about the real issues. User charges, for instance.We talk of big power and telecom projects, but ignore the losing state powerboards. We talk of roads but haven’t sorted out the toll issue. It’s thesame with ports. Decentralisation of administration, giving power to states,also speeds up new projects."

Adds Gupta of ICRIER:"Provided one has the will and one allows a level playing field to privatesector along with the government, such issues can be sorted out or specificconcessions made. For instance, for uninterrupted power supply, transmissionlines can be made separate with higher user charges." And as long as clearrules and guidelines are absent, subjectivism and controversy abound. Forinstance, suggests Gangopadhyay, small, easy-to-complete projects shouldimmediately replace fast-track projects, whose clearance is often clouded bysecrecy and subject to vested interests.

Lack of clarity is also a majorfactor that’s obstructing the flow of foreign investment in big projects. Andtalks of lock-in periods, or identification of high-priority sectors don’thelp. Says Gupta: "The BJP manifesto in effect says to foreigners: don’tcome." Adds Debroy: "Selectivity is unimplementable. It becomes highlysubjective and arbitrary. Once you decide to liberalise, say, consumer goods,let’s do it. No more hedging or selection."

Should the government spend? Buthow? On the ground, in foreign investment it’s really a question ofsmoothening the procedural problems in the areas that are already open. Therest, feels Gangopadhyay, "will be taken care of by the investorsthemselves once they are assured of political stability and no periodictinkering with rules". But it’s the domestic industry which needs somepotent salves to assuage their injured health and pride, a feeling which has nowfound a sympathetic ear in the BJP’s economic nationalism. Echoes Panandikerof RPG: "Reforms are not only about opening up the economy, it also meansstrengthening the domestic industry."

 Experts are not unanimous onany formula for industry to revive. While the common solution proffered is onthe lines of Keynesian supply-side economics—ie, the government should easemoney supply, spend more and create jobs to stimulate demand—the existingexpenditure scenario puts paid to that hope. Defence and interest payments, thetwo largest outgos, cannot be cut, except by using public sector disinvestmentto retire old debt—and therefore reduce the interest burden. But then, therehas never been any supporter for the government’s past actions on the PSUdisinvestment front. Both the process of disinvestment and the planned use ofits proceeds—to finance current expenditure—have come under heavy artillery,and rightly, even from the BJP.

What remains are administrative expenditure,which is actually set to rise with the latest pay commission, and thesubsidies—food and fertiliser. Says Debroy: "With better targeting, foodsubsidy can actually go up, because the really poor right now have no access tothe PDS." What can reduce is the government’s holding cost of grain, werethe Food Corporation of India to be wound up and were the government to quit theprocurement business. That would only affect the rich farmers, who continue toget the price they ask; the average farmer has very little surplus grain to sellanyway. As for fertiliser subsidy, it does benefit the comparatively worse-offfarmer and overall agricultural productivity, says Gangopadhyay.

With expenditure an immediatedead-end, raising earnings becomes vital. With VDIS success creating the rightwork atmosphere for tax collectors, income tax collections can go up witheffort, feels Debroy. As for customs, he feels while effective tariff ratescould come down from 70 per cent now, there is no external compulsion forreducing tariff further on manufactured items for some years, except for thequantitative restrictions on garments and textiles and the global infotech pact.The fears of Indian industry are quite unfounded on that count. But indirecttaxes need to be streamlined urgently. Cribs Panandiker: "Excise is cryingout for reforms. Input level taxation has to go. Then there are taxes likeoctroi, which encourage division of the country." Tax problems also plagueforeign trade, a major source of income for government. And it is the volumesthat get revenue in the long term.

 Bereft of funds, industry alsofeels that a boost to the lacklustre capital markets would be timely. But thechicken-and-egg syndrome seems to be at play here too. The financial system isflush with funds, but the right givers or takers are absent. CountersGangopadhyay: "Capital markets is the effect, not the cause. If stimulatingmarkets was the answer, we’d have had the highest growth rates in ’93-94 and’94-95." It is here that the government’s conservative monetary policyof holding the rupee by the neck comes under fire.

Let the rupee go! LamentsPanandiker: "The RBI has used big guns to kill small fry. If it fearedspeculation, that could have been checked by giving the banks a freerhand." Instead, says Gupta, "it is neglecting the goose that lays thegolden eggs". There is a clear consensus that having arrested the fall, theRBI should now let the rupee drift to find its own level in the market, whichwould probably be around Rs 42. Debroy feels intervention should come only whenit dips below Rs 45-46. Argues Gangopadhyay: "If the rupee is open tospeculative attack, the solution lies in deepening the market by allowingfutures and contracts. If we had 30 Harshad Mehtas, we’d not have one Harshadholding the market to ransom." Clearly, an immediate market-induceddepreciation would provide the much-needed boost to exports and correct theexchange rate anomalies. The fear of repeating the South Asian experience seemsto be more of paranoia as, empirically, a democratically elected government hasinner checks and balances to avert any major catastrophe. Example: the publicoutcry during Enron.

Finally, the real economy whichgets lost in the poll ado. For it, only the empty shells of promises. Why doesthe reform process founder when it hits the poorer rural economy? For it isthere that the government has to spend and also show a steel will. Pending landtenure reforms and rural infrastructure like markets and water, the agricultureeconomy, throughout the reform years, has shown a poor trend rate of growth. Theanswer, of course, is well-known. As Gangopadhyay says: "The state shouldimmediately stop providing infrastructure except social. Why should the state bein steel and incur losses instead of providing rural water or sanitation, oreven better, rural health and education? Why even in banking or insurance, wheregovernment enjoys undeserved monopoly? In fact, education of the girl-childshould be the one-point programme of the new government, but nobody even refersto it."

More power to the states can allowthem to correct various administrative loopholes for better treatment of socialsectors. For instance, a primary school teacher does not attend school becausehe/ she has to report to the district administration, and not to the panchayat.Of course, you can argue that land reforms, a state subject, remain the mostneglected area till date. But any government worth its salt knows that these arethe smoking issues that can ignite any-day and render even a 10-year-long reformprocess useless.