Reforms On Hold

WITH these quotes, Finance Minister Manmohan Singh at the India Meeting of the WorldEconomic Forum (WEF) in Delhi on December 4, confirmed what industry had feared all along.That the Government has no intention of pursuing the reform agenda for its remaining term,though elections are some time away.

Signs of this halt to the reform process had become apparent over thepast six months, with the Government failing to announce any major economic policyinitiative. The passing of the Depositories Bill by Parliament, though, was an exception.The Government’s belated attempts to curb the rupee slide and to reduce the liquiditycrunch confronting industry were mere fire-fighting operations.

Thanks to its ham-handed handling of telecom privatisation, theGovernment last week faced an opposition backlash, coinciding with two public interestpetitions filed in the Supreme Court questioning the tendering process. This is expectedto inhibit the Government further in proceeding with its liberalisation programme.

Says Rahul Bajaj, chairman and managing director, Bajaj Auto:"This being election year, the entire reform process has been going slow. Quiteunderstandable, but clearly a lot more needs to be done if reforms are to be brought totheir logical conclusion." And the unfinished agenda of the reforms rankles. At theWEF meet Bajaj made it a point to quiz the finance minister on the Government’s plansfor opening up the insurance sector, regulations for takeovers and steps to tackle thesevere liquidity crunch, forced on industry by the Government’s massive marketborrowing programme.

But these are not the only issues on which the Government had promisedreform, and not delivered. Other major concerns of industry include issues like reductionin Government borrowings and implementation of the Malhotra Committee report which dealsnot only with the privatisation of the insurance sector, but with the entry of foreigninsurance companies as well. In fact, since the submission of the Malhotra Committeereport to the Government in December 1993, some Indian companies have even charted outplans to enter the insurance sector in collaboration with foreign firms. "TheGovernment has been very unfair to the Malhotra Committee recommendations," saysCharan Wadhva, professor, Centre for Policy Research.

"Though the finance minister says he has completed three-fourths ofthe economic reforms, I would say he is only half-way through," claims notedeconomist D.H. Pai Panandikar. He feels that reforms have been on hold since the 1995-96budget. In fact, says Panandikar, "they have been reversed in some ways, like theincrease in import duty credit following the drop in the rupee’s value vis-a-vis thedollar."

This floundering and eventual halt to the liberalisation programme hascome in for a lot of criticism. "While most reform pro-grammes around the world slowdown before elections, we haven’t just slowed them down, we’ve stopped and insome cases reversed reforms," observes Wadhva. That too, when it is time to build onthe foundation of the reforms. The South-east Asian tigers, for instance, never made thismistake. Even if it were just a slowdown, observers feel, it is far too early, consideringthat elections are still some months away.

Adds Sanjay Jha, vice-president, Alliance Capital India:"Political compulsions are dictating economic policies at present. Reform is anon-going process. We’ve seen it deliver the goods for the past four years. Putting abreak at this juncture may not be a good sign for the country." In fact, foreigninvestment has already slowed down to a trickle in the last few months, with investorspreferring to wait for the elections.

And it is not just the election process that has stalledliberalisation. Market forces like a plunging rupee, credit squeeze, reduction in forexinflow, depressed capital markets and inflationary pressures have forced the Government totake a defensive posture on its reforms agenda.

The Government’s balance sheet on economic reforms is clearly onthe debit side. On the credit side, however, it has succeeded on the delicensing front, inits attempt to rope in foreign investment and spur industrial growth, as well as capitalmarket, trade and fiscal reforms. But, its attempt to open up infrastructure to theprivate sector is open to question.

Success has also been achieved by restricting licensing only to somesensitive sectors, bringing down import tariffs from a peak of 300 per cent in 1991 toless than 50 per cent after the 1995-96 budget, pruning the negative import list andfacilitating import of raw materials and capital goods. The Government also lured $13.5billion of foreign investment. These factors have spurred industrial growth to more than10 per cent.

In contrast to 1991, when India was mortgaging its gold to stay afloat, foreignexchange reserves today stand at over $17 billion, though they are down from a high ofover $21 billion a little before the rupee began sliding against the dollar. Revenues haveshot up due to rationalisation of duties. Inflation has also been brought down from a highof 17 per cent in the pre-reform era to a shade over eight per cent currently. However,Panandikar and other economists contend that 17 per cent was a figure touched only for ashort period. Though GDP has been rising from 1.1 per cent in 1991-92, to 4 per cent in1992-93, 3.8 per cent in 1993-94 and 6.2 per cent in 1994-95, it will be a struggle tosustain the pace this year.

But the debit list is long and seemingly endless. First, the Governmenthas only skimmed the surface as far as the Narasimhan Committee recommendations on bankingsector reforms are concerned. Denatio-nalisation has been given an indecent burial thoughprivate sector banks have been allowed to operate and minimum lending rate deregulated.

Second, the Government was supposed to raise Rs 7,000 crore from PSUdivestment. It has mopped up a piffling Rs 169 crore. Moreover, restructuring of PSUs hasremained a distant dream.

Third, subsidies on fertiliser, food and petroleum products were notslashed or brought back in the face of even the slightest political opposition. Thesubsidies bill has exceeded the budget targets year after year.

Fourth, apart from some feeble attempts, the Government has not yet formulated a systemof Value Added Tax, a long-standing promise. Fifth, the bloated bureaucracy saw virtuallyno trimming of expenses.

Sixth, despite the introduction of trade and current accountconvertibility, the Government is still a long way away from making the rupee convertibleon the capital account, because the macroeconomic fundamentals are obviously not as goodas they are being made out to be.

Seventh, the Goswami Committee recommendations on sick industries have been given the short-shrift, though economists agree that this issue is extremely sensitive politically, making implementation difficult. And the National Renewal Fund, launched by the Government with much fanfare, has failed to live up to expectations even though the Government has spent upwards of Rs 1,600 crore on it. The fund, initially intended to retrain retrenched employees, has mostly dissipated its corpus on voluntary retirement schemes for public sector employees.

Finally, the root of all economic evils: the fiscal deficit. It continuesto run amock, giving the Government, industry and the people sleepless nights. Though thefigure is targeted at 5.5 per cent of GDP, economists expect it to exceed 6.2 per cent.

Says Kirit Parekh, director, Indira Gandhi Institute of DevelopmentResearch: "It is sad that the wisdom of the electorate is being underestimated bysuccessive governments. Most governments feel that the people will react adversely ifreforms are undertaken before elections, forgetting that the Indian electorate has showntremendous judiciousness in giving its verdict."

Perhaps this is why reforms havebeen put on hold, remarks Parekh. But, he adds, "the Government fails to realise thatthe public may show its wisdom in voting for the right decisions and not necessarily thepopulist ones."

Now for some prophetic projections, courtesy Man-mohan Singh: "By theyear 2000 I expect the Indian economy to be at par with Germany’s, by 2020 I expectIndia to be the world’s fourth largest economy. We shall make the futurehappen." Not by inaction Mr Finance Minister.