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DISCREDITING REFORMS

Ultimately, the argument between socialism and reforms, between the command economy and the free market, turns on performance. The Economic Survey, 2002-03, shows that India has weathered yet another year of drearily disappointing economic performance. The estimated rate of growth of the gross domestic product in 2002-03 is 4.4. per cent, exactly as bad as in 2000-01, the worst since reforms were launched in 1991-92, way below the 5.8 per cent average achieved in the last decade of socialism (1980-90), and almost half the minimum growth required to abolish poverty. In eleven years of reforms, our economy has grown at an average of 5.9 per cent. This is all of 0.1 per cent higher than the annual average in the last decade of socialism. Was it for this that we launched ourselves into the Brave New World of economic reforms'

The Soviet Union collapsed the year Manmohan Singh introduced reforms. This was supposed to signal the end of the road for both authoritarian regimes and command economies. Henceforth, the world was to move forward to a democratic model for the polity and markets as the engine of growth for the economy. This was the “End of History”! The irony is that the economy of authoritarian China has reformed successfully, while the economy of democratic India has hardly responded to the reforms process. Is the right model of growth, then, the same for a developing democracy as for a command polity'

The proof of the Indian chapati lies in the eating: reforms imparted an initial spurt to growth in the first quinquennium of reform, 1992 to 1997. In the terminal year of this five-year period, 1996-97, the growth rate had risen to 7.8 per cent, not quite a “miracle” growth rate, but a sensible increase of a good 2 per cent over the annual average growth rate of the Eighties. Moreover, in each successive year between 1992 and 1997, the growth rate every year was higher than the previous year’s, not spectacularly higher but steadily higher: 5.1 per cent to 6.5 per cent; then 7.3 per cent in two successive years; rising to a crescendo of 7.8 per cent in 1996-97. We, therefore, came to believe that economic reforms lead both to higher growth and a more stable growth path.

The next six years have belied both hopes. The annual average growth rate over the period 1997-2003 has dropped to under 6 per cent from the 1996-97 high of nearly 8 per cent. Moreover, the growth path has been leached of stability. Where every year of the first quinquennium saw growth rates rising steadily, if modestly, the last six years have been marked by wild fluctuation. In 1997-98, following P. Chidambaram’s “miracle” budget — hailed by every commentator I know with the glorious exception of “Mani-Talk” in Sunday magazine — the growth rate collapsed from 7.8 per cent to 4.8 per cent. This is the largest single-year decline India has seen in two decades. The next year, 1998-99, growth recovered to 6.5 per cent, only to fall the following year, 1999-2000, to just above 6 per cent. There then followed the disastrous inaugural year of the millennium, 2000-01. Growth fell further to a mere 4.4 per cent. The pendulum then swung up to 5.6 per cent in 2001-02, only to swing down again this last year to the previous low of 4.4 per cent, the lowest since reforms began, the lowest since the terrible drought of 1987-88.

Thus, the reforms model has taken us not forward but backward. The growth rate in 2002-03 was nearly 1.5 per cent below the average of the last decade of socialism. The growth rate for the last six years is lower than in 1980-90. Most depressing of all, in the last six years, there has been no change in the pattern of up-and-down fluctuations which reforms were supposed to iron out. Moreover, in contrast to the socialism in the Eighties which showed dramatic recovery from a bad year to a better one, in the last six years under reforms, collapse has been dramatic but recovery only modest.

Thus, when the worst drought since Independence brought down the growth rate in 1987-88 to just 3.8 per cent, the measures taken to resuscitate the economy were so effective that the following year, 1988-89, saw the economy record the highest ever growth rate in the history of the Indian economy — a miracle 10.5 per cent. The next two years were also so impressive that, in the last three years of the last decade of socialism, India’s three-year average, for the first time ever, pierced the 7 per cent barrier. The annual average of the last three years of the first quinquennium of reforms — that is, the three years which mark the zenith of reforms — was a mere 0.3 per cent more than in the three years prior to Iraq’s invasion of Kuwait in August 1990. It was Iraq’s invasion of Kuwait which triggered the Indian economic collapse of 1990-91. In turn, the economic collapse triggered the economic reforms initiated the following financial year. Now, on the eve of the second Gulf War, whose consequences for our economy might be quite as severe as the first, our “reformed” economy stagnates way below the socialist rate of growth. Is it for this that we wrenched the econo- my from the anchor of socialism to navigate the uncharted waters of market reform'

The two real achievements of reforms — massive foreign exchange receipts and burgeoning food stocks — both mock us. No more than a small fraction of our mountain of foreign exchange constitutes foreign direct investment or even foreign portfolio investment, let alone net foreign trade earnings. The vast bulk of this treasure trove of foreign exchange is made up of hot money deposits by non-resident Indians who receive huge premium interest rates, 10 per cent or higher than their savings would earn in bank accounts in the West. Much of this would be withdrawn within months, if not moments, were there to be a collapse of confidence as occurred in 1990-91 during the run-up from the occupation of Kuwait to Bush War I. If the collapse takes place in months rather than moments, that is only because India thus far has refused to subscribe to that key requirement of the reforms doctrine which took south-east Asia to disaster: capital account convertibility.

As for food stocks, millions of tonnes of grain are rotting in government warehouses because the philosophy of reforms has dictated that food subsidies be controlled immediately and phased out as soon as possible. To control the food subsidy, prices of wheat and rice in government ration shops have been raised so high to meet the “economic cost” of procurement that the really poor have been forced to curtail their consumption.

This has led to the obscene spectacle of warehouses spilling over with grains while malnutrition levels increase and even starvation deaths are reported. To the applause of the pink papers and our associations of trade and commerce, our reform-minded government says the answer to mounting food stocks is to cut down foodgrains production, not decrease foodgrain prices. “As for the poor, let them eat cake”!

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