The Telegraph
Since 1st March, 1999
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- Urban India need not overreact: the economy, like life, will go on

This is the worst of times to write a column. We know that the sensitive index has taken a continuous battering and there is an overwhelming impression of gloom and doom. Especially if you speak to urban India or watch or read media that reflects urban India’s concerns, you find that the sense of India Shining has dissipated. India Shining or feel good in its general sense, not in the specific sense of the National Democratic Alliance campaigns. What has changed' The 8.5 per cent plus gross domestic product growth of 2003-04 rode on the low 2002-03 base and 2004-05 couldn’t possibly have replicated that shining.

However, industry is recovering, investment is picking up, credit off-take has improved and the meteorological department predicts a normal monsoon, at least in its preliminary assessment. Every analyst expects GDP growth in 2004-05 to be between 6.5 and 7 per cent, perhaps even marginally higher, a range endorsed by the Reserve Bank of India in its annual policy statement. This is not sufficient for gloom and doom. Yes, inflation may be inching up, courtesy capital inflows and high global oil prices. But on an annualized basis, we are still talking about an inflation rate not exceeding 5.5 per cent. Not sufficient for gloom and doom again.

The Indian economy has been doing well. How much of that is hype and how much of it is real' If it is real and long-term, as I believe it to be, the macro fundamentals haven’t changed because of the electoral results. This is despite the warts of backwardness and deprivation, typified in women losing their lives over free saris and farmers committing suicide in the Davos-friendly state of Andhra Pradesh.

However, in the exuberant rise of the Sensex preceding the elections, there was an element of hype since that exuberance was disproportionate to what macro fundamentals warranted. Sooner or later, there would have been a correction, retail investors would have got their fingers burnt and there would have been allegations of scams, regulatory failure and bull cartels.

Whether disinvestments occur through the disinvestment ministry or the disinvestment commission shouldn’t really matter. Consequently, are foreign institutional investors so irrational and myopic that remarks by a few left leaders persuade them to exit India en masse, like a herd of lemmings' They probably are. And just as the ballistic rise was over-enthusiastic, so is the present meltdown, possible bear cartels notwithstanding. And the gloom and doom sentiment in urban India mirrors this myopia. One could have understood price falls in public sector unit stocks, especially of the oil, gas and bank variety. However, the general sense of gloom and doom transcends this.

What are we so gloomy and doomy about' Reforms will go for a six, especially if you factor in the state results in Andhra Pradesh and Karnataka. Arguably, the state governments in Madhya Pradesh, Chhattisgarh and Rajasthan were also reformist ones. Because there are reforms and reforms. The composition varies, depending on the nature of the government. There wasn’t such a sense of despondency when those results came in. So is it the case that urban India lulled itself into a sense of complacency, expecting the NDA to first return with a landslide' And then, when the exit poll results began to trickle in, expecting it to return not with a landslide, but return nonetheless. And industry committed the blunder of putting its money where its mouth was, by funding the NDA. Now that those calculations have gone haywire, and life has become uncertain, despondency sets in.

Had the left been part of the government, life would have been simpler. Support from the outside is inherently unstable. However, what concrete policy changes do we visualize between the incoming government and the preceding NDA' Remember that the NDA also had its share of the left, there being little difference in economic policy between the Swadeshi Jagran Manch and the left. Remember also, that for the limited while it lasted, the United Front government didn’t have such a bad track record of reforms.

One can draw up a detailed reform agenda. Having done that, one will notice that most items included are state government subjects. There is little the Centre can do about pushing such reforms. It is wonderful to plug in big bang-type reform announcements in budget speeches. Such as revamping the Industrial Disputes Act. Industry chambers stand up and applaud. But when it comes to the crunch, little happens. Labour market reforms are expected to be a casualty courtesy the United Progressive Alliance. Labour market reforms are much more than the IDA, although the IDA is visible and invariably flagged by foreign investors. Since the application of the IDA is at best restricted to a limited section of the workforce (it doesn’t even apply to the entire organized sector), how important is it as a constraint' And how much success has the NDA had with revamping the IDA or pushing for labour market reforms in general' Consequently, flagging labour market reforms as a major point of deviation is neither here nor there.

Central government reforms are fundamentally about revenue and expenditure. In the short-run, expenditure is exogenously determined, although universal subsidies (as the left may well want), jack up expenditure. However, it is doubtful that the common minimum programme will endorse universal subsidies in the two areas that matter most for the Central government — food and petroleum products. How much success has the NDA had in curbing expenditure' And reforming it in the long-term sense' The reports of the expenditure reforms commission have all but disappeared from the public domain.

Certainly, as the finance minister, Jaswant Singh, ceased to mention the ERC. Constituting the ERC was a mistake committed by Yashwant Sinha. We can therefore turn to tax revenue and implementation of the recommendations of the two Kelkar task forces. Certainly, on value added tax, it was the Bharatiya Janata Party that was reluctant, even when state governments wanted it. The trader support base couldn’t be antagonized. It is my submission that on removing exemptions, introducing a full-fledged VAT and integrating service sector taxation into a VAT framework, the UPA stands a better chance of success than the NDA. And enhanced tax revenue provides the cushion for expanding public expenditure in health, education, drinking and irrigation water and the rural sector in general.

One obvious message of the elections is that the rural sector has generally been bypassed in the growth process. If income and consumption growth are now broad-based through rural reforms and increased public expenditure, what is so wrong' It is also my submission that prospects of increasing efficiency of public expenditure and improving efficiency and accountability through decentralization and other means, are brighter under the UPA rather than the NDA.

In that sense, the composition of reforms shifts and there is nothing inherently gloomy or doomy about that. What we have left is privatization. Of profit-making enterprises through strategic sales. And sales of majority shares. That will almost certainly be postponed. Instead, we will possibly have creepy disinvestments (not privatization). Minority sales through public offers. Indeed, that will be a point of departure with reforms as practised by the NDA. At the Central government level.

However, privatization of loss-making public sector units at the state-level is just as important, if not more. After all, most physical and social sector spending occurs at the level of the states. And because it is less controversial and less visible, state-level privatization has a tendency to go on. I suspect that urban India is therefore over-reacting. Life goes on. So does the economy. In a general sense, reforms are on auto-pilot and irreversible.

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