The author is former governor, Reserve Bank of India
Transparency in the budget process has been the main motive force behind the mid-year review released by the government of India two weeks back. It has unfortunately been at the receiving end of much criticism for not disclosing budget intentions. But, that was not the objective of the exercise. It attempted to lay out a roadmap of the economy, but not to indicate the precise pathways through which the economy is to be steered. The transparency of the budget process requires that the economic fundamentals be reviewed and the policy options discussed. It is then the privilege of the finance minister to identify the optimal policy frame. The review should not be blamed for not being what it did not claim to be.
The mid-year review consciously focusses on the fiscal state of the government, particularly of the Centre. Overall, however, the review is upbeat in its assessment of the growth prospects of the economy. Taking into account the behaviour of the monsoons and the upturn in the industrial sector, the review settles for an estimate of 5.5 per cent for the rate of growth in the current year — the same as the estimate of the governor of the Reserve Bank of India.
The mid-year review records the positive features of economic performance — especially on the external front. Exports showed an increase of 13.5 per cent in dollar terms in 2001-02, which had a small but impressive current account surplus of 0.3 per cent of gross domestic product. The review rightly credits this improvement to a combination of factors, including softening of oil prices and improvement in remittances, notwithstanding the difficult US scenario. The softening of global oil prices has played a role in the sustained improvement in current account. The first quarter of 2002-03 represented the third consecutive quarter with a current account surplus. The combination of current account surplus and capital inflows from abroad has led to an embarrassment of riches — the rise in foreign exchange reserves of India.
There is a dilemma this accumulation poses. India invests its accumulated reserves in shoring up the huge current account deficit of the richest country in the world, the United States of America, investing them in low-interest-yielding securities of that country. Accumulation of reserves in pursuit of security is needed in an uncertain global environment.
The focus of the mid-year review is obviously the fiscal question. While the review claims an improvement in fiscal performance in the current year, it notes that this could be derailed by “unanticipated weakening of the growth momentum” with its impact on revenue collections. The emerging drought situation could also increase pressures for higher food subsidies as well as for larger relief outlays, besides increased expenditure on subsidies for LPG and kerosene. These signs do not bode well for fiscal health.
The mid-year review takes note of the resilience shown by the economy in the face of a succession of droughts. The existence of abundant food stocks and the food security system has insulated the economy from higher food prices, which used to be a feature of earlier severe droughts. Resilience, of course, comes at a price — the price represented by the cost of maintaining high food stocks. While the review touches on the distortions caused by the minimum support price system to which we owe the success of the food security system, it refrains from exploring the politically difficult alternatives of rationalizing the system, as recommended by the Abhijit Sen committee on long-term food policy.
Turning to the issue of fiscal deficit, the review exposes some of the difficult political choices. Revenue enhancement does remain the main challenge, particularly in view of the industrial slowdown. In spite of this, the review hopes to bridge the fiscal deficit numbers. Part of the hope rests on the speeding up of disinvestment. The review comments on the confusion in respect of disinvestment, stating that there is need for underpinning the process of disinvestment in a consensus, which would guarantee no rollback of such reforms, a nuanced reference to the increasing scepticism about disinvestment policy.
The authors of the review, however, stress that their preference for disinvestment as a reform is based more on the possibility of unlocking the productive potential of current public sector unit investments, rather than from the generation of revenue. This reflects the pervasive influence of the Washington Consensus, which perceives that state enterprises are necessarily inefficient — notwithstanding the fact that some of the PSUs targeted for disinvestment have been sitting on substantial cash reserves.
It is ironic that even while recommending wholesale divestment of PSUs for unlocking productive potential, the same government shows an almost undue haste in forcing the PSUs to declare large dividends. Obviously, they have been highly profitable. “Public” need not necessarily mean “inefficient”. That the thousands of crores of PSU dividends are expected to contribute to the fisc demonstrate the fallacy of PSU inefficiency. However, disinvestment is needed to provide the resources for planned fresh investment. Shadow-boxing on the details of divestment has to end. The prime minister has to ask opponents of divestment to come up with rational alternatives for raising resources — to finance the larger investments needed by the country.
The review admits that more and more investment is the need of the economy. Even the recently noted upturn in the industrial sector, particularly steel and cement, is owing to the increased public investment and boost given to housing. Even the management of the fiscal deficit as a ratio of GDP depends crucially on achieving a higher GDP and higher government revenues, which, in turn, are driven by economic growth. Investment in the public domain also increases demand and indirectly fosters private sector investment. But, the road to higher private investment is riddled with problems, the most important of them being the poor availability of long-term credit. The review touches on the issue when it refers briefly to the slowdown in disbursements by the term-lending institutions, but hints at no solution.
The review is frank when it admits the government’s failure in implementing the expenditure reforms commission’s recommendations with regard to excess posts in the government. The ERC had recommended cutting down 23,416 posts. The government has been able to cut down only 7,921 posts. An ailing fisc cannot indulge in the luxury of keeping too many people on its rolls. The importance of cutting establishment costs cannot be denied.
Overall, the review does a workmanlike job of analyzing the current situation and its threats, even as it highlights positive accomplishments on the inflation front and on balance of payments. It is unfairly criticized for not disclosing budget options — the same dilemma as the annual economic review. If the authors of the review have been restrained in their advocacy of tough remedies, they are only to be congratulated for their prudence. Even before the ink was dry on the review, we had the finance secretary, S. Narayan, assuring the media that action on subsidies and interest rates was not on the cards. If the reports are true, we have an instance of a rollback even before the budget is presented.
The political establishment needs to be sensitized to the crucial choices before it. Above all, one hopes that the enlightened elements of the public take the message of the review seriously and lend its support to the necessarily tough measures Jaswant Singh has to take to balance the budget and complete the reform process. Such public debate and consultation will alone serve the purpose behind the review. There is no point in quarrelling with the bitter message that the report has given. The powers that be need to heed the adage, “Don’t shoot the messenger of evil tidings.”