The author is former director general, National Council for Applied Economic Research and chairman, Central Electricity Regulatory Commission [email protected]
For over ten years, India has talked of economic reforms. The reforms have been erratic, in spasms, with no overall coherent and cohesive programme and no consensus among any of the different political or other interest groups on what they should be. But we are all reformers now. Even a hard-line communist of the old school in West Bengal or Kerala cannot any longer be against reforms. He can be against specific policies but has to be for reforming the system of policies and procedures that hamstring growth and equity.
But in the last two years of Sonia Gandhi’s leadership of the Congress as well as the rise of new youthful leadership in the Bharatiya Janata Party and the loud extremism of some, along with the realities of electoral politics, a new type of consensus seems to be developing about reforms. This consensus is different from the “Washington Consensus” promoted by the International Monetary Fund and the World Bank, which was the template accepted by Indian liberalizers and pro-reformers for much of the Nineties. This emerging consensus is likely to have more general political acceptability and implementation.
The economic scenario today is dramatically different from that in the beginning of the Eighties and Nine- ties. Growth has averaged 5.7 per cent over the two decades and almost never fallen below 5 per cent, even with the worst drought in decades, for two successive years. Services dominate in the gross domestic product. Non-agricultural income is the important source of rural income growth. Consumer product purchases are, with housing, the real drivers of industrial and economic growth. There is pressure on industry to reduce costs, improve quality and productivity. Restructuring is beginning to affect even small units in terms of employing more professionally skilled people and accessing more modern technologies.
The banking system is flush with funds, focussed on reducing its non-performing assets and its spreads between lending and deposit rates. The legal environment is now favourable to improving bank performance. Lenders have discovered the greater safety in lending to small borrowers like domestic consumers, farmers, small borrowers’ organizations and so on, and this is now driving consumption and house-construction expenditures as well as private agricultural investments. The government is no longer so obsessed with “macro-economic stability” as it was, and is, willing to leave deficits high, but to spend its way out of economic downturns.
Public investment in roads and other infrastructure is again on the rise. This has had its positive impact on core industries like cement, steel, aluminum, construction, heavy equipment and so on. Indian business has discovered export to be more consistently profitable than domestic sales. Exports are rising and seem set to continue growing. At the same time, the recent discoveries of gas in Andhra Pradesh, the new liquid natural gas terminals on the west coast, private entry into oil exploration, refining and distribution as also soon into pipeline construction, growing use of gas, plans for a network of pipelines and oil and gas storage, and dismantling of the administered price mechanism for petroleum products, are making India into a significant factor in the world petroleum, oil and lubricants scene. Coal is on the verge of dramatic changes — private entries, productivity improvements, independent regulation and so on.
Foreign investment has had most restraints removed, though restricted in areas like buying control of public enterprises, retail trade or the media. The rapid expansion of foreign exchange reserves has brought us to the brink of capital account convertibility. The growing strength of the rupee is inducing improvement in domestic efficiencies. The tax system has changed considerably in slabs, rates and complexity. It is unlikely to see further radical transformations except to enable easier movement of goods across states and improve collections. Serious attempts to enlarge the reach of taxation have substantially enlarged the number of taxpayers and items subject to taxes.
Disinvestment has progressed in the last two years, and state governments seem determined to move it faster. Urbanization is growing rapidly while the reach of cable television is homogenizing the Indian consumer, whether urban or rural. The southern states have shown double-digit growth and are outstripping the rest.
It is in this context that we must view the emerging new consensus template on economic policies in all political parties. Except for founding reformers like Manmohan Singh and P. Chidambaram, there seem to be few in the politico-intellectual class who are bothered about macro-economic stability, the size of government deficits or expenditures or the bureaucracy. Perhaps they are lulled by the low inflation rates of the last few years, the result of unprecedented foodgrains stocks in government godowns, declining prices of manufactured goods, falling interest rates, and most importantly, a sluggish economy.
But the external situation for India is rosy, with large and rising foreign exchange reserves, a strong rupee, growing foreign investment, rising exports (but not so large as to make us too vulnerable to a declining world economy as it is in southeast Asian countries), improving competitiveness and a vast and growing domestic market. These factors make it likely that the government’s deficits will not dominate the front pages as it did in the first half of the Nineties and to a lesser extent, later.
While the growth of government revenue is a cause for concern, disinvestment in public enterprises is now a less accepted answer. There seems to be a general consensus (unspoken except by silent opposition to many disinvestments by the Congress) that a large public sector must remain. This is because of the immense power and privileges that it gives the political and administrative classes, and possibly because it is perceived to enable the government to exert greater influence on the private sector. The obsession with protecting small-scale units will remain, but the organized sector will have a role in small scale.
In areas of infrastructure or mass consumption like electricity, fertilizer, kerosene and passenger transport, the public sector enables government to use cross-subsidies and subsidies to look after the concerns of the poor and special interests like farmers. We may see some improvement in management of these enterprises, and more shareholders, but government control is unlikely to come down after the current disinvestment activity. The reforms in infrastructure that began hesitantly in the Nineties are likely to stop there.
We may see privatization of electricity distribution, but not of generation and transmission, though there may be diluted government shareholding. Independent regulation has had its day and we will see a considerable reduction in the role and powers of regulators. They are likely in future to be part of the ministry concerned as in the case of Securities and Exchange Board of India and the Reserve Bank. Explicit government policy formulations will limit the initiatives of regulators.
Viability of electricity distribution will improve because of better metering, control over thefts, more professional management, but without ownership changing hands in many states. This will be equally so with water and roads, though road transport corporations may well face more competition from private operators. Despite government ownership and control, competition from private operators will give greater muscle to consumers.
There will not be much growth in the government’s investment in agriculture. Rising incomes from non-agricultural activity will accelerate. The effects of the World Trade Organization on imports and exports will force changes in cropping patterns from foodgrains and oilseeds to other crops. The old prediction about India having the potential to be the granary of the world may begin to come true. But India will be the biggest anti-dumping litigant before WTO as it tries to maintain protection for vulnerable industries.
We will see a growth in protective non-tariff barriers. More foreign companies will buy production capacities. And more Indian companies will go overseas with production units integrated with domestic production and meant equally for domestic markets. With more competition, private entry into almost all areas, greater consumer choice, and rising foreign ownership, government procedures and red-tape might be moderated.
The outlines of a consensus economic policy are emerging. They may not fit conventional wisdom as to what is needed. But a consensus may enable more rapid development. Even with a different reforms template we must welcome any consensus that keeps politics out of economics.