The Telegraph
Since 1st March, 1999
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- The World Bank report emphasizes reforms and better governance

Time was when the government of India used to await anxiously the reports of the experts of the World Bank. If they so much as criticized the government of India’s economic policies, it was certain that the inevitable plea for more aid from the bank would fall on deaf ears. There has been a welcome change as a result of our booming foreign exchange reserves and our diminishing need for such aid. All the same, what the World Bank says has an undeniable influence on the markets, which are important in deciding the flow of capital resources into India. We need the imprimatur of the bank’s approval and its criticism, however well-deserved, is taken seriously. No wonder the latest report of the bank on “India: sustaining reform, reducing poverty”, with its dose of criticism, has provoked strong reactions from India’s leading mandarins, mainly because it questions some of our policies and casts doubts on our ability to achieve our targets of growth in the tenth plan.

It must, however, be conceded that the World Bank’s report is, on the whole, generous in its compliments to India’s achievements. It states clearly that India has continued to make good progress in increasing incomes and improving living standards over the past decade. It narrates how, after the setback associated with the balance of payments crisis of 1991, economic growth has picked up, and income poverty has continued to decline and many social indicators, particularly literacy, have continued to improve. Though the pace of reforms has slowed since the Nineties, cumulative changes have so far been substantial.

Also noted are the improvement in capital markets and a better investment climate. The report regrets, however, that progress achieved has been uneven, though steady. Various indicators of human development have improved, but some have not. The report notes the increased susceptibility to HIV/AIDS. It makes an important point about rising unemployment, which, though low by international standards, has increased. Further, an uneven spread of growth has resulted in some regions of India getting poorer compared to others.

The report, however, notes that various social and economic indicators have shown improvement. Poverty incidence has, for instance, come down from 44.5 per cent in the Eighties to 26 per cent in 2000. Life expectancy at birth has increased from 56 in the Eighties to 61 in 2000. Literacy has increased from 44 per cent to 65 per cent in the same period. Infant mortality in deaths per 100,000 is still around 68, although it has fallen from 115 in the Eighties.

The report has, however, taken objection to the deterioration in the fiscal management of the economy. Fiscal deficit for the country as a whole has increased from 8.1 per cent in the Eighties to 10.4 per cent in the latest period. The report points out that such a high level of fiscal deficit is unsustainable, given the already high level of government debt, which stands at 85 per cent of the gross domestic product, compared to 56 per cent in March 1986. The high overhang of debt reduces the feasibility of continuing to raise borrowed funds to manage the fiscal deficit. Particularly disconcerting is the fact that primary deficit — the difference between gross deficit and interest payments — is more than 3 per cent of GDP and rising. The bank stresses that governments both at the Centre and the states have to take steps to bring down the fiscal deficit.

The bank’s note of caution is welcome as there is a tendency to rest on our oars, mainly because of our healthy external position. The warning is a necessary corrective to the complacency that has set in as India inches towards the century mark on forex reserves. Granted, the bank concedes that the healthy forex position and the willingness of the banking system to help out governments with their borrowing needs guarantee that India will not face the type of crisis that countries in Latin America with a similar fiscal situation had to contend with.

It is, however, necessary to note the alarm signals raised by the bank, especially when it points out that India’s fiscal indicators are worse than those obtaining in some of the crisis countries in Latin America. But, crisis has not befallen India in the same degree — thanks to the robust forex reserves, and limited capital convertibility — and above all, a low resort to short-term external borrowing. The bank’s message is, however, mixed. It is not clear whether it reads the present strengths of India as enabling a higher resort to fiscal stimulus. Obviously, its ideology is against such an approach.

The World Bank agrees that India needs to grow faster. It endorses the goals laid down in the tenth plan. A telling statistic it brings out is that India begins the 21st century with a per capita income of about one-half that of China and Indonesia — countries which were at the same level of development as India in the Seventies. This emphasizes the need for India to catch up with the rest of the developing world, leave alone the richer countries.

The need to raise investment levels is obvious if we have to grow faster. How are we to achieve this' The report notes that India’s investment rate in the public sector has shrunk in the decades since the Eighties, although partly made up by private investment. The agricultural sector has been one of those hit by this decline in public investment, which has particularly reduced the flow of resources into irrigation and rural road infrastructure.

The World Bank report emphasizes that high fiscal deficit is itself responsible for the Centre and states not being able to spare enough resources for investment, as they are absorbed by subsidies and losses of public sector units. The message is clear. The governments have to reconsider their priorities, collect more taxes, and spend less on subsidies and on establishment. All this is, of course, desirable, but with the elections around the corner, will they be implemented'

The report notes the impact of the poll cycle on the economic management policies of the country. But, that dependence is a part of the democratic process and cannot be avoided. Even the United States of America is not immune to the adverse impact of the poll cycle on the fiscal situation.

Turning to the positive suggestions of the report, we should note the emphasis it lays on the improvement of governance and reforms in the power sector. These have been on the anvil for some time, but the crux of the issue is how to raise user charges and stem the theft of power. All talk of regulatory reform is to be seen against the political costs of implementation of the needed reforms. A larger consensus among political parties is a prerequisite for success of reforms. The report lays emphasis on the need for legal reform in the financial sector. Some steps have already been taken in this regard. But, they need to be followed through lest the financial sector prove a burden on the overall economy.

The report has performed a useful service by highlighting the need for economic reforms and improvement in governance. It would be incorrect to dismiss the report as irrelevant or unjustified. Heeding its tidings may spell the difference between success and failure in India’s growth pace. We should listen to the message of the World Bank report, however unpalatable it may sound.

The bank is, however, not clear in its prescriptions as to how to attain the higher growth targets. Should we depend on indigenous resources or turn to the Chinese model of higher foreign direct investment' How should we deal with the problem of abundant liquidity in the financial system and unfilled investment demands of infrastructure' Infrastructure is rightly highlighted as the weak spot in India’s economic performance. If need be, we should be able to organize a marriage of India’s abundant liquidity in the financial sector with the needs of infrastructure finance through creation of special purpose vehicles, which can be public-private partnerships.

Care should however, be taken to see that such partnerships do not sink under the burden of debt. They should be enabled to raise user charges as a part of the arrangements. On this will depend our chance of avoiding future Dabhols and creating a robust, vibrant infrastructure, which alone is the key to the ambitious goals of growth laid down in the tenth plan.

The bank has performed a professional job, true to its dharma. How we use it to refashion our policies to reach our goals depends on our wisdom and discretion. It would be folly to either decry the report wholly or adopt its prescriptions without due discrimination. The World Bank is, after all, today a storehouse of development experience, both good and bad. It is up to us to pick and choose from its abundant counsel based on its experience. There is no point in getting outraged by tidbits of the report. We should have long ago outgrown the stage of being frightened by the Bretton Woods twins. But, it is wise to listen to their cautionary note.

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