Getting away from decisive inaction

ASHOAK UPADHYAY
Growth and Governance
Business Line, 17 March

For the first time in its present tenure, the dream team led by Dr Manmohan Singh has the chance for a series of reforms of the most significant kind; ones always tip-toed around. But first it has to take stock of the underside of the current growth more ruthlessly than it has.

It is tempting to ask if the Congress leadership and the Government would have gone into a huddle over inflation and sluggish agriculture had the party won the recent Assembly elections in Punjab and Uttarakhand.
As policymakers of the best kind the country has had in recent times and the early advocates of reforms in the 1990s, both the Prime Minister, Dr Manmohan Singh, and the Finance Minister, Mr P. Chidambaram, are aware that a laggard agriculture, with a negative to 2 per cent growth coinciding with the term of office of the United Progressive Alliance Government, and the onslaught of inflation ought to be dealt with in the realm of economics; that the farm sector has trailed far behind as a result of systematic neglect, despite every Budget's homage through allocations, as successive governments toyed with the wonders of the telecom revolution and its easy-to-fit reforms in an economy devoid of any vested interests apart from MTNL. But they are politicians first and they are the leading lights of the party in power kept there by a coalition rife with tensions.

In the aftermath of the Assembly election defeats, the Congress president, Ms Sonia Gandhi, set the tone for the Prime Minister and the Finance Minister's subsequent policy rhetoric on agriculture and inflation, the constant reiteration of "inclusive growth" so as to "make a dent on poverty and unemployment... "

The language has the comforting resonance of a forty-year tradition of Congress rhetoric that seemed appropriate for the policies of "democratic socialism" but which has now become a faint echo of itself, a self-parody.

Presiding over or chief guest?

The UPA Government has presided over the fastest growth period in decades with almost every indicator breaking one record after another. It has not guided that growth through specific reforms or policies meant to shape the destinies of either the financial system or the organised sector unless you consider the relatively easy money policy. When it came to power mid-2004 the economy was already climbing at the rate of 7 per cent; interest rates were already at historic lows. Mr Chidambaram's first Budget acknowledged the reality of growth but failed to gauge its depth; or, which is more likely, refused to accept its potential. In July 2004, admitting "fundamentals were strong," the Finance Minister pronounced the outlook for the year as "benign." The accent was on the promises: Growth with stability and equity. And a negative legacy: Agriculture and industry with a modest aim of 7-8 per cent growth.

The second Budget, in February 2005, reflected the recognition that the UPA Government was presiding over an economy that had hit the deck running. The Government, he told Parliament, had inherited an economy that "we now know" had grown in 2003-04 at 8.5 per cent. The Finance Minister was, however, dismissive; he passed off his immediate predecessor as "a very lucky man" and focused on the negative legacy: A high inflation rate, dip in business confidence evident in a drop in investment and current account surplus. The forecast fiscal 2005, therefore, was a modest 6.9 per cent.

It was in February 2006 that the "reasons to celebrate" were enunciated; all through the earlier months data showed impressive GDP growth, beyond the modest expectations of 6.9 set by the CSO for the year. With an annualised 7.5 per cent GDP growth, the Government was taking the bow for having presided over an inflation-free economy that had carved its own trajectory back in 2003-04. The Government was simply the chief guest at a celebration that seemed never-ending.

For what did the Government do in concrete terms to get the economy to swing? Most of the reforms had already been put in place, many by those in power during the 1990s and some by those now in the Opposition.

After an initial hesitation, as the new millennium began, the economy started to respond to the changes with great alacrity. The UPA Government, specifically those in the key economic ministries of Finance, Commerce and the Prime Minister, not to mention the Planning Commission and the Reserve Bank of India, added one vital ingredient to the stew in the pot — an exuberance of expectations.

The key economic ministries and to an extent the Prime Minister himself adopted an aggressive language of growth, of wealth creation; the distributive aspects of that growth, so long the self-anointed mission of the party, was reserved for Budget speeches — till the Assembly elections brought the UPA face-to-face with the discrepancies in its discourse as heard by a nation cleft more than ever by wealth and the means ff acquiring it.

More than halfway through its term the UPA Government is still infatuated with its power to transmit positive vibrations. Till early this year it seemed to be in sync with the growth agents; every quarter the indices showed the economy cresting one wave after another; exports outpacing themselves, manufacturing excelling every three months, services and IT guiding India onto the world's centre-stage, forex reserves climbing unbelievably encouraging the RBI to get more liberal in the use of dollars by Indian companies and individuals, underwriting as it were, the capacity of Indian corporations for global acquisitions.

The transmission of aggressive growth signals is by no means an insignificant task. It helped transform global perceptions immensely. Five years ago, the tardy disinvestment and churlish coalition partners were considered deterrents to growth; today, one is a challenge and the other irrelevant for that surging self-confidence the organised economy transmits.

The Inflation Factor

In January this year inflation crossed the 6 per cent mark and, for the first time, the Budget speech reflected a nagging worry. But the rise in prices was evident all through the previous eight months, climbing inexorably from around four per cent despite monetary and fiscal measures to ease "supply constraints".

While the RBI measures to squeeze liquidity were mild, they may prove effective in ways that will harm credit offtake by those that need it most — the small enterprise and the homeless. The fiscal measures — chiefly, curbs on exports and freer imports — have so far failed to arrest the price rise though after repeated requests, cement and steel producers have agreed to maintain prices.

At the same time, neither the latest Budget nor the ones that preceded it have given any indication of how the moribund sectors will respond to all the largesse showered on them. The Budget for fiscal 2008 is not exceptional in its concern for the aam admi. Every provision in it was contained in the first one of 2004-05; all that the Finance Minister has done is to top up the allocations every year. But the problem is not money anymore; the thicket of regulations, multiple and arcane legislation, an illiquid land market and the unwillingness of the policymaker to cut through it are the main deterrent to growth.

Contracting expectations

Two years from general elections, and with some States due for polls this year and the next, the temptation to throw good money after bad on the schemes meant to generate inclusive growth may be difficult to resist. But resist the government must. For the first time in its present tenure, the dream team led by Dr Singh has the chance for a series of reforms of the most significant kind; ones always tip-toed around. But first it has to take stock of the underside of the current growth more ruthlessly than it has.

Both the infrastructure and farm sectors are in crisis; the country has lost the food security it had assiduously built up over the years, the cities are in a mess and things will get worse under the present pattern of growth that henceforth will be inflation-led.

Contracting its growth expectations is a good place to start. Preparing for a scaled growth of, say, seven per cent will not harm the poor that have seen little of it anyway. Putting in place an enabling environment for the two backward sectors will encourage investments — and create jobs and incomes — and make budgeted schemes more meaningful. Right now, they are just hollow intentions.