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| Shankar Acharya: Stability, security and stasis? | |
| Political exigencies require economic management to keep growth from dropping below 5% and to recover to 7% plus soon | | Shankar Acharya / May 28, 2009, 0:30 IST | |
Less than a fortnight ago, when the election results were declared, the country was swept up in a flood of relief bordering on euphoria. The likely prospects of a hung Parliament and rampant horse-trading had been avoided. So had the scary possibility of a government led by an unwieldy, inexperienced and possibly rapacious third (or fourth) front. Instead the Indian electorate confounded the vast majority of pundits and pollsters and returned a greatly strengthened UPA alliance to power, with Congress winning an astonishingly high 206 seats and most regionally-based upstarts (including the Left and BSP) cut firmly down to size. Nor did BJP’s warmed-up Hindutva campaign, with its divisive overtones, win favour with voters; the party’s seat strength was reduced by 16 per cent and the NDA trailed the UPA by over a hundred seats in the final outcome, despite the JDU’s deservedly good performance in Bihar.
Quite clearly it was a vote for stability and security and endorsement of the Congress troika of Sonia, Manmohan and Rahul. Was it also a vote for strong economic reforms? The stock markets seemed to think so as the Sensex soared above 14,000 on the Monday (18th) following the electoral results and hit the upper circuit-breakers for the first time ever. Newspapers and TV channels gushed about the imminence of a reform bandwagon rolling free of an obstructionist Left.
But is that really likely? Economic reforms were not a serious campaign platform for the Congress or UPA. The first list of 19 cabinet members boasted an average age over 65 (one commentator dubbed them “tired old men”) and excluded the best known reformer, Montek Ahluwalia. The crucial finance portfolio went to Pranab Mukherjee, undoubtedly the most experienced cabinet minister in the current firmament (he first held a cabinet portfolio thirty years ago), but not renowned for a stellar track record in economic reforms. The debate over the allotment of important infrastructure ministries has been dominated by the intricacies of accommodating key poll partners, with little attention to reform requirements. The same is true for other portfolios in areas crying out for major reform of government policies and programmes, including human resource development, energy, urban development, law and labour. Does this mean we will have another five years of near stasis on economic reforms?
Alright, cabinet formation does not seem to be a harbinger of a government committed to major reforms. But that need not rule out all reformist possibilities. Political exigencies require economic management to keep India’s economic growth from dropping noticeably below 5 per cent in the current global recession and to recover to 7 per cent plus as soon as possible. As I argued last month (BS, April 23), with fiscal space exhausted, an ideologically neutral argument for a “reform stimulus” can be mounted on precisely these grounds in order to revive private investment. With exports falling and public investment sluggish, a failure to revive private investment would make it very difficult to attain the implicit growth requirements outlined above. My suggested minimum reform package (calibrated then for a much more “unwieldy coalition” than the one delivered by the electorate) comprised the following elements: holding the centre’s fiscal deficit to Mukherjee’s Interim Budget target of 5.5 per cent of GDP (implying a combined, centre plus states, deficit of 9 per cent of GDP); implementing the UPA’s commitment to usher in an integrated Goods and Services Tax (GST) by April 2010; an early shift to market-based pricing of petrol and diesel; and a legal amendment to reduce the minimum government share in public banks to 33 per cent, so that they can raise capital in the market and thus expand their services to under-served areas and communities. For the medium term, I had suggested a strong focus on reform of education and urban development, especially infrastructure and municipal finance.
I would certainly look for all these elements as a “minimum package” in Mukherjee’s full budget slated for July. If several of these are absent, then the prospects for a successful stimulus to private investment would be correspondingly dim. Indeed, with a relatively strong electoral mandate for the Congress and UPA and the absence of vetoes by the Left, we should expect a substantially stronger reform stimulus from the forthcoming budget. Fairly obvious additional items would include: raising of the foreign investment limit in the insurance sector from 26 to 49 percent; a liberalisation of foreign investment in retail trade; a fresh bill for denationalisation of the coal industry and resumption of the disinvestment programme.
One caveat on the last. It would be a pity if such resumption (which is widely expected) excludes strategic sales (which the Trinamool Congress has reportedly opposed) and is limited to disinvestment of minority holdings. The real economic benefits from a disinvestment programme come from the transfer of control to private firms, which generally deploy the transferred assets much more productively than the erstwhile government owner. The fiscal gains from disinvestment are largely illusory, since the associated reduction of the government’s borrowing requirement has to be balanced against the fact that the private sector has equivalently less capital funds to deploy after purchasing the government assets. So, the “crowding out” effect of a specified fiscal deficit on private investment is not really reduced by resorting to disinvestment.
If the PM and his finance minister really wanted to signal strong economic reform, then the best way would be to loosen our onerous labour laws, which have over-protected a tiny minority of employees in the organised sector at the expense of an overwhelming majority (over 90 per cent) of “casualised” workers in the unorganised sector, where untrammelled hire-and-fire is the norm. The simplest signal would be to raise the operative threshold limit (above which government permission has to be sought for closure or retrenchment) in the Industrial Disputes Act from the current 100 workers to 1,000 workers. That would signal powerfully the government’s intention to boost organised sector employment by enhancing the incentives for private firms to expand their workforce. The stimulus to private investment in labour-intensive industries would be equally strong. It could be a “game-changing” reform on the path of expanding the demand for labour at a time when the demographics are guaranteeing huge increases in the supply of job-seekers. Then you could really call this a reforming government. We can but hope.
The author is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. Views expressed are personal
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