Devangshu Datta: Encouraging inaction
BEATING THE STREET
| Macro-economics rarely has similar situations. The balance of payments crisis in 1991 was one situation with little room for manoeuvre. Any experienced politician would have been compelled to do much the same things Manmohan Singh did. Others might have shown less finesse but reforms were forced. |
| India has not seen a similar situation since then. The economy continues to have large structural problems but these are not considered urgent. So government after government has the latitude to waffle, delay and avoid unpleasant measures. |
| As a result, GDP growth has been lower by at least a couple of percentage points per annum since 1996. That's a lot "" it means a 2004 economy that is about 20 per cent to 25 per cent smaller than it might have been. |
| A few examples suffice to illustrate this hypothesis. Telecom growth was stunted through 1996-2000 due to a ridiculous policy. Growth in that industry plus the multiplier effect of that growth on overall GDP is worth 1.5 per cent per annum or more in itself. |
| Or take disinvestment, which has been delayed by over 10 years. This led to a compounding of negative returns on capital employed from PSUs as a bunch, as well as the missing out on injections of cash from sells off. |
| Just assume the 2003-04 returns from disinvestment had been credited in say, 1997. Compound over time for an inkling of the losses through delay. |
| Another example: banks and financial institutions received the legal muscle to effectively clean up NPAs only after the Securitisation Act passed in 2002. The first drafts of that Act were mooted in 1994. |
| Similarly, the power sector received an incentive to reform after the Electricity Act of 2003 passed, six years after the failure of the PPP policy. |
| Another example of delay and disaster: US-64 returns could have been market linked in June 1998 when the trouble became apparent to everyone. Investors would have received the benefits of the boom of 1999-2000 and the government would have saved itself subsequent massive bailouts and associated embarassment. |
| Nobody counts the cost of delayed reforms. Circa May 2004, high-priority areas should be things like the capping of the fiscal deficit, arm-twisting to ensure power reforms across the whole country, a stress on cleaning up urban body finances, continued excise/customs tariff cuts and reforms to reduce delays in the justice system. |
| Unfortunately, no new government is likely to display much urgency about any of these. Capping the fisc implies cutting its own expenditure, power sector reforms require delicate balancing of centre-state equations, cleaning up urban finances is politically sensitive, industry will scream loudly about tariff cuts and a justice system that delivers will land a large proportion of the political elite in jail! |
| Given this, there isn't likely to be much difference in policy between a BJP or Congress-led coalition. |
| In other areas of economic concern, there isn't much difference either. The economy will continue chugging along until the next slog-over situation forces quick action. |