Reforming The Reforms

But no party now dares make reforms an electoral issue. There is a feeling that the Nehruvian development model was wrong. Yet, the socialistic ethos is deep rooted. To understand this, factors specific to India have to be kept in mind. First, socialistic ideas were spread through a free debate, not imposed by the state. Secondly, Indias record was not so dismal, particularly compared with Pakistan and Bangladesh. It is poor only in comparison with other Asian countries. But those countries did not have democracy. Also the eighties, which is perceived to be part of the socialistic planning era, witnessed an upward swing. The foreign exchange crisis of 1990-91 was the result of heavy defence imports, and not of the planning model.

Several historic changes have taken place with only a small support base to begin with. But the support broadens subsequently. When Roosevelt launched his `New Deal, only a small minority of Americans supported it, but it later gathered massive support. However, this is not happening in the case of Indian reforms. The main reason for this is that the reforms have failed to deliver the goods. The proof of the pudding is in its eating. It now appears that the average performance in the nineties, the first decade of reforms, would be just about the same as that in the eighties. Not a big deal!

Instead of facing the reality, the reformers are trying to gloss over the poor performances. Even the CSO exaggerated advance estimates of growth in the last financial year. There will also be a shortfall in the revised estimates of revenues given in the budget for 1996-97. There is a big shortfall in the projection of industrial production and exports. A great deal is being made out of a big increase in agricultural production. But agricultural output in 1996-97 will be just about the same as that achieved in 1994-95. The collapse of exports is most serious. It cannot be explained by `factors beyond our control, when China has registered a strong export growth. The cumulative effect of inflation has priced out Indian products. Export revival would need a dollar to be worth Rs 39. But we are in a bind. The continuing capital inflows are pushing down the price of the dollar in rupee terms. On the other hand, devaluation would add imported inflation to domestic-origin inflation. Repeated devaluation makes further reforms more difficult.

The reformers are least worried about what is happening on the savings front. Their answer to the recession is to induce people to consume more. The aggregate demand can be stimulated by four factors: personal consumption; social consumption like education, health; investment, particularly in infrastructure; and exports. Our public savings were already negative. But the reforms have messed up household savings by premature consumerism, diversion of financial savings into physical assets like gold and real estate, and ill-conceived incentives for financial savings. Reformers created so much euphoria about a 200-million-strong middle class that huge investments went into high-priced consumer goods for which there was no demand. As a result, the economy will not get the full value of the investment made in the reforms period.

The reforms are now stuck. Further advance cannot be made without some hard decisions like the increase in prices of diesel and kerosene, reduction in subsidies, increase in power rates, making the exit of uneconomic units easier, and de-reservation of small-scale industries. But these hard decisions in a democracy are not possible without active public support for reforms.

But how can broad public support for reforms be built? In popular perception, reforms are associated with a steep increase in food prices and scams. Both of these were caused by bad sequencing of reforms. The steep increase in food prices was caused by hasty globalisation of food prices in the name of removing negative protection for agriculture. Scams were caused by hasty deregulation of the financial sector without putting in place proper regulatory mechanisms. In its latest credit policy, for instance, the RBI relaxed the norms for investment by commercial banks in non-banking financial companies without building a regulatory framework for monitoring the end-use of funds by NBFCs. Our judicial system is so bad that nobody has been convicted for the scam of the century which took place within a year of the reforms.

If reforms have not endeared themselves to the general public, the reformers have themselves to blame. Right from Dr Manmohan Singh, our reformers have been intellectual apes. They have shown no originality, innovation, or adaptation to the specifics of Indian conditions. Take the latest case of the report on capital convertibility. It is a mechanical copy of the provisions of the Maastricht Treaty. Pity our reformers. They only look to the west for inspiration and even here they are outdated. The Maastricht Treaty has all but collapsed. The reputation of Helmut Kohl, the moving soul behind the treaty - who was poised to excel the position attained by Bismarck in history lies in ruins. Another misfortune of reformers is that they have no communicator like Nehru who could sell the dream of reforms to the public. Their salesman try to sell capital convertibility by announcing: `Now you can keep an account in London or Paris. This is not the way to build popular support for reforms.