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Shankar Acharya: The Leviathan returns

Few green shoots of reform scattered in President's address

Shankar Acharya  |  New Delhi 

Government is back. At least that’s the lesson I draw from the new Government’s major policy statement, the President’s address (PA) to Parliament last week. Roughly speaking, the two decades 1985-2004 saw the progressive dismantling of government controls over and payments, industry, prices, finance, capital markets and investment. The tax system was substantially reformed. New private players were encouraged in a whole gamut of sectors (hitherto monopolised by government enterprises) ranging from airlines and ports to telecom, banking and energy exploration. Many government companies were listed and their minority stakes were sold in the stock market. Some public enterprises were even privatised. The pace of change was uneven but the direction was one way. The last five years of rule witnessed an ambivalent mixture of trends. On the one hand, the government stopped privatisations and disinvestments, halted most reforms, strengthened price controls on petroleum products, fertilisers, food grains and selected interest rates and undertook major expansions of social programmes (notably the NREGP) and caste-based quotas in education and public employment. On the other hand, a potent combination of past reforms, successful fiscal consolidation (till spring 2008) and the liquidity-fuelled global boom propelled the biggest surge in private investment that India has ever seen, spurring economic growth to 9 per cent.

Now things seem set to change. The “ten broad areas of priority” outlined in the PA (including security, communal harmony, growth, infrastructure, social uplift, governance reform, etc) are mostly unexceptional, except for one glaring omission to which I will revert. But the principal vehicle for achieving these goals will apparently be government programmes of one kind or another. These will include existing “flagship programmes” such as NREGA, the National Rural Health Mission, Sarva Shiksha Abhiyan, Bharat Nirman and Indira Awas Yojana. Ambitious new programmes are also promised, including a Madhyamik Shiksha Abhiyan for universalising secondary education, a Rajiv Awas Yojana for slum dwellers and a significant new National Food Security Act for guaranteeing 25 kg of food grain per month for every below-poverty-line family at Rs 3 per kg. (Never mind that the public distribution system hardly exists outside the four southern states, Bengal and a couple of metropolises and that the costs of the system compare very poorly with private distribution channels). Furthermore, although disinvestments from public sector undertakings (PSUs) will be resumed, government will retain majority ownership. So the present PSUs will continue indefinitely, even if they are in hotels and tourism. Even in banking, the minimum 51 per cent government ownership of PSU banks will be retained, with their need for fresh capital (for expansion) being met from the government budget.

In a poor country substantial reliance on government programmes and policies is perhaps unsurprising. The problem is that India’s long experience in providing public services is extremely unsatisfactory. We have too many government schools where teachers don’t show up (or don’t bother to teach), too many primary health clinics with absent nurses and paramedics and too many police posts which citizens fear to approach. As Rajiv Gandhi pointed out long ago, corruption and leakages plague most public programmes and services, including those aimed at alleviating poverty. What’s more, most of the available evidence suggests that matters have worsened since his observations, as public services have become increasingly politicised and standards of probity have fallen steadily. It is against this background that the major emphasis on government programmes in the UPA’s agenda for economic and social development is worrisome.

In fairness, the PA shows awareness of the problem: “An area of major focus for my Government would be reform of governance for the effective delivery of public services.” In pursuit of this goal the PA mentions several steps, including: implementation of reports of the Administrative Reforms Commission (which have been gathering dust in the last five years); a publicly available database for all “non-strategic areas”; strengthening of the Right to Information Act; creation of a new Independent Evaluation Office for all flagship programmes; five “Annual Reports to the People on Education, Health, Employment, Environment and Infrastructure”; a model “Public Services Law”; various National Councils for health and education; a “Delivery Monitoring Unit in the Prime Minister’s Office to monitor flagship programmes” and so on.

Somehow it is not very convincing. It smacks too much of setting up a plethora of committees and councils as a soft option to grappling with very deep-seated organisational problems. The theme of providing more information on public service performance is fine. But most “beneficiaries” of public services already know what’s wrong with them; they lack “voice” to make improvements or options to “exit” to alternatives provided by non-government service providers. The PA shows little sensitivity to such issues. Furthermore, the proposed major expansion of social welfare programmes is bound to increase stress on government budgets. Despite the PA’s inclusion of “Prudent fiscal management” as one of the ten top priorities, the prospects for substantial reduction of the current record fiscal deficits don’t look too bright. Nor, therefore, do the prospects for significantly lower interest rates.

The really big omission in the PA’s ten priorities is employment promotion. And I mean real, productive jobs, not the make-work relief opportunities condescendingly provided to the poor by bureaucratic structures under the NREGA. This lacuna is particularly glaring against a background of the growing millions of desperate job-seekers, as the so-called “demographic dividend” inexorably swells the supply side of the labour market and our benighted labour laws and other impediments choke off the demand for workers. The UPA’s predilection for governmental solutions is revealed by its passing reference to employment issues: “High growth is necessary to provide the government [italics added] the capacity to expand opportunities for employment”. This when government employment accounts for less than 3 per cent of India’s labour force.

To end on a brighter note, there are a few green shoots of reform scattered through the PA. These include: reform of higher education along the lines recommended by the Knowledge Commission; a more investor-friendly approach to public-private partnerships in infrastructure; implementation of the roadmap for the Goods and Services Tax; “operationalising the provision of open access” in the power sector; reforms in the coal sector; a roadmap for judicial reform; and encouragement of foreign direct investment. But even if these green shoots all mature into full grown healthy plants, will it be enough to power the high levels of private investment necessary to recover and sustain rapid growth?

The jury is out.

The author is Honorary Professor at ICRIER and former Chief Economic Adviser to the Government of India. Views expressed are personal.

First Published: Thu, June 11 2009. 00:24 IST
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