The Economy Is Running Out Of Steam

It is clear that the real constraint to faster economic growth is political. And the political will to introduce deep-rooted economic reforms is currently at its nadir. The first phase of reforms that we have witnessed so far essentially comprises tax, tariff and licensing reforms which are the easiest to introduce. But what India now needs is the second phase of structural change, which will be socially painful, and hence requires greater political will, integrity and statesmanship. But this is woefully lacking. The Surveys grandiose claim that with the growing participation of virtually the entire spectrum of political opinion in the reform process, there is a good prospect that a higher growth rate would become a permanent feature of the economy rings hollow.

 

The second phase of reforms requires economic pricing, public sector restructuring, infrastructure deregulation and full transparency and accountability of all economic agents particularly governmental. The power sector cannot be revived in an environment where the provincial governments want to give it free to farmers to protect their vote banks. If oil prices are to reflect world prices, diesel and kerosene prices would have to be sharply hiked. If the fiscal deficit is to be cut, you cannot give away more and more of subsidised foodgrains supposedly to the poor and frequent salary hikes to government employees. If banks and insurance companies are to adapt to the financial needs of a rapidly modernising economy, you have to take head-on the vested interests of the unionised and highly vocal white-collar staff that is opposed to radical change. Surely all this is a tall order for a hotch-potch of 13 parties running the UF government.

The Surveys succinct description of the current economic scene as being mixed is just that a mere description. But the more important question is: What does it bode for the future? The diagnosis of Indias economic ills cited above provides the answer. The formidable constraints to sustain economic growth at 7 per cent a year posed by infrastructure and the fiscal deficit cannot be eased in the short run, even if there was adequate political will. Thus the economy cannot but slow down over the next two to three years. The country will now pay the price for putting reforms on hold for two years before last Mays elections due to political considerations.

The Surveys analysis of the industrial slowdown is interesting. The problem does not lie at all in manufacture (which accounts for 77 per cent of the weightage in IIP), but entirely in infrastructure (power, oil, coal) and intermediates like steel and cement, reflecting the fall in fixed investment (thanks to the government-induced liquidity crunch which the Survey now confesses was excessive). But how will the manufacturing sector maintain its robust momentum next year with a faltering core sector?

Agriculture too is in a mess. For the first time since the Green Revolution of the late 60s, per capita availability of foodgrains has declined. This is despite nine successive years of good monsoons and foodgrain imports in 1993 and 1996 and, we may add, of rising food subsidies. In fact last year, agriculture posted a negative growth rate and while it is expected to rebound to 3.6 per cent this year, it will be well below the 4-4.5 per cent rate expected earlier.

The Survey rightly ascribes this to a sharp fall in public investment in agriculture and leaving this vital sector on which a substantial proportion of Indians depend for a livelihood out of the reforms process. Surely a high growth path is unsustainable economically and socially if agriculture misses the bus. But will the government have the gumption to remove trade, price and movement restrictions on agricultural produce? To infuse technology and capital into agriculture by allowing corporate participation? To tax rich farmers to fund public investment in rural asset creation?

Almost every vital sector is replete with similar issues: Oil, telecom, aviation...

In this context, the 1997 Budget proposals to be announced today will provide the key signals of whether Indias political class is committed to real reform or not. This is not to expect too much in the Budget per se, which is after all mainly a statement of the governments annual accounts. Nonetheless, it is an important occasion to articulate its policy thinking. Even if a few bold steps are taken, like opening up of insurance, phased deregulation of oil prices and removing the regulatory cobwebs surrounding power and telecom, it could mark the beginning of an important new phase of the reforms process. (The author is a Mumbai-based market analyst)