The Virtues Of Consistency

During the course of his speech, Mr Deve Gowda also expressed surprise that the new market-friendly policy regime had not as yet sparked off a phase of accelerated growth. What else can we do?, he seemed to be asking. A couple of weeks ago, this paper published an open letter from Subir Roy which contained very sensible advice about several measures which the government could take to speed up the growth process. There may well be some disagreement about the desirability of specific policies.

The particular way in which policies affect the economy will typically depend upon important parameters as well as on the actions of different groups of economic agents outside the sphere of government control. Moreover, since the values of these parameters may not be known with certainty, there is always room for differences of opinion about the efficacy of some policies, even when there is agreement about the basic objectives. Ideological differences, which will usually imply disagreement about the ends will obviously lead to discord about the means. However, everyone will agree that it is absolutely imperative for the government to adopt a clear and unambiguous position on certain broad policy options. If there are issues on which the government has not yet made up its mind, then this too should be stated explicitly. In other words, what must be avoided at all cost are contradictory and misleading policy statements by important government functionaries. Declarations of this nature create unnecessary confusion amongst potential investors. Entrepreneurs do not know what to believe about future government policies. These doubts increase the riskiness of future projects, and hence reduce the flow of investment.

 

Unfortunately, the United Front ministry has been guilty of this cardinal sin several times in the past. Perhaps the most flagrant transgression in recent times was committed in an interview given by Madhu Dandavate, deputy chairman of the Planning Commission. In response to a question about the areas which should be opened up to foreign direct investment (FDI) and the multinationals, Mr Dandavate declared that there should be a highly selective approach to the entry of foreign capital and MNCs. He went on to clarify that foreign capital should be commensurate with the needs of the economy, and should be allowed into infrastructure and areas where technological gaps exist. Now this is a reasonably explicit statement of intent. One can disagree with it (as I do), but it has the virtue that no one can accuse Mr Dandavate of mincing words. But, are we to assume that this is the position on FDI which will be adopted by the United Front government?

In his address to Assocham, the prime minister mentioned that his government had actually expedited the process of sanctioning approval to FDI proposals. He also quoted figures to show that there was an appreciable increase in the actual number of FDI proposals sanctioned. Mr Deve Gowda was quite categorical about the need to step up FDI. He did not seem to favour a highly selective approach towards foreign investors, and certainly made no suggestions that these should be restricted to those relating to the infrastructural sector or even ones which are technology intensive. Since these seem to be the only types of foreign direct investment meeting with the approval of Mr Dandavate, it is clear that the deputy chairman of the Planning Commission and the prime minister do not agree on basic economic principles.

Perhaps this provides the answer to another question raised by the prime minister, who wanted to know why foreign investors still view our reforms with suspicion. Well, what other perception can we expect them to hold about our reform process? After all, the government spends a rather large sum of money on the Planning Commission. So, they cannot assume that the views of the deputy chairman of the Planning Commission are completely irrelevant in the formulation of government policies. So, despite the welcome signals emanating from the prime minister, no one can be completely sanguine about the present governments enthusiasm for FDI. Of course, the possibility of disagreements about major policy options such as privatisation or the role of FDI will always exist in a government which is essentially a loose coalition of very diverse parties.

Ideally, the ruling parties should meet frequently to iron out differences and come up with coherent policy documents. And ministers must not contradict each other or issue statements which are not consistent with the common policy documents. Unfortunately, our politicians have always been prone to the foot-in-mouth disease.