The problem

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RARELY has the economic scenario looked as bleak. The continuining recession in the market, often described as the absence of a ‘feel good’ factor, accompanied by daily stories of industrial closures, great distress in the countryside, including famine deaths, despite mountains of foodgrains roiting in the Food Corporation warehouses has made the dream budget of Yashwant Sinha seem like a distant memory. And now, with the shocks administered to the global economy by the terrorist depredations of 11 September adding to the ongoing downturn, it does appear that we are in for hard times.

On this there is little disagreement. The Indian economy which, by local standards, grew fairly spectacularly between 1991 and 1997, has hit a roadblock. Maybe it was because with the major crisis which ushered in the era of economic reforms safely behind, the policy-makers lost steam and political will to take the process forward. Quite clearly, the growing political uncertainty in the final years of the Narasimha Rao regime, and the rapid succession of coalition regimes that followed, took its toll.

As decisions started being put on hold and the proclivity for populist gestures to satisfy notional votebanks re-surfaced, every key economic indicator started displaying negative trends. Even the coming to power of the NDA regime, now in its third year in office, did little to stem the unease in the entreprenuerial classes. The end result is of an economy in crisis – growth rates in all sectors are down, so is employment in the organised sector. Worse, not just the Centre but every state is in a fiscal mess, hard put to meet even its salary costs and interest payments, forget initiating fresh development expenditures or investing in the social sectors to ensure some relief to the economic underclass.

There is expectedly little unanimity about the reasons for the downturn, even less about what needs to be done, including in the short run. There are those who lay the blame on the policies followed in the last decade – the process of internal and external liberalisation, seeking greater integration into the global market, and reducing the role of the state in managing the affairs of the economy. Some, basing their criticism on the protests in Seattle and beyond, even trace the roots of recent terrorism to the mindless policies of globalisation.

Their opponents, and it needs to be admitted that they are in majority (though currently somewhat subdued), posit that the problem lies not in the processes of privatisation, liberalisation and globalisation but in the inability to take the process forward. In particular, they point to the inability to cut subsidies, carry out labour market reforms, aggressively rid the state of loss-making units, and create a legal and institutional environment to facilitate a greater role for private capital, both domestic and foreign.

While there is little doubt that despite the ideology of privatisation, government control continues to stymie any effort at new productive investment, it is equally true that economic reforms need to be politically embedded if they are to carry the majority with them. The success of economic policies cannot be assessed only in terms of abstract principles such as forex reserves, control of fiscal deficit or a comfortable balance of payments position but everyday concerns of poverty, unemployment and inflation.

Economic policies will be sustainable and beneficial if government spending shifts from consumption to productive investment, to the development of physical and social infrastructure, and does not involve borrowing from the public to finance consumption expenditure. More importantly, the process must ensure autonomy for producers with commensurate accountability, which implies transparency of functioning.

The last decade has shown that while poverty figures have declined, there is a wide variation across sectors and states. Equally, there is no significant accelaration in growth rates in the primary and secondary sectors. If the poverty figures are read in conjunction with those of unemployment and underemployment, we find that there is a distinct deterioration in the quality of employment (organised sector work force declined; it went up in the unorganised sector; self-employment declined; casual wage employment went up).

So if poverty figures have declined but unemployment has worsened, the likelihood is that the growth, such as it is, has only helped those persons, regions or sectors of the economy that are already employed or better-off. Evidently, the last decade of growth and macro-economic stability has been achieved at the expense of equality between individuals, regions and sectors. The political implications in the decline of the ratio of rural to urban per capita income or of unorganised sector to organised sector incomes, a steady increase of inequality between states, and a shift in factor shares from wages to profits can be well imagined.

The issue, to restate, is not that we have privatised or globalised too rapidly, because we have not. In any case, the total exposure of our economy to the global market remains under ten per cent. The real problem seems to be with our quality of governance, what with crony capitalism, corruption, and short run populism taking precedence over sound policy-making.

It is not that solutions are not available, though even the diehard optimists will agree that it will be a long haul. Five decades of indifferent economic management and a consistent neglect of the human capital needs of the poor, reflected for instance in our abysmal record in providing affordable and reasonable quality education and health services to our populace, cannot be wished away.

Take for instance our tax to GDP ratio, which reflects the ability of the state to raise resources. It is today among the lowest in the world, standing at half of what China manages. The answer to this is not, as was once thought, a reduction of our already low tax rates. Rather the effort should be at rationalising the revenue system, widening the tax base to include agriculture and services, and ensuring better compliance. Without these resources, and not frittering them away by adding to government wage bills, unnecessary subsidies and running unprofitable enterprises, how can the state be expected to invest in infrastructure and social services?

It does appear that these uncomfortable truths are finally being appreciated by the political class. No one across the ideological spectrum seriously argues for a return to the economic management structure of the ’80s and earlier. Similarly, few propose a delinking from the WTO regime. How effectively we will be able to translate this realisation into a policy and implimentation structure, however, remains uncertain. And, unless there is decisive economic leadership, the crisis will continue.

This issue of Seminar discusses various contours of our economic turmoil as also proposes a series of remedial measures. We cannot afford to lose more time.