19 November 2003 00:30
Growth Is Different From Reforms
There is a feel-good factor in the economy and with good reason. For one, driven by a good monsoon, the growth in
agriculture is expected to be a record 8 per cent against a negative 3 per cent last year. The growth in manufacturing
and in services is also reasonably good and all this leading to a possible 7 per cent GDP growth. This makes the 8 per
cent target for the Tenth Five Year Plan less of a pipe dream. Interest rates are low though they have stopped falling
after the Reserve Bank of India governor refused to cut rates earlier this month. Reserves are at historic highs and
crossed $90 billion - a far cry form the hand to mouth existence we used to have. The stock markets are in a bull phase
with the indices touching three-year highs. Obviously we are an economy which is on the move. Government officials right
from the top are pleased as punch and want the show to roll on. They are however facing two types of criticism on the
way the economy is managed. The first which feels that all this growth we are seeing is nothing great and is just part
of a global upward business cycle. According to them, almost all emerging market economies are growing at this rate or
more and we are not any different. This is mainly because of strong commodity prices and low interest rates. The same
tonne of steel is fetching more. These people almost seem to be unhappy about the feel-good factor. It should be pointed
out that in the past, even when the global economies were performing well, we were the laggards. That is why Korea,
Taiwan, Malaysia and others have stolen the march over us in terms of per capita income and other important indicators.
So, my view is that even if India is keeping pace in its growth with other emerging markets, it is creditable. There is
the other type of criticism, which comes from leading economists who are delighted at the growth but worry about what
they call "the practical status quo" in reforms. They worry more because, according to them, due to this
feel-good factor, we may just forget what reforms is all about. As this comes from people of international repute and
whose patriotism cannot be doubted, we need to understand this distinction between growth and reforms very carefully.
Over the last two decades, reforms, as understood the world over, mean a few things. These are practically universal. In
other words, when we talk of reforms in China or India or Mexico or Romania, economists and investment bankers mean the
same animal. What are the key components of any reforms? First and foremost is changing the role of the government from
that of a player to that of a facilitator. The second is to permit market forces to determine supply, demand and most
importantly pricing in the economy. Third, to have a global approach to investment whereby capital can flow freely
across borders. Fourth, reducing and finally eliminating all trade barriers so that citizens of all nations can freely
access goods and services at the best value for money. And finally, reforming government finances so that it is not
running huge deficits that will mortgage future generations. One may ask, why do we need these reforms if we can have
growth without them? A relevant question that demands an answer which is quite simple. We need reforms because
experience has shown that when growth was pursued without giving importance to reforms, it invariably ended in a
disaster. The Indian experiment with socialism ended in a mess that led us to reforms in 1991. The Russian experiment
with communism was even worse and led to upheavals of horrible proportions. Indonesia’s experiment with Suharto-style
crony capitalism was also calamitous. In other words, only by reforming the economy using the cardinal principles set
out earlier can we get sustainable growth which will ensure a continuous increase in living standards for the people.
Once this distinction is drawn between growth and reforms, we can be more objective about our analysis of the present
state of the economy. When we do that, we see that the performance is still pretty good though a lot more needs to be
done. We have removed QRs totally and reduced trade barriers. We are protecting our farmers only to the extent we need
to protect their livelihood - unlike the West where it is a case of pampering. We have rejigged our financial system and
removed the vexed issue of non-performing assets in a way that it is unlikely to destabilise our economy. We however
appear to be lagging behind in some key aspects of reforms and these need to be objectively examined. The sale of
government units has practically come to a grinding halt and the money to be raised from sale of government shares in
the fiscal year 2003-04 is far less than the budgeted. More seriously, there is a feeling among market players that sale
of PSUs has got bogged down and the accelerator is not being applied. This is a very serious matter. The second area of
concern is the dirty thing called fiscal deficit. This is the sin where all the sins finally rest and is worsening
according to economists. They are angry that the feel-good factor has taken the microscope off this cardinal sin. They
would like us to use the growth period to push through a strong dose of fiscal correction. So when they see even a
closed chapter like administered pricing mechanism in petro products being flouted and populism creeping in, they cry
foul. They are also not satisfied that the fiscal responsibility legislation will deliver as it has been made a paper
less tiger. They are also very displeased that the administered interest rates are preventing the supply-demand dynamics
of money from getting optimised. They are very unhappy that we are dragging our feet on sectoral FDI caps. It is a tough
call for those who manage the economy. The feel-good factor can cut both ways. One is to bring inertia on the basis that
"let the good times roll" and if "it ain’t broke don’t fix it", the other is to see this as a
welcome period of calm to prepare for the storms ahead. Given the complications of electoral arithmetic it’s a Hobson’s
choice! The author is a Delhi-based investment banker and Convenor of the BJP Central Economic Cell. The views expressed
herein are personal. He can be contacted at pnvijay@vsnl.com
[AIW [Asia Africa Intelligence Wire]] |
RUSSIA IN FACTS
