Thursday 31 January 2008

Killing Economic Reform in India (UPIASIA)

M.D. Nalapat

Manipal, India — Manmohan Singh, India's present prime minister, was brought back from Geneva to India as economic advisor to the government in 1990 by the commerce minister at the time, Subramanian Swamy. The long-time bureaucrat had been particular that a protege, Montek Singh Ahluwalia, be made the commerce secretary, a condition that was accepted by the minister.

A year later, Singh became finance minister in the first regular Congress government to be headed by an individual not from the Nehru family. P.V. Narasimha Rao was determined to accelerate the pace of economic reform, aware that the statist policies of the past had led India to bankruptcy, and in Manmohan Singh, found a willing instrument in the process.

Sadly for the country, by 1995, Rajiv Gandhi's widow Sonia began a political destabilization of Rao, afraid that his continuance would permanently block the Nehrus from reclaiming the Congress Party. From the beginning of that year till Rao's election defeat nearly two years later, the cautious finance minister obeyed the new signals and slowed down the reform process to a crawl.

Fortunately for Manmohan Singh, his numerous contacts in the Delhi media ensured that this phase was ignored, and that he -- rather than Rao -- got the credit for the 1992-96 reform package. It was therefore with substantial expectations that the 280-million strong Indian middle classes welcomed the takeover of formal power by Singh eight years after the 1996 election defeat of the Congress Party.

Nearly four years on, these hopes have died, together with the reforms.

While subsequent governments were able to maintain the 9 percent growth rate achieved under Narasimha Rao, rather than moving to the 12 percent level anticipated by former admirers of Manmohan Singh, growth has come down to 8 percent and is slipping. The government spends US$50 billion on subsidies for food, fuel and fertilizer, and a further US$6 billion each on keeping afloat the public enterprise sector and hooking the consumer on subsidized petroleum products.

Disinvestment of public enterprises has halted altogether, as has the setting up of Special Economic Zones. Neither has there been any effort at reform of the labor laws that have created an abundance of "jobless growth" in a human power-rich country, with most investors preferring to increase outlays on capital assets rather than on augmenting labor stock.

Although power has become a primary bottleneck to growth, this sector too has been kept immune to reform, a fate shared with a higher education system that has become totally dysfunctional. The absence of research capabilities and vocation-based training within the Indian university system has led to dependence on outside technology, as well as human power in crucial fields such as aviation.

As for the Indian legal system, this is still cluttered with more than 23,000 separate regulatory fiats, thus forming a corpus stifling to adaptation. Unlike its predecessor, the Sonia-led United Progressive Alliance has not even tried to simplify and rationalize the choked Indian legal system.

During the 1970s, India had the distinction of having an effective marginal income-tax rate that topped 95 percent. Small wonder that evasion became rampant. As finance minister in 1997, Palaniappan Chidambaram cut back the top tax rate to 30 percent, but after coming back to the same job in 2004, has instead presided over a vicious expansion in the powers of the income-tax department, the word of whose officers is final in matters of computation of income and tax, with even judicial remedies closed by statute. As a consequence, bribery levels within the department have gone up substantially, together with harassment.

Today, even expenditures as essential to modern business as corporate travel are being taxed as "fringe benefits." Unfortunately for the deficit -- and India runs a current account deficit that amounts to 3 percent of GDP -- the finance minister in his new anti-reform avatar is, in the manner of former colonial masters of the country, paying attention only to the collection of revenue, and not how it gets spent. Official bodies themselves say that the leakage to corrupt officials and politicians from swelling government expenditure is as high as 97 percent -- in the National Rural Employment Guarantee Scheme, on which US$49 billion is the outlay for just the current and the previous year.

While the stock market regulator, the Securities and Exchange Board of India, has taken its cues from the Sonia-led government and slammed the Indian investor with a slew of restrictive provisions, the Reserve Bank of India has enforced a policy of monetary restraint on the private sector that has sucked out nearly US$60 billion of liquidity from the system and pushed Indian bank interest rates to a level three times that paid by U.S. and European competitors.

As for China, the steady upward increase in the value of the Indian rupee -- caused by conscious central bank policy -- has resulted in an estimated 12 percent fall in competitiveness of India with China over just the past six months. Textiles in particular, which hoped to displace their Chinese competitors, have been the hardest hit by the negative swing in the exchange rate, leading to multiple job cuts caused by falling orders.

To top this beaker of misery, a misnamed Competition Act has been passed by the UPA government to make it much more difficult for Indian companies to make acquisitions abroad. In brief, while the socially efficient private sector is being constrained, the corruption-filled superstructure of public expenditure is ballooning. Just when India seemed to be on the verge of an economic takeoff, its dirigiste leaders are working overtime to once again pull growth down to the "Nehru" rate of 3 percent.

-(Professor M.D. Nalapat is vice-chair of the Manipal Advanced Research Group, UNESCO Peace Chair, and professor of geopolitics at Manipal University. ©Copyright M.D. Nalapat.)

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