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India sets out economic ground
rules
By Indrajit Basu
KOLKATA - Last week, India's Prime Minister Atal
Bihari Vajpayee did what he does best: walk the
tightrope. He refused to bow to the powerful
anti-disinvestment lobby that was threatening to derail
the reform process and gave his firm backing to both
disinvestment and greater openness to foreign direct
investment (FDI).
FDI and divestment have
emerged as the two most contentious issues lately that
sharply divide Vajpayee's government. In the past
fortnight, senior members of the cabinet have openly
attacked the government's privatization program and
suggested that it could undermine India's national
security. Vajpayee had imposed a temporary freeze
following criticism of the sell-offs from within his own
Hindu nationalist Bharatiya Janata Party.
Presiding over a meeting of the country's
planning commission - which crafts the economic agenda
that India should achieve in the set of a five-year
period it calls the "plan period" - Vajpayee spelt out a
tough six-point reform agenda that includes the
disinvestment of state-owned companies, tax reforms,
creation of a national market and foreign direct
investment as a major resource supplement to propel
India on an 8 percent growth track. The prime minister
also endorsed the country's ambitious FDI target of US$8
billion of inflows per year that was set by the planning
commission, but then reduced the target to $7.5 billion.
Vajpayee also made clear that he was not
intimidated by opposing forces' call to throw out the
government's "anti-people" reform measures. His comments
are likely to undermine the increasingly vocal section
of the government's policy detractors, which include a
few key ministers who have been agitating to prevent
further liberalization of the economy, including reform
measures such as divestment of state-owned units, the
policy of opening the country to foreign investors,
labor laws and fiscal prudence.
"For some
reason, Vajpayee had removed himself from his
commitments to reforms and divestments," said the
country's noted economist Swaminathan A Iyer, "but now
it seems that he has put his weight back".
"We
cannot afford to set a lower growth target if we want to
move towards our cherished dream of building an India
free of poverty, illiteracy and homelessness, free of
regional, social and gender disparities," Vajpayee said.
Vajpayee, however, added that caution would be
exercised in terms of protecting the interests of both
the industry and the nation. "Let there be no worry in
any quarters that we would follow such an FDI policy as
would weaken the Indian industry or hurt national
interest," he said, "this will never happen."
Vajpayee listed, among other things, the primary
aim of governance-related reforms as: "greater
encouragement to private entrepreneurship, with the
government strengthening its role in the formulation and
implementation of policies, legislation, regulation and
facilitation, and exiting from direct participation in
production and distribution."
Vajpayee also
acknowledged that the Indian economy had not performed
"up to our expectations" in recent years and that there
was skepticism in some quarters whether it was "at all
feasible for us to climb from a rate of growth of 5.5
percent last year to 8 percent in the 10th plan
[2002-07]."
But, although Vajpayee's comments
are likely to enthuse the aficionados of the Indian
economy, a few pro-Indian experts have pointed out the
twists and turns that the country could face in
achieving Vajpayee's 8 percent GDP growth targets.
According to economist S L Rao, the former
director general of India's National Council for Applied
Economic Research, "there are adverse elements to factor
in".
"This year's drought over most of the
country is already said to have reduced the year's first
tranche harvest - April to September - by 15 percent,"
said Rao. "The continuing rise in domestic prices of
petroleum, oil and lubricants will affect consumer
spending on other items. The rise in international
prices of oil and gas will increase the trade deficit. "
Rao adds that pressures on government
expenditures and on its compulsions to borrow more are
immense, owing to the recently dole outs to some of
India's sick financial institutions - like the Unit
Trust of India, Industrial Finance Corporation of India
and Industrial Development Bank of India; drought relief
to states; rising defense; and, national security
expenditures.
Moreover, India's capital markets
are in poor state, which, says Rao, has resulted in poor
capital formation both in the private and public
sectors. Rao also says that all recent foreign
investment did not add new manufacturing capacities;
they only bought up existing ones, and all these have
led to a declining share of manufacturing in gross
domestic product.
"The structure of the economy
is lopsided for a country at our stage of development
and poverty," says Rao, adding that all these factors
give reasons to be skeptical.
But these
downsides do not seem to dampen the optimism of India's
economic planners. K S Pant, deputy chairman of the
Planning Commission, quotes the International Monetary
Fund's first deputy managing director Anne Kruger's
optimism and the country's April to June 2002 GDP growth
rate of 6 percent to stress that an 8 percent GDP growth
rate is achievable.
Pant even has a ready reply
for the 5.35 percent average GDP growth rate per year
for the plan period 1997 to 2001, against the targeted
growth rate of 6.5 per cent. "This [India's lower than
expected growth rate] was mainly due to the Southeast
Asian economic crisis, the sluggish global economy and
three years of drought in large parts of the country,"
says Pant.
But Vajpayee is undaunted. "This is
achievable provided we can accelerate the momentum of
economic reforms," he says, adding that all his
government needs to do is "to control government
expenditure, address the continuing bottlenecks in
infrastructure and promote employment-friendly labor
policies."
Easier said than done? Only time will
tell.
(©2002 Asia Times Online Co, Ltd. All
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