Indian utopia: Double-digit
growth By Kunal Kumar Kundu
BANGALORE - India has come a long way. For
years the economy bumped along with about 4%
annual growth in gross domestic product (GDP).
Then it began to perk up, climbing to 6% and then
to an average of 8% over the past three years.
Moreover, the current high growth rate has
been achieved in a very stable macroeconomic
context - low inflation and healthy balance of
payments. With the threat of higher oil prices
receding, the
macroeconomic environment
becomes even more favorable.
Given these
factors, one is not surprised to see Prime
Minister
Manmohan Singh
talking about a possible annual growth rate of
10%. However, despite the recent impressive track
record, there are good reasons to be skeptical
whether India can achieve double-digit growth.
Indeed, it is difficult to visualize a
significant increase in the growth rate over the
next few years in the absence of changes being
made, and quickly, on a whole variety of fronts.
The Planning Commission itself, in both the
mid-term review of the 10th Plan and the draft
approach paper to the 11th, has referred to
several policy measures that are critical to
accelerating growth beyond current rates.
There's no gainsaying the fact that the
economic-reform policies undertaken beginning in
1991 have impacted the Indian economy. Even the
manufacturing sector, which was a laggard, has
picked up and is fueling the growth momentum. But
India has already carried out the easier parts of
reform. Achieving a growth rate of 10% requires it
to tackle the difficult part.
India is
failing miserably on this front.
Despite
the hype in the international media about India's
global integration, economic reform has been
halting and hesitant. Even the parties over the
past decade that supported reforms while in office
played them down at election time. Any party that
initiates some reforms is quick to disavow them
once out of power.
This duplicity is best
displayed by the leftist parties. In the states
where they hold power, they are often driven by
the inexorable logic of fiscal near-bankruptcy and
competition for investment to be pro-reform; but
in New Delhi their leaders regularly indulge in
ideological grandstanding.
The left's
duplicity was also highlighted by the different
economic yardsticks it applied in Kerala and West
Bengal. The leftist posturing against the
multinationals and liberalization continued even
as they unveiled "Brand Buddha" (an allusion to
Chief Minister Buddhadeb Bhattacharya) in West
Bengal and opened the floodgates for foreign
investment in the state.
The Communist
Party of India (Marxist) has been asking the
national government to review the policy on
special economic zones, saying such units would
hurt tax revenues in the long run. "The issue of
sanctioning SEZs must be seriously considered by
the government. The government will lose Rs970
million [more than US$21.5 million] in tax
revenues as it is giving high tax incentives to
SEZs," said party politburo member Sitaram
Yechuri.
He pointed out that only 25% of
the land allotted for SEZs would be used for
manufacturing while "the rest would be used for
commercial purposes. Which means that SEZs are
essentially for real estate." Calling for a halt
until a comprehensive review of the SEZ policy,
the CPI(M) leader said the indiscriminate growth
of SEZs is not only detrimental to the interests
of the farming community but also poses a threat
to national food security because of its
large-scale acquisition of farmland.
So
what would one expect? A total backlash?
Absolutely wrong. The Left Front government in
West Bengal is going out of its way to acquire
prime agricultural land for the small-car project
of Tata Motors. Justification: "In West Bengal it
is a specific project for which 1,000 acres are
being acquired in a specific area and for which
some farmers are to be evicted."
But
somehow this zone isn't in the same category as in
the SEZ project in Haryana or the Reliance power
project at Dadri, Uttar Pradesh. "Here 60% of the
farmers have agreed to sign up to sell their land.
Tata Motors' small car plant is an important
project which is needed for the state's
development," said CPI(M) general secretary
Prakash Karat. Double standards?
The
CPI(M)'s double standards are not confined to SEZs
but also go to labor issues. The party that
wrecked and ruined the state of Kerala with its
incessant labor agitation is reining in its cadres
when it comes to industrialization in West Bengal.
The opposition is not confined to the
left. The recent reversal of a cabinet decision
toward some privatization was under pressure from
a non-left regional party. Trade unions of the
right as well as leftist parties are opposed to
privatization and labor reform.
In
general, because of social heterogeneity and
economic inequality, the social and political
environment in India is conflict-ridden, and it is
difficult in this environment to build consensus
and organize collective action toward long-term
reform and cooperative problem-solving efforts. In
vote-bank-driven politics, economic sense almost
always gets sacrificed at the altar of politics.
When groups don't trust one another in the
sharing of costs and benefits of long-run reform,
there is the inevitable tendency to go for the
"bird-in-hand", short-run subsidies and government
handouts, which pile up an enormous fiscal burden.
Few politicians dare oppose the continuing serious
under-pricing of water and electricity, the
featherbedding of the public payroll, and a
long-standing refusal to tax the wealthiest
farmers.
A growth rate of 10% will require
fast supply-responses across a variety of sectors,
and some of these will be found wanting, more so
if a powerful supply-response is dependent on any
action - policy, regulatory or investment - by the
government. This is where governance is failing.
As Jagdish Bhagawati, of Columbia University in
New York, has said, "Politicians have to
understand that growth can't be a passive,
conservative 'trickle-down' strategy. It is a
radical and activist pull-up strategy where
considerable state effort is put into accelerating
the growth rate."
Indeed, economic
integration of a country requires that it open to
foreign investment, adhere to flexible labor laws
and practice careful fiscal policies. In a country
with severe poverty and economic inequality,
however, such reforms do not win many votes for
politicians. Here again, India has failed
miserably to sell reform to the masses, thereby
allowing politicians with devious intentions to
scuttle desirable reforms at every conceivable
opportunity. Flexible labor laws in India, for
example, are still a pipe dream. And, the less
said about fiscal policies, the better.
Indeed, fiscal discipline is important for
macroeconomic-policy credibility and
sustainability. On this score, India has very
little to show for itself. The combined fiscal
deficit (central plus state governments' deficit)
is estimated at 7.5% of GDP for fiscal 2006, down
from 9.5% in fiscal 2001. But this understates the
underlying deficit.
The central government
conveniently excludes a large part of the
oil-subsidy burden from the fiscal-deficit
calculations and treats it as an off-budget
liability (passing it on to the oil companies). A
large part of the recent improvement in the
deficit would be offset by the increase in
off-budget oil subsidies over this period.
Similarly, state governments have been excluding
large amounts of electricity subsidies from their
deficit estimates (although this subsidy burden
has been shrinking at the margin).
The
consolidated deficit for fiscal 2006, including
the two major off-budget items, oil subsidies and
state electricity board losses, would increase the
headline deficit level to 9.3% from 7.5%,
according to an estimate by Morgan Stanley. In
fact, despite the high GDP growth rate, India is
probably the only emerging market to have
witnessed a relatively smaller correction in its
deficit over the past five years.
India's
deficit is the highest among the major emerging
markets and about two to three times that of major
developed economies as a percentage of GDP.
Although there has been some improvement in the
fiscal-deficit trend at the margin, there is
little evidence that the government is
implementing any major structural reforms to
reduce revenue expenditure, which is critical to
achieve a sustainable reduction in the deficit.
Also, reform would gain popularity if it
were to be equally and simultaneously concerned
with reform of the appallingly bad delivery of
basic social and infrastructure services for the
poor in large parts of the country - in education,
health, drinking water, irrigation and more.
In the euphoria of high growth rates of
recent years, one should not forget, for example,
that India's health sector is worse than even some
African countries - for example, the percentage of
underweight children in India is not just five
times that in China, it is worse than most African
countries.
If economic reform continues to
benefit only a handful of Indians while the
majority experience no change in their lot, 10%
GDP growth rate will remain only a pipe dream.
Kunal Kumar Kundu is a senior
economic analyst with a leading foreign bank in
India.
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