The Hindu Business Line : What is `reforms with human face'?

There is a case for economic reforms — withdrawing the state from activities the private sector can carry on profitably — and for a human face — redoubling the involvement of the state where only it can mediate. But the problem is in translating this into reality. Will the ruling alliance unitedly shrink, re-size and restructure the government to present its human face? Else, not only human resource development but also economic growth will suffer, says V. Anantha Nag eswaran.

AFTER A week of unexpected twists and turns, the country now has Dr Manmohan Singh as the Prime Minister. It is a happy ending to the drama that began to unfold with the exit polls. Internationally, not just in India, it would be hard to find a man who would better fit such a high office. His task has just begun. Invariably, it has been easier to introduce economic reforms in most countries when there are crises.

With some justification, it can be said that the presence of Communists in the ruling coalition is crisis enough. Accompanied by many other characters that mal-implemented the Fifth Pay Commission, they have the ability and the record to put India's fiscal health beyond the pale of repair. The combined fiscal deficit of the Central and State governments at 12 per cent of GDP is already high. However, that does not seem to faze the Communists. They have begun demanding subsidised diesel for farmers.

The new Congress Chief Minister of Andhra Pradesh began his rule by signing free power for farmers. Dr Manmohan Singh had to remind him that user charges are essential. It appears that he might have to repeat the advice many times over. Mr Rajasekara Reddy's neighbour in Tamil Nadu has restored sanity in the political discourse in the State but, unfortunately, also brought on fiscal insanity. Shelf life of common sense economics in India is cruelly short. Indeed, Verdict 2004 is a testimony to that.

The left-of-centre coalition has dug out a hackneyed slogan of combining reforms with a human face. What they must realise is that the pre-requisite of showing a human face to the poor requires less of the government that India has seen over the years and not more. It requires a qualitatively different government.

`Reforms with a human face' is relevant

For starters, it is quite appropriate for Dr Manmohan Singh to talk of a human face for reforms. The state has an obligation to provide a life of dignity to many millions who do not enjoy even the bare necessities of life. It is inevitable that when the space of economic activity opens up for the private sector in an economy hitherto controlled by the government, it is the people with the necessary skills and resources — health, education and wealth to obtain them — that participate in and profit from such expanded activity. Hence, their incomes initially rise faster than those who do not possess such advantages. Even if the latter find their income rising, perceptions of such rising inequality brought out by more open consumption patterns of the urban dwellers could be a powerful political weapon.

However, slogans are easier but delivering on them is not. That is why Kerala and West Bengal have the country's highest unemployment rates while Gujarat does not. That is why, when Candidate Lula of Brazil threatened to repudiate IMF loan agreements, investors wiped out the value of Brazilian financial assets, perhaps, in an attempt to prevent his election. Voters were unfazed. They elected him in 2002. In 2003, he became a darling of the markets. He not only did not repudiate any IMF loan but also arranged another stand-by facility. He increased the target for primary budget surplus and recently granted a hike in minimum wages that was far below what was demanded by the workers affiliated to his own party. Is it the power of logic that sways even firebrand Leftists to embrace certain principles of capitalism or, as Indian communists would say, is it the power of capital that forces such a shift?

In defence of reforms with human face

Prof Jagadish Bhagwati's recently released book, In Defence of Globalisation eloquently establishes that it is the power of ideas that persuades politicians like President Lula to embrace globalisation even as they wish to calibrate its rough edges. However, one of the reviews of the book, done by Knowledge@Wharton (http://knowledge.wharton.upenn. edu/index.cfm?fa=viewArticle&id=985) found it disappointing that Dr Bhagwati did not address the issues raised by the Scorecard on Globalisation, 1980-2000: Twenty years of diminished progress, published by the Centre for Economic and Policy Research in the US. The Scorecard states that progress in boosting life expectancy, reducing infant mortality and promoting educational growth all experienced disappointing reductions between 1980 and 2000.

While the authors of the Scorecard do not suggest that globalisation was responsible for the deterioration in performance, they do aver that "a very strong prima facie case can be made that some structural and policy changes implemented during the last two decades are at least partly responsible for these declines".

It is easy to agree with the tentative conclusions reached by the globalisation scorecard. Just as economic reforms expand the scope of national economic activity, globalisation expands opportunities internationally for those who are in a position to take advantage of them. Since this has also come with a requirement that the state shrinks itself, it has reduced the scope for the state to intervene on behalf of the weak and needy. The ability of the state to bring more people to participate in economic activity is curtailed.

Hence, a conceptual case exists both for economic reforms — withdrawing the state from activities that the private sector could carry on profitably — and for a human face — redoubling the involvement of the state where only the state can mediate. The problem for India starts in translating the concept into reality.

Who would show the human face and how?

Gaurav Datt and Martin Ravallion (Is India's Economic Growth Leaving the Poor Behind? May 2002, Policy Research Paper, World Bank) help to define reforms with a human face: "Achieving a policy environment conducive to growth interacts multiplicatively with human resource development; doing just economic reform or just human resource development one may achieve very little in terms of poverty reduction, but doing both can take a nation a long way."

Therefore, in practice, `reforms with a human face' means pro-growth reforms must be strengthened by pro-Human Resource development reforms. While the former meant withdrawal and disengagement of the state, the latter requires re-defining the priorities of the State. In effect, it implies a drastic restructuring of its organisation.

Are the Congress and its allies ready for this more difficult task? Its achievements are not encouraging. After the early de-licensing and liberalisation of the financial sector, the Congress could not tackle the more difficult ones. Rajiv Gandhi who railed against the Congress culture in 1986 finally became a victim of that culture.

In fact, since Rajiv Gandhi made the famous statement that only 15 per cent of every rupee spent by the state on development reached the intended beneficiary things have worsened further. The state now appropriates more resources meant for the poor. Therefore, is there much purpose in pushing more resources through a corroded and clogged delivery channel that the Indian state apparatus is?

The Common Minimum Programme devotes two lines for administrative reforms when it is the key to delivering government services to the poor and downtrodden. They are normally powerless to take on the bureaucrats. As Mr Swaminathan Aiyar wrote recently, the face of the government to the public is the electricity linesman, the village patwari and the registrar at the Taluk Office. Unless the government has an action plan to make them responsive, reforms with a human face would remain an empty and worse, a misleading slogan.

If the delivery channels are cleared of the debris — it is a tall order and the CMP does not acknowledge that the state machinery, as it exists today, is incapable of discharging its responsibilities — the next question is about finding resources.

Finding resources is the second step

Let us take up privatisation. If the state wishes to discard those units it does not wish to own, why should a profit-seeking private entrepreneur find it attractive to own them? If profit-making public sector units are to be retained, would there be a guarantee from the government, based on objective study, that the profits are commensurate with the potential? If not, is there a justification to retain them still under the government? More importantly, even where the profits are in line with potential, is it necessary for the government to engage in businesses where a competitive market environment exists?

It is true that ownership need not be a factor in operating efficiency but it is an empirical fact that, in India, it is an important factor. Public sector units, operating as extended arms of the Ministries and government departments, are unable to apply commercial considerations both in strategic and tactical decisions. The two state-owned air carriers are classic examples. Hence, to retain profit-making units within the public sector is tempting and seemingly persuasive but does not release sufficient resources for the state to make a difference in areas where only it can.

For instance, the agriculture sector needs resources for irrigation. The CMP states that "the UPA government will ensure that public investment in agriculture and irrigation is stepped up in a significant manner at the very earliest". How?

Existing policies leave little scope for boosting agriculture through provision of better and more irrigation as the funds are diverted for providing subsidies at input and output stage. Successive governments have not taken the public into confidence on who benefits from such subsidies. Mr P. Chidambaram, when he was Finance Minister, released a white paper on merit and non-merit subsidies. That should be put on the public domain again and should form the basis for the detailed roadmap on fiscal policy that the CMP that the ruling coalition has promised within 90 days.

They would do well to remember that `budget subsidies in India are large, largely hidden, mainly input-based, and generally regressive. These subsidies hide and promote inefficiencies.

The primary remedy is for the government to disengage itself from several sectors where its presence is not required' (D. K. Srivastava and Bhujanga Rao: Government Subsidies in India: Issues and Approach, National Institute for Public Finance and Policy, paper presented at the Conference on fiscal policies to accelerate economic growth, May 2001).

The question for India is whether the ruling alliance would stand united in shrinking, re-sizing and restructuring the government to present its human face. If it does not, reforms with a human face would not only fail to deliver on human resource development but would also pull down the economy's growth impetus.

(The author is Director, Global Economics and Asset Allocation, Credit Suisse, Singapore. The views are personal. Please address feedback to nageswar@singnet.com.sg)