The Hindu Business Line : Speed and content of economic reforms

The record of reforms is mixed and there is uncertainty about the process, is the consensus of economists who discussed the Indian economy recently. They are agreed that India can grow at a much higher rate, provided some sectors — farm and infrastructure, for instance — get due attention. A. VASUDEVAN analyses some key aspects of the economists' findings.

Of late there have been intense discussions on the speed, course and content of economic reforms in India. The India Policy Forum (IPF), set up hardly a couple of years ago, presented an opportunity for economists — Indian, and non-resident, as also foreign — working on the country's policy problems to discuss the reforms experience of the last 15 years and to provide perspectives on the future at a meet in Mumbai on August 3.

The expert views, aired through articles in financial dailies and journals and via the electronic media, remind one of the interactions between foreign and Indian economists on the Indian economy in the 1950s. What is interesting is the near-consensus of views among most NRI and foreign economists, with many Indian experts in agreement with them.

From the IPF panel presentations, the following major points emerged.

The growth rate can be lifted to double digits on a sustained basis provided policies are got right. It could even be 13-14 per cent a year.

Manufacturing holds the key to higher growth since the services sector has shown sufficient dynamism.

Agriculture is burdened with a large number of unemployed who have to be shifted to labour-intensive manufacturing sector.

Labour reforms are the key to growth of manufacturing.

Fiscal deficit reduction by broadening the fiscal base is necessary to trigger higher growth.

Foreign direct and portfolio investments should be promoted.

Infrastructure needs must be addressed and promotion of foreign investment would facilitate improvement in infrastructure.

There should be widespread privatisation, in particular of banks.

Primary education and health need focused attention.

Insurance reforms and distress-resolution mechanisms need to be strengthened.

Absence of progress on corporate bond market reforms has been a barrier to MNC operations.

The regulatory set-up is good in some areas such as telecom but not effective in many others.

Trade liberalisation should be pursued along with other initiatives for further opening of the economy.

Capital account convertibility is not advisable at this stage.

The record of reforms, according to the panelists, is mixed and there is an air of uncertainty in the process. Again on each of the above points, the discussion was brief. One is left with an impression that the panellists have a wider view than the Washington Consensus and have more closely aligned themselves with the spirit of the World Bank's Report of 2005 and the much ignored Barcelona Consensus of 2004. But would the present day political economic environment allow the realisation of the suggested framework?

Strong Deviation

Achieving double-digit growth on a sustained basis would require timely application of policies, both macro-economic and institutional, almost simultaneously. This would imply a strong deviation from the trend that has been observed in the last 14 years. Growth between 1992-93 and 2005-06 averaged 6.38 per cent per year with the standard deviation being very low at 1.4545. Not surprisingly, the quarterly year on year (y-on-y) growth between June 2000 and March 2006 (24 observations) gave the arithmetic mean of 6.41 per cent while the standard deviation was about 2.3397. The last 12 quarterly observations between June 2003 and March 2006 yielded y-on-y mean growth of 8.13 per cent and standard deviation of 1.4517.

The question is whether double-digit growth can be achieved on a sustained basis if the announced policies are not implemented due to political dynamics that is much more intractable than the uncertainty, say, about prices of crude oil and metals.

Manufacturing and agriculture have often acted as will-o-the-wisp, notwithstanding the removal of barriers to entry. The key role assigned by the panelists to manufacturing does not mean that the services sector would not grow and improve its share in GDP in future. What is, therefore, needed is to improve the productivity of agriculture while promoting the growth of manufacturing and services.

Are they realistic?

This brings us to the question of not only increasing output per hectare but also reducing the number of dependents on agriculture and rural activities. The solution to the former lies mainly in the technological and institutional frontiers but implementation has been lax. Regarding the latter, the panellists' solution is to invigorate labour-intensive manufacturing — food processing, for example. Is this realistic, given our experience about labour-intensive industries' performance since the mid-1950s? Is this realistic, given the availability of new technologies?

Theoretically, one can argue that innovations in technologies would generate larger employment opportunities than before. Such innovations, however, have to be economy-wide. In any case, the number of jobs required to be generated in the next 10 years is so large that one wonders whether the suggested solution is the real answer.

Labour reforms

The panellists' view that the absence of labour reforms constrains manufacturing growth has to be viewed at from more than one point of view. Undoubtedly flexibility in the labour market and contract laws are important incentives for producers. Such reforms would thus be efficiency-promoting.

But in India where social security is conspicuous by its near-absence for the vast majority, implementation of labour reforms on the lines of those found in some of the highly industrialised countries would be socially and politically impossible. In this context, one should concede that the recent initiatives towards financial and social inclusion and re-training would facilitate relaxation of some of the stringent labour laws. It is also doubtful if such reforms can be defended on economic considerations alone, in the light of the equity-growth relationship that is extensively discussed in the literature.

Financial and social inclusion and the added emphasis on provision of education, health and rural and urban slum rehabilitation and infrastructure such as roads would imply that fiscal deficits would exceed the targets set in 2004. It is perhaps time to revisit the appropriateness of fiscal targets, given the evolving and growing responsibilities of the state. Moreover, there does not seem to be the crowding-out phenomenon. The saving rate has been high at about 29 per cent of GDP, notwithstanding the public sector dissaving.

There is an enormous amount of work that economists, especially those associated with IPF, would have to do as they revisit the five themes touched upon here and perhaps to other areas of reforms as well. Their endeavours, however, would need to be realistic and that is possible only if they interact not only with policy-making bodies but also with observers of the social and political scene. The resulting policy frame would then be truly imbued with the political economy environment.

(The author, a former Executive Director of the Reserve Bank of India, can be contacted at asurivasudevan@hotmail.com)