Competition in Bankruptcy

Foreigners have stopped asking Whether the economic reforms since 1991 are reversible, and instead tend to make gung-ho statements about India becoming the next Asian tiger. Some already regard Mr Narasimha Rao as Deng Xiaoping Jr.

They should look at the antics in the current Andhra Pradesh elections, where Mr Rao’s prestige is at stake. Both, Congress and Telegu Desam Party (TDA), are making election promises certain to bankrupt the state exchequer. The TDP promises to give poor families rice at a highly subsidised rate of Rs 2 per kg. Mr Narasimha I Rao has made anguished state-. ments about the need to avoid election promises involving unsustainable giveaways. But, having paid lip service to financial rectitude, his party has promised 5 to 10 kg of rice free of charge to families with school-going children, and subsidised rice to others at the rate of Rs 3.50 per kg. Both parties have promised to abolish prohibition, foregoing revenue of Rs 1, 000 crore per year. Add the promises on rice, and the two parties are proposing giveaways ranging from Rs 1,600 crore to Rs 2, 200 crore per year.

This would be unexceptionable if the state had the necessary revenue. But Andhra Pradesh is already bust, and unable to deliver essential services. Any new giveaways will be at the expense of education, health and basic infrastructure. Voters are being asked to choose between two rival visions of bankruptcy. The fundamental assumption of both parties is that voters are dumb, and nothing succeeds like excess.

So political competition in give-aways, a major factor which made India bust in 1991, is very much alive despite liberalisation. Rising revenue deficits in the 1980s were bridged by excessive government borrowing, which spilled over into foreign borrowing, which ultimately could not be repaid.

There were many reasons for overspending, but the biggest was the rise in subsidies, which touched almost 16 per cent of GNP by the late 1980s, not far short of the entire tax revenue of the country. The bulk of the subsidies benefited better-off people, not the poor. Borrowing to finance subsidies is suicidal — the loans have to be repaid with interest.

CENTREPIECE: The centrepiece of the 1991 reforms was the reduction of the fiscal deficit. There were, of course, other major reforms such as widespread delicensing of trade and industry. But, experience the world over shows that all other reforms will fail if a country runs reckless fiscal deficits.

Mr Manmohan Singh has frequently stressed the need to raise canal water rates, which do not cover even maintenance costs in any state today, threatening the siltation and gradual collapse of entire canals. Yet in the Madhya Pradesh state elections last year, Congress promised to cut the low canal rates decreed by the preceding BJP government. The Congress won the elections, strengthening the political case for myopia.

This problem is not special to India the world over, politicians love spending but hate taxing. Within limits, subsidies are not only permissible but desirable. The key question is whether a country can keep political competition in subsidies within the bounds of prudence.

India can probably do so if it has a stable Central government, but this cannot be guaranteed in future elections. Some foreign investors say it does not matter who comes to power, since the next government will have to continue with liberal policies. This would be true if either the Congress or BJP win.

But what happens, as is conceivable, if neither party gets more than 220 seats out of 544 in 1996? The result will be a minority Congress government, dependent on support from sectarian and Communist parties, liable to be driven into populism and paralysis.

Liberal policies may continue, but will mean little if reckless giveaways become a means of political survival. The real danger comes, not from a change in government but from unstable coalitions, which are by their very nature myopic and imprudent.

Remember that, despite much foreign debt, India looked an eminently rescuable economy in 1989. Then the Janata Party came to power as a minority government, and the trouble began. The party’s manifesto had promised waiving bank loans to small farmers, but Mr Devi Lal and the farm lobby got it expanded to cover all farmers, raising the cost by Rs 6, 000 crore. Then came the Mandal and mandir agitations, the collapse of the V. P Singh government, and a new era of instability and myopia presided over by Mr Chandra Shekhar.

At this point foreigners stopped lending to India and NRIs began to withdraw their dollar deposits. They knew India was rescuable in economic terms, but felt the polity was incapable of taking the tough rescue measures needed.

Political instability could recur after 1996, and if so, all bets on India will be in danger. Minority governments can be pressured into enormous giveaways. Those who claim the reforms are irreversible need to remember a fundamental truth: nothing is irreversible except old age and death.

What do you think?