Continuity, with a populist tilt

The first six months of Manmohan Singh\’s rule have produced no significant improvement in the quality of politics. But have they produced improved economic policy? Not really. Stock market fears that the government would be captured by the Left Front have proved false. But so have optimistic predictions that economic reforms would ride again under the Singh Parivar (Manmohan Singh, Montek Singh Ahluwalia and N K Singh).

We see a slight tilt to the left, and a more than slight tilt towards populism. But overall, we see mainly continuity. The half-baked liberalisation of the last decade continues, with some positive steps and some retrograde ones.

The slight tilt to the left does not worry me. The tilt to populism does. The government slogan of \”reforms with a human face\” implies that Manmohan Singh\’s first round of reforms in 1991-96 was somehow inhuman. Nobody explains how this inhumanity produced the sharpest ever fall in poverty and the sharpest ever rise in literacy since 1991.

Let me list the main populist trends, main positive changes, and main negative trends.

Populist trends

Job quotas for dalits and backward castes in the private sector. The Congress benefited from such reservation in the Maharashtra elections. Expect more of the same before the coming elections in Bihar, Jharkhand and Haryana.

Free power for farmers has been decreed in Andhra Pradesh, Karnataka, Tamil Nadu and Maharashtra. Expect the cancer to spread.

State Electricity Boards were supposed to become solvent again after their debts of Rs 40,000 crore were partly written off, partly transferred to the centre. But the Economic Survey estimates that SEBs will lose another Rs 21,698 this year!

The open-ended subsidy for cooking gas and kerosene could exceed Rs 10,000 crore. A sensible attempt to raise cooking gas prices by Rs 5 every month till the subsidy was eliminated was rolled back when the Left Front objected.

The Common Minimum Programme promises to increase education spending from 3.4% to 6% of GDP; health spending from 0.9% to 3% of GDP; and a National Employment Guarantee Programme that will cost at least 1% of GDP. These are enormous sums for programmes with enormous leakages. Good intentions, dubious outcomes.

Naive pessimists worry that India already has the second highest consolidated fiscal deficit in the world. So, won\’t the spending spree promised in the Common Minimum Programme lead to fiscal disaster? Hopefully not. First, most states are so incompetent that they find it difficult to spend money productively: every year they return unspent thousands of crores of Plan funds. Second, central government revenues are benefiting from two long-term factors: the expansion of the service tax, and the fall in interest payments arising from lower interest rates. So, fiscal deficits should continue to be high but not disastrous.

Next, look at the main positive and negative policy changes.

Main positive changes

A new textile package in the budget has removed traditional tax discrimination against the mill sector, provided for technological upgradation, and hence laid the foundation for India Inc to take advantage of the abolition of global textile quotas from 2005.

Legislation is in hand for appointing a pension regulator, and allowing foreign investment in pension funds. This is a major conceptual breakthrough.

A new Special Economic Zones law is in the works; hopefully, industries in such zones will get the same quality infrastructure and labour flexibility as in Chinese SEZs.

The budget offered school vouchers on an experimental basis. This again is a conceptual breakthrough.

Six airports are to be upgraded with private participation.

Import tariffs continue to fall towards ASEAN rates.

Main negative changes

The target of doubling agricultural credit in three years reverses years of banking reform. Chidambaram should create conditions where banks can profitably lend to agriculture, instead of forcing them to lend against their better judgement.

Supposed decontrol of oil prices has been replaced by firm control.

Paswan has decreed, formally or informally, price control on steel and drugs.

The proposal to allow private coal mining has been dropped, despite the growing coal shortage.

The absurd rule in civil aviation policy continues, allowing FDI only by companies with no connection to aviation.
On the basis of this evidence, here is my verdict on six months of Congress rule: Despite political rhetoric, we have more continuity than change on the economic front. India remains firmly on the neo-Hindu path of half-baked liberalisation.

This should continue to yield the neo-Hindu growth rate of 6% per year, but not the targeted 7-8%. The government wants neither radical reform nor backsliding. By rocking the boat only minimally, it wants to survive a full five-year term. And it will.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top