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the Old Economy
Speaking to the U.S. Congress during his
recent visit to the United States, Prime Minister Vajpayee noted, “In
the last ten years, we have grown at 6.5 per cent per year: that puts
India among the ten fastest growing economies of the world.” He boldly went on to add, “We are determined to sustain the
momentum of our economy: our aim is to double our per capita income in ten
years -- and that means we must grow at 9 per cent a year.”
Vajpayee is to be applauded for setting ambitious goals
for the nation he leads. After
all, no general ever won a war without being ambitious.
The bad news, however, is that the Prime Minister’s
resolve is about to be tested. Finance
Minister Yashwant Sinha must soon present the second budget of the present
government. If he fails to
announce bold new initiatives, the Prime Minister better shelve his goal
of doubling India’s per-capita income in ten years.
If tough decisions are not taken in the first two years of the
government’s tenure, they will not be taken in the last three.
The list of potential reforms is too long to
fit this column. Therefore,
let me focus on what I regard to be the most important area to stimulate
growth: industry. The major
new stimulus to growth must come from further freeing up of the Old
Economy, which lags behind the unfettered New Economy.
Prior to the July 1991 reforms, the conventional industry
was shackled in five different dimensions: the heavy industry was a public
monopoly, private industry in the organized sector was subject to strict
investment licensing, most of the remaining sectors were reserved for
small-scale enterprises, labour laws effectively prohibited exit of firms
with 100 or more workers, and imports were subject to licensing and
exceptionally high tariffs.
The reforms during 1990s have unshackled the
economy in some of these dimensions. Thus, public monopoly has been abolished except in railways,
investment licensing is a thing of the past, import licensing is
essentially gone and tariffs have been substantially reduced.
Nevertheless, the process of freeing up the industry
remains incomplete in key respects. If
we are to begin growing at 9 percent, immediate action is needed on at
least four fronts.
First, our labour laws remain entirely untouched by
reforms. While the workers in
the organized sector enjoy absolute protection from retrenchment, contract
labour and other workers are under a perpetual threat of being laid off. Both situations need to be remedied.
Without the reform of labour laws, we cannot take full advantage of the
liberalization that has already taken place.
For instance, the Prime Minister recently ended the small-scale
reservation for garments and hosiery
making. But potential
large-scale manufacturers will still hesitate to enter so long as exit
costs remain high. Exit
conditions have profound effect on entry decisions: not many enter the
“no-exit” world of the Mafia voluntarily unless they expect to become
Second, the process of industrial
liberalization will remain incomplete without an end to the small-scale
industries (SSI) reservation. Several
hundred key labour-intensive products continue to be reserved for
manufacture by small-scale enterprises.
While economic assistance to small enterprises can be defended on
income-distribution grounds, there is no rationale whatsoever for the ban
on the entry of large-scale manufacturers in these products.
With import licensing virtually gone, our small enterprises must
already compete against products manufactured by large-scale enterprises
elsewhere in the world. Why
then deny our own large-scale enterprises the right to manufacture these
Three years ago, the government had appointed
an Expert Committee on Small Enterprises. Led by its dynamic chairman Abid Hussain, the committee
recommended an immediate end to the SSI reservation. The committee argued, “The reservation policy has provided
an illusion to the government and the country that adequate
protection/promotion was being provided to SSI.
It has actually done precious little for their promotion, and
succeeded only in keeping out our large enterprises.”
The reservation policy has hampered the growth of
important sectors like light engineering and food processing.
It has also stunted the exports of toys, textiles and leather:
small enterprises are simply unable to supply large volumes of
high-quality goods in time. If
we are to effectively compete with China in the world market, it is as
important to unshackle the SSI sector from the reservation policy as it
was to free the organized sector from licensing.
The third area that deserves immediate action is
privatisation of public sector units (PSUs).
It may be argued that if private sector grows sufficiently rapidly,
the relative importance of PSUs will automatically decline over time.
But the fact is that PSUs constitute a very large proportion of the
industry. We cannot afford to
sacrifice their rapid growth and still grow at 9 percent per annum.
That means privatisation.
When pressed on slow progress on privatisation, the
government has often taken a cover behind the argument that there is no
consensus for it. This is
rather disingenuous. Precisely
what sections of the society oppose privatisation: the man in the city
street or the farmer in the village?
Much of the opposition seems to be concentrated in the line
ministries themselves, which stand to lose their enterprises without
gaining the revenue from their sales, the workers who enjoy guaranteed
high-wage jobs without having to work and the top civil servants who fear
losing the perks that come with sitting on the boards of these
Finally, any serious reform must carry forward trade
liberalization, our tariff rates remain among the highest in the world.
Without further tariff liberalization, the economy’s
transformation into the producer of labour-intensive goods will remain
the government faces opposition to liberalization from the domestic
industry, which seeks protection. But
good economics says that protection to the domestic industry should be
provided through the exchange rate, not selective trade barriers.
Times, January 31 2001