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Goodbye to Double-Digit Growth Rate

Arvind Panagariya

Wednesday June 30, 2004

According to an old joke, Indian economists are divided into two types: pessimists and optimists. The pessimist says that there is so much wrong with the Indian economy that he cannot imagine it getting any worse and the optimist says he can.
The changes in the past fifteen years have, of course, relegated this joke to history. We now only argue about whether India can push the current growth rate of 5 to 6% significantly up.

Speaking on behalf of the optimists, I have argued for some time that a double-digit growth is well within India’s grasp. India still remains well inside its true production possibilities’ frontier, which makes further acceleration of the growth rate a perfectly feasible task. Sceptics might say that this is not possible without a major increase in the savings rate but the savings rate is itself known to rise with rising incomes.

Viewed another way, with 65% of its labour force still in agriculture and underemployed, India is just waiting to be transformed from a primarily agricultural to a primarily industrial economy.

As labour-intensive industries grow and pull even a quarter of the rural labour force into gainful employment in the next 10 years, we can expect the industry to grow at double-digit rates.

Simultaneously, the accompanying reduction in the population pressure on farmland will help raise agricultural productivity and wages. Add to that the increased scope for many ancillary services to grow, and you have a winning recipe.

Unfortunately, if one goes by the signals being transmitted by the policy initiatives in the past month, the prospects for this scenario to play out in the near future are dim. At the time the Common Minimum Programme (CMP) was released, despite its many flaws, the optimists held hope for three reasons.

First, it could be that the CMP was a purely political document and will not be in the way of future reforms. Second, as a second best, even if the United Progressive Alliance (UPA) found itself bound by the CMP, wherever available it will exploit the flexibility offered by its vague language. And finally, with Dr Manmohan Singh at the helm and P Chidambaram as the finance minister, one could hardly imagine a slowdown in the reforms.

Recent developments strongly suggest, however, that the UPA intends to live not just by the letter of the CMP but its spirit as well. The prime minister recently announced his intention to personally hold fortnightly reviews of the progress towards the implementation of the programme.

In a letter to all the ministers, he is reported to have said, “There are lots of promises made in the Common Minimum Programme and we have to fulfill them.” In parallel, a 20-member advisory board on the CMP has been appointed under the chairmanship of the Congress president Sonia Gandhi.

The strict implementation of the CMP means that some key reforms, without which growth cannot be pushed beyond the current 5-6% range on a sustained basis, will not take place under the current government.

Foremost among them is the reform of the Industrial Disputes Act, which is explicitly ruled out by the CMP. The reform of other labour laws is also limited to harmonisation and streamlining. The CMP also effectively shelves the privatisation programme as reflected in the decision to eliminate the disinvestment ministry.

The lesson of the past several years had been that the administrative ministries do not want to self-destruct by giving up their enterprises. Only a ministry whose survival depends on privatisation holds the promise of an effective privatisation programme.

But the news gets worse. Many of the policy initiatives originating in the various ministries are reminiscent of the pre-reform era and fail to take advantage of the flexibility in the CMP to promote genuine reforms. For example, despite promising “a major promotional package for the SSI sector,” the CMP does not rule out trimming the SSI list.

Yet you will not find any reference to such a move in the recent “Draft Note of the Small Enterprises Development Bill 2004.” Instead, according to the minister for small scale industries, “The Bill will address the issues relating to registration, credit, marketing and trade protection.”

In the same vein, while the CMP is not hot on privatisation, it does not rule it out. But among the first acts of the new minister of heavy industry & public sector enterprises has been to appoint a high-power committee to look into the issue of reviving sick public sector units under it. The ministry has also requested the finance ministry and Planning Commission for funds for this purpose. At least from the news reports, one cannot find any reference to the circumstances under which the high-power committee would recommend selling off the units rather than throw good public money after bad.

As a final example of bad policy proposal, the new steel minister has recently proposed to introduce a steel price regulator. According to a newspaper report, following the removal of the administered prices and reduction in trade barriers, the Indian steel industry had become highly competitive. Precisely what purpose could the creation of a price regulator serve?

In the forthcoming budget, finance minister Chidambaram carries an unusually heavy burden. He will need to go an extra mile to re-establish the credibility lost due to the poor policy initiatives to date and the existence of many ill-conceived promises in the CMP.

These have been widely discussed in the press, most notably by Shanker Acharya in a recent article in a business daily. Among the major reforms the FM could announce to reassure the markets are the trimming of the SSI reservation list by eliminating all textiles and apparel items, replacement of the current fragmented tariff regime by a 15% uniform tariff and the implementation of the Kelker tax reforms proposals on both indirect and direct taxes. The exemption raj in direct taxation is as much of an evil as the license raj and inspector raj.