Tread cautiously, Mr. Sinha

By Prem Shankar Jha

Hours after he presented his budget, Mr. Yashwant Sinha described it as the start of a second generation of economic reforms. But in the euphoria that was released by his measures to revive investment in industry, few grasped the import of his words. Yet it is this second generation of reforms that will decide the fate of the economy, and of the millions of job seekers that enter the market fresh from schools and colleges every year.

These structural reforms fall into four categories. The first is the abandonment of a high interest rate policy that has been kept firmly in place since the first monetary reforms initiated by Mr. Pranab Mukherjee in 1974. The second is the dismantling of administered pricing, to be completed over two to five years. The third is the dismantling of mercantilist policies in agriculture, especially pertaining to food procurement. The last is the amendment of labour laws to permit hiring and firing freely in factories that employ less than 1,000 persons. These make up 96 per cent of industrial establishments and employ 89 per cent of the industrial labourforce. If the Government is able to stick to its resolve and completes these reforms, it will more or less complete the transformation of India from a command to a market driven economy that was the final goal of the reforms that began in 1991.

Anyone who has even an inkling of the nature of globalisation knows that without completing this transformation the Indian economy will drift from crisis to crisis and eventually founder. This could easily cause the country to disintegrate. Yet these structural changes will have such a profound impact on peoples' lives in the short run that unless they are managed with the utmost sensitivity the political backlash could well cause them to fail. Were that to happen India might find itself in the worst of both worlds - a dismantled command economy that has withdrawn the protection it once gave to the people, but without the energy and flexibility to ward off an invasion of foreign products and compete successfully in the global market.

A close look at the proposed structural reforms shows that none has been sufficiently well thought out to minimise the losses they will inflict and the political backlash that could follow. This is especially true of the two most sensitive reforms - the freeing of agriculture and the amendment of the labour laws. The latter has already been stiffly opposed by the trade unions and may have played a role in Ms. Mamata Bannerjee's decision to delink the Trinamool Congress from the NDA. But the full implications of the Government's decisions on food procurement have still to sink in. The Central Government was forced to abandon the unlimited procurement of all the foodgrains offered to it by farmers at the declared support price, and to limit it to the amount needed to maintain buffer stocks against drought because since 1992-93 procurement has consistently exceeded the offtake from the ration shops by 50 to 80 per cent. This has caused a steady increase in the foodgrain stocks held by the Government,. Much of this grain has rotted, but holding even the rotted grain has been costing the Government Rs. 5,000 a tonne per year.

In January 2000 the stocks of foodgrains had risen to 31.4 million tonnes against a buffer stock requirement of 16.8 million tonnes. The decision to charge the economic cost of holding foodgrains from those above the poverty line, when they bought food from the ration shops, caused an especially sharp decline in offtake last year. As a result in January this year the Government found itself saddled with 45.7 million tonnes, almost 29 million tonnes more than it needed. A change of policy became imperative.

The Centre has promised financial support to State governments to undertake procurement and distribution over and above what it buys for insurance purposes. But since the States too do not have the money to incur a loss of Rs. 5,000 per tonne on storage and distribution, they will only procure as much as the offtake merits. Thus, the overall total procurement is likely to come down from 31 million tonnes in 1999-2000 to around 20 million tonnes in future years. In fact Government purchases could be even smaller next year if the Centre decides to draw down some of its present bulging stocks.

The impact that the diversion of 10 to 15 million tonnes of grain from the PDS to the market will have on prices can be easily imagined. Yet if the Indian farmer is ever to increase his income by moving from low value-added, non-perishable produce to high value-added and, in most cases, perishable produce, he has no option but to go through this trial by fire.

Mr. Sinha has tried to cushion the blow by simultaneously removing most of the constraints on inter-State movement of foodgrains that have existed since British days. This will enable the Punjab farmer to sell directly in Kerala and vice versa, and lead to an equalisation of market prices all over the country - a change greatly to be welcomed. But the fact remains that the system of unconditional and unlimited government purchases has greatly inhibited the diversification of Indian farming. As a result, farmers will face several rough years before they succeed in diversifying their crop to take advantage of the liberalised domestic trade regime. Many will not survive the changeover. Mr. Sinha and his colleagues will do well to remember that when a five decade old system is broken one change will beget others. If the liberalisation of the food economy is to benefit the farmer instead of harming them it must be accompanied by a rapid improvement of facilities for storing and marketing perishable produce. The first needs cold storages, but cold storages need uninterrupted, high quality power supply, and that will only come if the State starts charging economic power tariffs from the farm sector and metering its consumption. Thus the farmer, in whose name the States are resisting the reform of rural power tariffs, will be the first victims of their solicitude.

Mr. Sinha would also do well to consider using the opportunity created by slackening market prices to switch from the present inefficient and leaky system of food rationing to a system based on food stamps that the recipients can use to buy a wide range of products. The desirability of the change is not in doubt. But there could be no better time for making it. Food stamps worth Rs. 100 per month per member of each below the poverty line family would cost the Central and State governments Rs. 48,000 to 50,000 crores a year. But not only would the resulting demand provide a much needed cushion for market prices: it would morally justify the removal of all remaining administered pricing, such as for kerosene and cooking gas.

Send this article to Friends by E-Mail

Section  : Business
Previous : Wireless technology dominates at CeBIT 2001