An equal governance

By Pulapre Balakrishnan

WE ARE on the eve of the passing of one decade since a pronounced turn in the national economic policy. From the beginning, a large part of the criticism this evoked had flagged a potential for disaster of trade liberalisation rather than for any inherent lack of potency in the reforms. Thus we had been warned that tariff reduction would suck in imports which combined with the IMF loan would leave us increasingly indebted. Ten years hence this has not come to pass. Indeed almost every indicator on India's interface with the rest of the world has improved, notably India's external debt in relation to her national income. While it is far from having been established that this is the strategic consequence of the reforms per se it does nevertheless point to a certain resilience of the economy in the face of international competition. The failure of the wolf to appear in the form of renewed balance-of-payments stress may, however, have had the unhappy consequence of taking our attention away from what may be considered to be of most interest in an economy with a high poverty count, its capacity to generate wealth. Where trade accounts for only about one fifth of our national income, most economic activity in India involves interaction between our compatriots, not between us and foreigners. It is the nature of this interaction that must determine the quality of life for us. In this connection one might also call attention to the potential role ascribed to foreign direct investment in India's future. That this appears to be exaggerated is evident from a reading of the experience of the United States in the 20th century or even from that of the more recent emergence of South Korea as a world beater.

Returning to our own reforms, we may start by asking how they have delivered in the area where most was promised of them, growth of income. Here the comment by The Economist magazine that the reforms have finally sloughed-off what had once appeared as an eternal Hindu rate of growth is in the nature of a sleight of hand. While it is technically correct that the 6 per cent and odd annual average achieved in the 1990s exceeds the steady 3 per cent and odd rate, recorded on average during the three decades since 1950, the latter was already breached even before the current reforms were launched. Indeed, if we were to divide the last 50 years into three sub-periods - 1950-80, 1981-91 and 1992- 2000 - we would find, I wager, that the rate of growth of the gross domestic product accelerates most in the second among these. In terms of the rate of growth, therefore, the period since the reforms does not represent as significant a shift relative to the past as do the 1980s. This history is informative as to the mainsprings of growth. One relatively unrecognised feature of the 1980s is that during that decade agriculture grew faster than in any other decade starting 1950. The associated faster overall growth in the economy very likely signals that a demand constraint is unbound by faster agricultural growth unleashing rural purchasing power. Thus the slowing of agricultural growth in the 1990s may have compensated for any dynamism sprung by the removal of barriers to entry through delicensing and of supply constraints through trade liberalisation, central elements of the reforms.

Arguably, the reforms have adopted a supply-side strategy which cannot in itself be faulted. The moot question is how much of a very real supply constraint in the Indian economy the reforms have been able to ease. Legal barriers constitutive of a policy regime may regulate entry but they do not alter the supply conditions of an economy. Further, while any analysis of the supply side must legitimately incorporate prices as incentives it must also recognise the importance to it of inputs that are external to the private firm. These include infrastructure and a nation's human-capital endowment measured by the educational and health status of its manpower. Notice that all of these inputs, apart from being external to the firm, are in the nature of public goods. At least since Adam Smith, we are attuned to the proneness of the market to undersupply public goods, for their services cannot be attached by the private producer even as they are siphoned-off by the public as consumers. Public goods from schools to sewers are foundational to growth and development for which reason they have historically been provided on a large scale by the state as distinct from the market in economies as diverse as the U.S. and South Korea.

Since infrastructural development is not so easy to measure, a proper assessment of its progress under the aegis of the reforms is not so straightforward. However, an indirect assessment may be made by noting the steady decline in public investment by the Central Government. This has been an almost inevitable fallout of the reforms. First, there was the plain ideology of the Washington Consensus, taken on board by India's economics establishment, that all public expenditure is bad. Next, the political economy of fiscal management has implied that cuts in public expenditure have fallen disproportionately on capital outlay, either directly by the Centre or in the form of on- lending to the States for investment projects. Any international comparison would suggest that the decline in public investment in India since 1991 is unfortunate. It has been found for the U.S. economy that the trajectory of private sector productivity growth parallels the path of public investment. So the idea that public investment diminishes private incentive is bad economics.

Contrary to an ideological reading of the argument that there is a need for enhanced supply of public goods in the economy, I suggest that at least some privatisation is a necessary first step. For instance, there can be little economic justification not to jettison those jaded jalopies that are Air India and Indian Airlines when much-needed capital can be freed for more effective use elsewhere in the public sector following their privatisation. That there is the issue of getting a reasonable price is no doubt a crucial but nevertheless separate matter.

In the realm of political economy while on the topic of public goods, it is by now clear that the States hold the key. Almost every item of public infrastructure from power to education and transport other than the Railways and the airlines is a State Subject. Thus far the States have adopted a somewhat coy approach of `wait and watch' while the Centre has lurched weakly from pillar to post. A high point of this approach has been the States' wet response to the Centre's suggestion that henceforth they stock grain. When carried to its logical extreme this plan has in it the potential of weakening the power of the northern farm lobby to influence prices via its geo-political access to Delhi. In many ways the role of the Centre appears set to shrink in the future. The States will perforce need to get their act together.

The substantial opening up of the economy since 1991 has not produced a promised deluge. Nor has it propelled the economy forward at a faster rate. The reforms have at best only maintained the tempo of acceleration that had commenced earlier. Growth has been more steady since 1991 though. All this does not add up to a stirring verdict. However, it is not an entirely surprising outcome either. Significantly affecting the rate of growth in the economy would require a different strategy. Among other things, it must include a larger effective supply of public goods. On the other hand, the political rationale of the reforms is to make space for unlimited private initiative within the economy while leaving intact a colonial machinery of government not intended to encourage progress in the first place. Steering India to prosperity is not for the squeamish or the inept. It commands an equal governance.

Send this article to Friends by E-Mail

Section  : Opinion
Previous : Nuclear risk reduction
Next     : Ceasefire extension