Recipe for economic revival

AT THE END of a flurry of meetings last week on how to deal with the present slump in the economy, the Central Government appears to have decided that in the short term a major step-up in public investment is the best option to pull the economy out of its present sluggishness. The Prime Minister, Mr. Atal Behari Vajpayee, at the meeting with his Advisory Council on Trade and Industry, suggested that private investment could then ride on the back of the higher public outlays. This is indeed the best option and this course of action could well have been decided upon months ago. But much will depend on how quickly and by which mechanisms this strategy will be implemented. Success will also depend on avoiding the mistakes of the past.

At the same time there is no shortage of contradictory advice like what Mr. Vajpayee had allowed himself to be given earlier in the week by the McKinsey Global Institute (an arm of the international consultancy, McKinsey and Company) on the basis of its country report on India. McKinsey is no different from other management consultancies whose expertise is in commercial affairs, not economic policy. The consultancy has done 12 other country studies, more recently on Russia, Poland and Japan, but none of them has shaken the world of economic decision-making. The 13th country study is unlikely to change the impression that making substantive suggestions on economic policy calls for an altogether different and higher order of skills. The burden of the McKinsey argument is that the introduction of a strong regulatory framework, the removal of reservations for small industry, a sharp lowering of import duties, privatisation of electricity generation, a total sell-off in the public sector, freedom of entry to foreign supermarket chains and reform of regulations in the urban land market will push annual Indian economic growth to the 10 per cent mark as early as 2004-05. There are also some outlandish suggestions like permitting 100 per cent foreign direct investment (FDI) in all sectors other than defence; outlandish because no economy of any consequence has such an extreme regime for FDI. But the basic problem with the report which passes itself off as a substantive one is that while it quantifies the increments to GDP growth in the whole economy that would follow specific policy measures, it is based on an analysis of no more than 13 sectors, accounting for just over a quarter of India's GDP. The bulk of the recommendations have been made many times before by a number of Indian organisations and economists. A foreign management consultancy repeating these does not add to their legitimacy.

Considering the unique circumstances surrounding the gloom in the Indian economy - a stagnation in domestic demand that has led to a cut-back in private investment and the global slow-down that has adversely affected exports - the immediate solution that suggests itself is a public investment-led economic revival. The presence of substantial foreign exchange reserves and large food stocks permits the implementation of such a strategy, which should have an immediate and positive impact especially on demand in the rural economy. This in turn should boost overall growth. Incidentally, only two sectors in agriculture - dairy processing and wheat farming - were found worthy of study in the McKinsey report. There certainly are many challenges in a public investment-led strategy, the likelihood of a wastage of resources is the most important one. However, it should be possible to link an increase in public investment to tariff increases, improved administration and greater accountability in irrigation, railways and power. The second major stumbling block is a shortage of budgetary resources. The only notable capital investment that is now showing signs of taking place is in the national highway programme, which is financed by the cess on diesel and petrol. But there is no need for new cesses or higher taxes. The financial sector is flush with funds that could be profitably invested in infrastructure, provided of course that the inefficiencies in these sectors are simultaneously addressed.

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