Southern States - Kerala

Whose reform is it?

By Roy Mathew

THIRUVANANTHAPURAM APRIL 7. The State Planning Board and the Government says it is our reform. The Asian Development Bank (ADB) says it is their reform.

The ADB Web site almost contradicts official claims when it says that the ADB ``attempts to introduce macro-level fiscal and policy reforms, followed by sector specific support in Kerala''.

Listing good news from India, it notes that State monopoly has been abolished in virtually all sectors. Import licensing has been completely abolished. The import duty has come down from a high of 45 per cent to less than 25 per cent on average. India's foreign investment regime is as liberal as in other developing Asian countries. Reduction has been made in the fertilizer and food subsidies.

It further says that the reforms have been beneficial. The economy has grown at more than six per cent coupled with full macroeconomic stability, compared with growth rate of 3.5 per cent during 1950-1980. Inflation has been low. Rising incomes have helped to reduce poverty.

As bad news, it says that fiscal deficit has been in dire strait. The combined deficit of the Centre and the States exceeds 10 per cent of the gross domestic product.

It adds that the ``old economy'' must be further unshackled. A key deficit in India's growth process has been the failure of the conventional industry to pull workers out of agriculture into gainful employment. The needs to be addressed include reform of labour laws, speeding up privatisation of public sector units and liberalisation of trade by reducing duties.

Infrastructure is another area where pace of reforms has been slow. In the power sub-sector, for instance, reforms involving privatisation and distribution have been undertaken in several States but no spectacular success has emerged as yet. Fertilizer and food subsidies also pose another challenge.

As much as 0.7 per cent of the country's GDP goes to fertilizer subsidies, much of which support the domestic fertilizer industry rather than farmers. Besides, economic reforms have completely bypassed agriculture.

``Needed as well are reforms in higher education. India must allow entry of private universities like most other countries including Bangladesh and China. Financial sector reforms, especially banking, remain a distant goal. Foreign banks have not yet moved in aggressively.

Privatising the banking system is taking time. Lay-offs in banks have been difficult to implement, and voluntary retirement schemes have been expensive.

``Finally, reforming the over-sized bureaucracy is essential to open the top bureaucracy as policy-making has become extremely specilised activity.''

A disclaimer that the report was prepared by Arvind Panagariya, former Director, Economic and Development Resource Centre, and Chief Economist of the ADB follows this. The views expressed in policy briefs are those of the author and do not necessarily reflect the views or policies of the ADB.

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