A shoddy guidebook

The report of the Prime Minister's Economic Advisory Council calls for an acceleration of the pace of economic reforms but fails to address evidence that close to 10 years of reform has failed to deliver on the promises that were held out.

THE usually dormant body, the Prime Minister's Economic Advisory Council (EAC) has this year chosen February, the month of the Union Budget, to submit a report to the executive head of the nation. But do not be misled. This is not a report providing advi ce on what the government can do at budget time to resolve the crisis in agriculture, stall the slump in industry, or reduce the appalling levels of deprivation that still haunt the nation. Blandly titled "Economic Reforms: A Medium Term Perspective", it is a collation of policy recommendations of the kind that the World Bank and the International Monetary Fund (IMF) have been gratuitously providing India over the last decade, and the official economic establishment has been regurgitating at periodic in tervals.

The thrust of the document is that, notwithstanding the scepticism about the gains from liberalisation to a limited circle, the government should accelerate the pace of economic reforms. It is replete with recommendations covering a wide range of areas, but makes little effort to argue the case for individual policies. Most of the recommendations are those routinely advanced by advocates of the view that private investors responding to market signals should be allowed to determine investment and its all ocation, in the belief that this would magically deliver growth with equity. It recommends that the average rate of tariff on India's imports, which has come down from 87 per cent in 1990-91 to around 34 per cent in 1998-99, should be brought further dow n to 12 per cent over a five-year period. It supports the government's privatisation drive, and suggests that it should be accelerated. It calls for a reduction in subsidies all round by increasing prices and user charges. It demands that reservation of areas of production for the small-scale sector should be withdrawn, allowing existing units in these areas to grow to economic sizes. And so on.

A nation that has been subjected to policies of this kind for over a decade and that is yet to experience the benefits that they were expected to deliver, is unlikely to respond enthusiastically to more of the same. This is not to say that a document on the so-called "economic reforms" process in India is not in order. In July 2001, the accelerated reforms effort launched in 1991 would be 10 years old. That is a period long enough to make an assessment of its fall-out in terms of both realising its obje ctives and triggering unintended consequences that are adverse from the points of view of growth and welfare.

In particular, it would be useful to understand why the promise of launching India on a new growth trajectory, relative to the 1980s, has not been redeemed; why industrial growth has been sluggish in all but three years during the 1990s; why despite evid ence of stagnation in per capita foodgrain production and availability the government is stuck with an embarrassingly high level of foodstocks rotting in its godowns; why exports which were to provide the new stimulus to growth during the last decade hav e on average languished; why the rate of employment growth has been far less than what is warranted by the rate of growth recorded; and why, if we ignore the extremely controversial and non-comparable data yielded by the National Sample Survey (NSS) 55th Round of consumption expenditure relating to 1999-2000, the evidence points to a setback in the process of poverty reduction during the last 10 years.

An assessment which honestly addressed these questions could have provided the basis for a more reasoned public debate on the benefits of reforms that can be the only basis for generating, if at all possible, what the EAC presumes already exists: a "nati on-wide and broad-based consensus" on the need to accelerate reforms further. However, elsewhere in the document there is evidence that the EAC is not so sanguine. The fact that it recognises the growing disillusionment that is being expressed in all man ner of forms both within the country and abroad with the types of policies it seeks to advocate comes through in a small section sub-titled "Misgiving about Reforms." However, while listing some of these misgivings, the report responds to them in a manne r that reveals that the EAC's intentions are not all that sincere.

For example, while noting that a common misgiving is that reforms have not touched the poor, the document states that poverty predates reforms and that the latest NSS data for 1999-2000 show a decline in poverty, bearing out earlier surveys conducted by the National Council of Applied Economic Research (NCAER). This bland statement conceals the following facts: 1. Till the 1999-2000 survey, the NSS data indicated that the pace of poverty reduction during the 1990s had slowed relative to what was achieve d during the 1970s and 1980s; 2. The revised questionnaire adopted for the 1999-2000 survey is controversial to a degree where even the Planning Commission had recommended that an expert committee be set up to examine the comparability of estimates yield ed by that survey relative to earlier ones; 3. The NCAER surveys, primarily targeted at gathering data on durable consumption for private sector clients, do not collect much information on necessary consumption and none on food, and so are completely uns uited to making estimates of poverty in the country. The evidence that the poverty alleviation effort has suffered during the years of reforms is still strong and cannot be dismissed.

THERE are other instances of a cavalier attitude when dealing with evidence. Consider the following statement made in the course of discussing misgivings that liberalisation threatens a loss of national sovereignty: "It is worth examining how China has s ucceeded in achieving a high rate of growth and virtual abolition of poverty on the basis of billions of dollars worth of exports of a wide variety of goods." It definitely is worth examining why China's reforms have delivered export success and India's have not. That the document does not do. But it is also worth revealing that China's success in eradicating poverty predates its reforms effort and recent evidence suggests that the loss of employment that has accompanied reforms in China threatens a ret urn to poverty among some sections of the population.

Incorrect, or even dishonest, assertions of this kind indicate that the intent of the document is not the declared one of prescribing future strategies to the Prime Minister in a context of general consensus over the broad direction of policy. Rather, it is to pack a set of slogans into a pamphlet, which the authors presume would be credible because of their own stature. Unfortunately, the validity of that belief would not be judged by the market that the authors hold so dear, since the document is avai lable free of cost to those who may be eager to read it.

Even if there is some substance to the EAC's belief in its own credibility, some of the far-reaching recommendations in the report are bound to test it severely. For example, the document recommends that the procurement policy should be drastically revis ed and replaced with a support price policy that limits government purchases to that required to prevent a sharp fall in prices. As a corollary it suggests that the role of the Food Corporation of India (FCI) be reduced to maintaining a minimum targeted buffer stock of, say, 10 million tonnes, and the public distribution system (PDS) be supplied with grain obtained on the basis of tendering by private traders.

There is an obvious short-term problem with such a policy recommendation. Since the government is currently burdened with close to 40 million tonnes, reducing stocks to the 10 million tonnes level would require offloading huge volumes of the stock in the open market, which would result in a collapse in prices. But the EAC could argue that this process could be spread out over time, and that the 10 million tonnes target should be seen as a medium-term one. Even so, the problem of price stability would re main. It hardly needs stating that the monsoon-dependent supply of foodgrains fluctuates much more than demand. So if the intention at all times is to maintain a buffer stock of 10 million tonnes, in years of good harvest open market prices would tend to fall sharply, and in years of bad harvest they would tend to rise. A support price policy of the kind being advocated can hardly ensure stability in food prices.

ANOTHER area in which the EAC has been rather bold in its recommendations is the labour market. Interestingly, while the report refers rather approvingly to the controversial and non-comparable NSS 55th Round on consumption expenditures for 1999-2000, it does not mention the more acceptable employment estimates that emerge from that round. They point to a very significant deceleration in employment growth in both rural and urban areas, with the annual rate of growth of rural employment estimated to be f alling to as low as 0.67 per cent over the period 1993-94 to 1999-2000. This is less than one-third the rate recorded during the period 1987-88 to 1993-94. In fact, it turns out that this is the lowest rate of growth of rural employment post-Independence . What is more, the employment elasticity of rural output growth or the responsiveness of employment growth to output growth during 1993-94 to 1999-00 was also a third of that during 1987-88 to 1993-94. Clearly, the period of liberalisation has been char acterised by a setback on the employment front.

This, however, does not feature as an issue in the EAC report, which is more concerned with increasing the flexibility of labour markets confronting the organised sector. In its view, the requirement that government permission should be obtained for the closure of units should be abolished or at the most restricted only to units employing 1,000 workers or more, as opposed to its applicability to units employing 100 or more workers currently. This would supposedly provide "employers with sufficient flexi bility to reduce the volume of employment or restructure producing units (or in extreme situations even close them down) when changes in market conditions and technology make it unavoidable." Given the trends in employment reported above, none can take s eriously the EAC's view that such flexibility would generate new employment opportunities in the organised sector to an extent required to balance for the obvious deterioration in employment trends. The EAC is not just blinkered in its vision, it is clea rly partisan.

WHAT is of interest are the motives driving the EAC's decision to issue a document of this kind at the present moment. The intention could not have been a sudden desire to collate all reformist policy propositions in one document to provide the Prime Min ister with a reference book that aids quick recall. In any case, if it was, an index at the back would have been of much help, as the quick-reference manuals, produced for profit and sold to facilitate easy use, of mass-market, packaged software has taug ht us.

One possibility is that, despite assertions to the contrary, it is the disturbing lack of consensus about reforms that seems to have driven the EAC to produce this report and discuss, however inadequately, at least some of the misgivings about reforms. W ith the tenth anniversary of the reforms in sight, discussion about the gains from reforms is bound to revive. That discussion can prove embarrassing for a coalition whose political backing is to be tested in the Assembly elections in four States and a U nion Territory that are imminent. The EAC report is possibly an early salvo aimed at muting the damage that such a discussion can have. Which is why it is surprising that some sensible people like the Governor of the Reserve Bank of India, Dr. Bimal Jala n, whose organisation is more circumspect in its analysis of economic trends and cautious in advocating policies, has signed this report. At least he should have realised that a good start to the task of downsizing the government, which he advocates, wou ld be a ban on the production of such poorly reasoned and totally futile pamphlets with funds drawn from an increasingly cash-starved exchequer.