'Economy may deteriorate further'

M.K. Pandhe, general secretary of the Centre of Indian Trade Unions (CITU), is of the view that if the second phase of economic reforms are pursued doggedly, the growth of the economy will slow down. It would enable foreign financial investors to increase their grip over the Indian financial sector, he cautioned.

Official statements indicate that the government intends to initiate a new phase of economic reforms, titled reforms II. What is your view on this matter?

The second generation reforms essentially deal with the financial sector. The process was heralded with the Insurance Regulatory and Development Authority Bill, and will cover banking and other financial sectors. It seeks to boost the entry of foreign pr ivate capital by removing the "hindrances"that appear to have been noted by multinational companies.

It visualises modification of labour laws that would facilitate the implementation of the reforms. The appointment of the Second National Labour Commission and the terms of reference finalised by the government are clear indications of this.

The Government is resorting to this exercise without properly studying the impact of the first generation of reforms. Nine years of that reforms process has not yielded the projected results. On the contrary, in certain respects it was responsible for se veral repercussions for the economy. Despite periodic statements about the negative aspects of the reforms no corrective measures have been. The studies conducted by the World Bank and the IMF have clearly indicated that the structural adjustment program me has not yielded the desired results. Yet, the government is doggedly pursuing the reforms, which may result in further deterioration of the economy.

If the second phase of reforms is carried out, foreign financial investors will strengthen their grip over the financial sector and utilise the credit flow in their favour.

Broadly, how do you assess the track record of the first phase of reforms?

The first phase of reforms clearly indicated a considerable slowing down of growth. Foreign investments are coming in without taking into account the needs of our economy. They are entering the food processing industry, share market operations and sector s where India has already built a sizable production capacity. The MNCs prefer to purchase Indian units and use the infrastructure built up by them rather than build up new units.

Industrial sickness increased substantially during the last nine years, resulting in an estimated six lakh units facing sickness and closure. The rate of unemployment has risen alarmingly with every industry talking of downsizing to cut costs. New entran ts in the employment market find it extremely difficult to get a job.

Reckless disinvestment in the public sector, ignoring even the observations of the CAG (Comptroller and Auditor-General) report has led to the sale of valuable assets at throwaway prices. The sale proceeds were used only to meet the budgetary deficit. Ev en the Chairman of the Disinvestment Commission criticised this approach.

Failure to boost exports in comparison with growing imports has led to a widening of the trade deficit. It generated pressure to devalue the rupee to an alarmingly low level.

The bulk of the foreign investments has hardly brought new technology or the needed investment to boost the economy. These developments have led to an increase in the size of the population below the poverty line.

The fiscal concessions have been used to boost profit, not for the advancement of the economy.

The fiscal situation remains extremely difficult. What in your view are the taxation (or other revenue mobilisation) options available to the government to deal with it?

If the government is keen to raise resources, ways and means are available. The profits earned by several big business houses, despite recessionary trends, should be taxed.

Most of the big business houses which are responsible for adding to the non-performing assets (NPAs) of the banking industry, have increased their assets substantially in the recent past. If these NPAs are recovered from other assets of the defaulters, t he government can mobilise more revenue.

The imposition of agricultural income tax on rich farmers has been debated for several years, but the government does not show the political will to take a firm measure. The Government has failed miserably to take action against big tax evaders. Amnesty schemes have not yielded results to the desired degree. Firm action against tax evaders will help mop up additional revenue.

Action can be initiated against traders who indulge in underinvoicing and overinvoicing during export-import operations.

The taxation on white goods and luxury items is minimal, while the burden on the poor is higher. This policy should be reversed.

All imports are not useful for the common man. Additional customs duty to restrict import of such items will help the economy. Similarly, reduction in customs duty on steel, coal and other items, which have rendered the units sick, should be restored to previous levels.

The exemption limit for income tax should be enhanced. Higher levels of tax in the top brackets will yield more revenue.

Do you think some measures could be initiated on the expenditure side to deal with the fiscal crisis?

Administrative expenditure is increasing disproportionately. The perquisites given to members of Parliament, Ministers and top bureaucrats can be brought down. There should be a ban on advertisements by Ministries; foreign and Indian tours of Ministers s hould be made need-based. Expenditure on these trips should be brought down to the minimum.

Jumbo Cabinets are responsible for heavy administrative expenditure. The size of the Cabinet should be restricted. Misuse of funds given to MPs for local development should be checked.

What have been the growth implications of the fiscal correction? Do you think there has been an investment deficit in the infrastructure sectors because of the fiscal correction?

In the name of fiscal correction, the government has taken a decision to invite more foreign capital for infrastructure development. However, that capital has not come. On the other hand, the government has scaled down its own investment in this sector, resulting in the slowing down of the economy. The Budget should provide more funds for infrastructure development in the public sector. Otherwise the fiscal mismanagement of the economy will only add to further slowing down of the economy.

What specific measures do you envisage for boosting investment in the infrastructure sectors?

In the case of infrastructure development, the gestation period is high and the private sector will not come despite the policy framework. The Government will have to augment revenue so that more infrastructure can be developed at an early date. Several schemes have remained on paper. The report of the National Transport Policy committee is an example. The shortfall in the power sector is also glaring with the result that even government-sponsored schemes have not been fulfilled. Budget should pay more attention to it. The leasing of airports and ports will only cause further stagnation in infrastructure development.

Do you think there is a need for specific incentives for savings and/or capital market investments? Is the current pattern of incentives provided appropriate?

There is a paramount need to give incentives to small investors. However, the government's decision to reduce the interest rate on Public Provident Fund by one percentage will reduce investment in this sector. Other small savings schemes should be made a ttractive to generate more savings.

Experience has shown that whatever concession was given in the previous budgets to savings, it has not resulted in increasing investment. It has only led to an increase in speculative share market activity. Despite more concessions being given to this st rata, the slowdown of the economy co could not be checked. There is, therefore, an urgent need to review the concessions given to this sector. The money garnered by this strata should be mopped up through suitable tax measures, and the funds generated sh ould be utilised for infrastructure development.

What implications do you see for the labour market from Reforms Phase II?

In the name of labour flexibility, an attempt is being made to reduce the number of regular jobs and convert them into temporary or contractual jobs in the informal sector. On the plea of downsizing, voluntary retirement schemes are being introduced in a big way in the public and private sectors. There has been a "wage restraint" with a view to keeping the wage cost low in a "competitive environment". In several cases, the working conditions are more unfavourable to the working class, while managerial r emuneration and perks are on the rise.

The growing rate of unemployment is being used to keep working conditions at low levels. Existing fringe benefits are being curtailed, step by step.

The Government has already announced its intention to amend the Contract Labour (Regulation & Abolition) Act to enable employers to engage more contract labour. Section 25(O) of the Industrial Disputes Act is being deleted to enable employers to close do wn units.

These measures will make the labour market favourable to the employers. Naturally, there is bound to be stiff resistance from the working class to these measures at all levels.