Reforms and lessons

Messages for India from the crisis-ridden East Asian economies loomed over the CII-organised Partnership Summit in Chennai.

THE economic crisis in East Asia and the general elections in India dominated the proceedings at the fourth Partnership Summit organised by the Confederation of Indian Industry (CII) between January 8 and 10 in Chennai.

The first summit was organised on the occasion of the CII's centenary celebrations in Calcutta in 1995. The theme of the Chennai summit was "Networking Global Partnerships" aimed at helping Indian businesspersons enter into agreements with those abroad. Prime Minister I.K. Gujral inaugurated the Summit, which was attended by about 1,500 delegates, including about 250 from abroad.

In his inaugural address, Gujral asserted that the Indian economic reforms were on an irreversible course. He was, however, quick to assert the need for "caution and prudence", probably prompted by the East Asian crisis. He claimed that there was "a good measure of consensus" among India's political parties on the need for reforms and maintained that most parties had incorporated reforms in their economic agendas. Governments in the States, led by different parties, had adopted key aspects of the reforms programme, providing a stable basis for further reforms, he said. He called for an increase in investments in infrastructure projects in order to double the country's infrastructure capacity in the next five years. According to him, over the next 10 years, $350 billion or more will be needed to finance projects in this sector.

Gujral dismissed suggestions that coalition governments would not be able to implement reforms. Pointing out that four governments were formed at the Centre in the last two years without recourse to any "extra-constitutional" means, he argued that the Indian democratic system was stable, even if the political parties were not.

One of the more striking aspects of the Summit was the fact that despite the faltering industrial growth over the last two years, the captains of Indian industry called for "wider and deeper" economic reforms. There were, however, a few dissenting voices that called for the protection of "national industries" from "foreign companies".

The Deputy Prime Minister of Thailand, Supachai Panitchpakdi, speaking from first-hand experience, urged caution, particularly in the matter of opening up the Indian financial sector to foreign capital. Various other speakers from abroad were also of the opinion that the Indian economy had escaped being ravaged by the crisis that had overtaken East Asia because it had opted for less, rather than more, reforms.

The Indian participants showed a keen interest in the East Asian developments for two reasons. First, Indian industry and trade have been trying to get a foothold in the Eastern economies that were booming till a few months ago; the participants wanted to know what went wrong with the countries that had "successfully" implemented trade and industrial reforms through the 1990s. Secondly, Indian businesspersons were worried about the immediate danger posed to Indian exports by the sharp drop in the value of East Asian currencies. They also appeared keen to learn about the effects of being integrated with the global economy.

THE foreign dignitaries who spoke at the Summit included Italian Prime Minister Romano Prodi and Polish President Alexander Kwasniewski. Prodi led an 84-member delegation, while Kwasniewski led a 29-member delegation. Ministers from Sri Lanka, the United Kingdom, Egypt and Uganda were present. Other prominent participants included Dato Ajit Singh, former Director-General of the Association of South East Asia Nations (ASEAN), and Jeffrey D. Sachs of the Harvard Institute of International Development (HIID).

Romano Prodi's address was relevant to Indian industry because of his strong emphasis on the development of small and medium industries. He said that large enterprises venturing into new markets needed the support of small and medium enterprises. "Otherwise," he warned, "they run the risk of becoming giants standing on clay feet." Small units' biggest advantage was that they could react with speed to the needs of the market, he said. He proposed the integration of large units with small and medium units into what he called "clusters". This, he said, would enable greater competitiveness. The significance of Prodi's remarks could not have been lost on Indian industrialists. Small units in India have repeatedly complained that large units impose serious cash-flow and other financial problems on them by delaying the settlement of bills for goods supplied by them.

Kwasniewski, who addressed the valedictory session, suggested that a "shock treatment", of the kind administered in Poland, could set India on the road to faster economic growth. Poland, called the "Soaring Eagle" of Europe, is held out as a successful emerging economy. Kwasniewski said that State enterprises now generated 40 per of Poland's gross domestic product (GDP), compared to 90 per cent in the late 1980s. He said that the goal was to bring this down to 20 per cent. Poland, he said, had started privatising its telecom companies even before Germany and France. He, however, made no mention of the high rates of inflation, high levels of unemployment, the squeeze on wages and the highly unstable performance of agriculture during this period - information that was available in a booklet titled, The Polish Alternative, that was circulated at the Summit.

THE general elections and the agenda of various political parties also constituted a major item on the Summit's agenda. The Bharatiya Janata Party (BJP), the Congress(I) and the Dravida Munnetra Kazhagam (DMK) were represented at the Summit.

Union Industry Minister Murasoli Maran (who belongs to the DMK), said in his speech that the country could easily absorb Foreign Direct Investment (FDI) to the tune of $10 billion without risking its sovereignty. He said that FDI investments of this order would constitute only 2.4 per cent of GDP and would hence not pose any danger to the domestic industry. Sounding a note of caution, he told the industrialists that protection, only to serve the interests of "self-serving swadeshiism", could not go on indefinitely. Maran reminded industrialists that Indian companies had 600 joint ventures abroad, with a market capitalisation of $15 billion; this was to imply that protection in India could have a backlash abroad. However, he observed that while FDI to the tune of $22.4 billion was approved by the Foreign Investment Promotion Board (FIPB), only $5 billion had materialised. He said that the FIPB would be abolished and he promised more deregulation.

Jaswant Singh, who represented the BJP, made astute use of the platform by reaching out to a larger audience. He declared that his party would protect food and agricultural subsidies, increase capital expenditure in the agricultural sector and promote the growth of agro industries. He said that a BJP-led Government at the Centre would do away with the "tyrannical bureaucracy" that was inconsistent with the liberalisation process. Jaswant Singh confirmed the BJP's commitment to privatisation by promising to follow the recommendations of the Disinvestment Commission.

Rajesh Pilot, who spoke for the Congress(I), promised more investments in the infrastructure sector if his party formed the government. However, he maintained that care would be taken to avoid the widening of the "rural-urban divide".

Chief Election Commissioner M.S. Gill welcomed the CII's suggestion for the creation of a trust for donations to political parties. Speaking at the summit on the economic reforms, Gill said that the policies had come to stay and that the only questions that had to be addressed pertained to the "speed, direction and details" of their implementation.

Lok Sabha Speaker P.A. Sangma said that "democratic dissent and India's cautious approach" had helped India avoid being engulfed by the East Asian crisis. The Karnataka Chief Minister J.H. Patel and Tamil Nadu Chief Minister M. Karunanidhi urged investors to invest in their respective States.

Union Finance Minister P. Chidambaram and the Deputy Prime Minister of Thailand spoke at the same session on the second day. The contrast between the approaches of the two politicians was striking. Panitchpakdi candidly admitted that "over-investment" and a "dangerous reliance" on short-term foreign funds had led to the East Asian problems. He called for a cautious approach to the liberalisation of the financial sector and emphasised the need for stringent supervisory mechanisms. He spoke about how difficult it was for governments to control private capital flows and defend their currencies.

Chidambaram spoke in general terms, focussing neither on the issues raised by the recent fall of the rupee nor on the faltering pace of industrial growth. He said that the Government had a "clear road map" (the S.S. Tarapore Committee Report) for capital account convertibility and that it would keep a "close watch on the signposts along the road to capital account convertibility." He ruled out "competitive devaluation of the rupee" in order to stay in line with the devalued currencies of East Asia.

Panitchpakdi said that the East Asian governments had always been conservative, with balanced budgets. Thailand, for instance, had budget surpluses for nine consecutive years, until last year. According to him, the crisis in Thailand was caused largely by the private sector and not by government expenditure and borrowings. The private sector, he said, accounted for $70 billion of the $90 billion in short-term foreign loans. He said that private debt was made buoyant by the Thai Government's adherence to Article VIII of the International Monetary Fund (IMF) which prescribed the freeing of capital flows in countries. "Liberalisation means," he said, "that governments will have less authority." According to him, "over-dependence on external borrowings and the tendency to use short-term capital to finance long-term projects" are responsible for Thailand's present troubles.

Later, speaking at a press conference, Panitchpakdi launched a scathing attack on the IMF and Western governments, particularly the United States, for not having done enough to restore calm in the ravaged economies of East Asia. Referring to the dramatic drop in currency values in East Asia, he said that there was an urgent need for developed countries to maintain market access to help the Asian countries recover. According to him, this was the surest way to ensure that funds that went out of the region at the height of the crisis come back. He said that the East Asian crisis could lead to a global recession if Western governments did not act to restore the confidence of these countries.

THE faltering pace of industrial growth, caused by the credit squeeze last year and a serious demand constraint in the current year, were pushed backstage at the Summit. The situation has been worsened by the slow growth of exports this year. In his speech, Chidambaram said that his 1997 "dream Budget" and the credit policy had failed to "kick-start" the industrial sector because of political uncertainties. This was a point of view that was more or less echoed by the captains of Indian industry. Although industrialists repeatedly raised the issue of the problems plaguing the infrastructure sector, no mention was made of the squeeze on public investment in infrastructure projects and heavy industry since 1991, an important derivative of the liberalisation drive.

In contrast, a study conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI), which was released on the eve of the Summit, stated that the "dual attack" of "reduced demand and cheaper imports" have imposed a squeeze on the Indian economy and industry. According to the study, the lack of purchasing power in rural India and the "low public expenditure on the core sector" are the reasons for the slump in demand. The FICCI study reveals that there is still room for consensus on significant aspects of the reforms.

An expert's viewpoint

JEFFREY D. SACHS, Director of the Harvard Institute of Inter-national Development (HIID), is a leading advocate of the "big bang", shock therapy approach to reforms which aims at swiftly tiding over resistance to reforms. Sachs spoke at the CII Summit on the last day, at the session focussed on Tamil Nadu. However, a major part of his speech was devoted to the crisis in East Asia. He criticised the International Monetary Fund's (IMF) "bureaucratic approach" to the economic problems of the countries of that region. "The IMF," he said, "committed a fundamental blunder by asking banks in Malaysia, Korea and Thailand to close down, and caused more damage to these economies." According to him, this resulted in a severe credit squeeze that hit even the working capital requirement of companies. He said that despite having spent over $100 billion in packages for the region' s economies, "confidence has not been restored".

According to Sachs, the East Asian crisis was "not in the real sector but in the financial sector." He said: "Self-fulfilling panic, an almost visceral reaction, caused the crisis." He said that India was in a much better position because its debt profile was relatively more long-term in nature. Sachs described India as being on a "platform to launch export-led growth, apart from drawing large volumes of investment to meet the demands of a large internal market." He suggested that the rupee's exchange rate be "kept flexible". The Reserve Bank of India should not try to defend an announced position of the rupee, he added.

Jeffrey Sachs said that foreign direct investment (FDI) was relatively more stable since it was long-term in nature. Therefore, he said, the Indian economy should be made "more open" to FDIs and "less open" to short-term capital debt flows.

When asked about the decision of the international credit ratings agency Moody's Investors Service Inc. to review India's credit rating, Sachs told Frontline that the rating agencies had themselves contributed to the "stampede mentality" in the past and that they were "a piece of this vicious crisis".

In July 1997, Sachs became a key adviser to the Tamil Nadu Government on economic policy reforms when the State Government signed a three-year Memorandum of Understanding (MoU) with the HIID. His responsibilities include advising the State Government on developing export-oriented industries, suggesting tax and expenditure reforms and helping improve the working of the Tamil Nadu Electricity Board. Sachs has also been asked to help the State promote foreign investment and infrastructure development and develop the social sectors, particularly primary education and health.

Sachs, who is currently on his first mission to Tamil Nadu, told Frontline that he was now working on "setting priorities for the State budget". According to him, competition among States is a healthy development since it leads to faster foreign investment flow. Tamil Nadu's economy could, he said, be integrated with the global economy on the basis of sustained growth of exports.