'Fiscal restructuring, an unfinished task'

Manmohan Singh still retains a quiet sense of proprietory pride over the policy of economic reforms he introduced in 1991. But in the four years since he left the Finance Ministry, he says, matters have deteriorated. Although he insists that he do es not want to get into the business of apportioning blame, he does confess to a sense of disquiet at both the state of the fiscal apparatus and the broader economic situation. Excerpts from an interview he gave Sukumar Muralidharan:

What are your impressions of this Budget? Do you view it as being continuous with the process you initiated in 1991? Or does it represent a pause or even a reversal?

I think the BJP did explicitly acknowledge in the President's Address that the process we launched in 1991 was a historical necessity. They have also admitted that it has yielded good results. So I think that after all that they said while in the Opposit ion, they have now realised that there is no other paradigm to work with. But there is a lot of unfinished work from the first generation of reforms and all this talk of a second generation diverts attention from this.

Unfinished business in terms of what?

First of all, in terms of fiscal restructuring. If the macroeconomy is not in good shape, all the other structural changes will not yield the desired results. Now what was the basic purpose of our fiscal reforms? It was to restructure our fiscal system, to control the size of the fiscal deficit and to restructure government expenditure. It was not a programme of cutting down the size of the government, but of getting it out of certain areas and getting it into the kind of activities which it ought to be doing - like education, health, social security, irrigation, infrastructure... Now that is not happening.

Take tax reform. Tinkering with tax rates has a lot of appeal. You are either hurting some interests or helping some interests. Therefore all Finance Ministers have concentrated their energies on that. It is a much more difficult task to improve tax admi nistration. Almost ten years after the reforms started, our tax-GDP ratio is lower than what it was. This is a sad commentary on the tax administration in our country.

Is it a commentary on the administration or on the basic philosophy underlying the tax reforms?

I think it is basically the administration. There are a lot of leakages, a lack of transparency. I started this programme of permanent account numbers. Five years have passed and even today citizens do not get permanent account numbers. In customs and ex cise again, there is a lack of transparency. And tinkering with rates every year and calling some rates as Cenvat and so on, do not help.

When you talk of plugging the leaks, widening the net and so on, there are certain political risks associated...

I think if we have a determined administration, it is possible to go back to the tax-GDP ratio of 1991. The growth rate of the economy has not declined. Why then should the tax-GDP ratio fall?

You mean to say that despite lower rates, you can still maintain buoyant revenues...

That was the whole purpose of lowering rates - to improve compliance. Therefore I think we should look at these things - whether there are some flaws in tax administration.

Does this talk of second-generation reforms then divert attention from the foremost priorities of the moment?

The most critical problem of India is the fiscal balance. The fact of the matter is that we have a system in which all the revenues of the Central Government are absorbed in paying salaries and interest. There is a yawning revenue deficit. If you have a deficit and you are investing the money productively, then there is something to show for it. But that is not the case.

There is a programme of disinvestment which you had started and has not quite taken off. There is now talk of a new approach to privatisation called "strategic sales".

Let me say that "strategic sales" in this country will always be suspect. They will only invite all this talk of crony capitalism. I don't think large-scale privatisation will be a viable option in India unless you are willing to sell assets to foreigner s. As long as our financial system is nationalised, nobody here will have large sums of money to buy these assets. And I do not think the country is ready to see large shares of public sector equity landing up in the hands of foreigners. While I do see a role for disinvestment, I do not think that the government's role in infrastructure can really be wished away. Instead of talking about privatisation, we should focus on the old classical task of making the public sector enterprises work more efficientl y, running them in a manner that they will not be a drag on the budget, that they will generate a positive rate of return. We must get back to the role of the public sector as an engine of accumulation.

There has been this curious phenomenon of the 1990s, that despite the sharp drop in public sector capital expenditure, the aggregate growth rate has not been suffering. How sustainable do you think this process is?

The reforms have certainly improved the efficiency of resource use at the margins. Take the older systems, when you had industrial licensing with its built-in bias towards creating excess capacity. In the same way I think import licensing which was linke d to capacity created an inherent bias towards high capital use. Further, if you had an import policy which changed from year to year, you would have people holding large and unnecessary inventories. With delicensing and import liberalisation, people do not have to use capital or invest in capacity as they used to. Again, there is more competition, both internally and externally. In the 1980s we were hovering at a growth rate of around 5.5 per cent. I believe that the 6 per cent growth rate we are now h overing around - that extra half percentage point - is the efficiency effect.

What would you say about the distribution effect of this, since there is a feeling that much of the growth has been underpinned by the "wealth effect" and that there have been growing disparities in the 1990s?

I do worry about this. It is not true that the poor have become poorer, but the gaps in income have certainly become wider. There is evidence that certain States like Uttar Pradesh, Bihar and Orissa have not done as well as others like Maharashtra, Gujar at and some southern States. But I do not think that the reforms have created this problem. I think, for instance, that there is a crisis of governance in these States. The kind of social churning that is taking place in Uttar Pradesh and Bihar was, I th ink, completed long back in the southern States. Also, with the knowledge-based economy now on the horizon, if our delivery system for elementary and secondary education remain as primitive as it is, then the gap between the small enclave-type knowledge- based industries and the rest of India will grow.

There is the problem of regional disparities and then of inter-class disparities.

From the visual evidence I would say that these are phenomena which one has to watch. If we have to remain a functioning democracy and a cohesive federation, then inter-regional disparities and inter-class disparities have to be kept in mind.

Does this mean something additional in the reforms effort or a change of direction?

As far as economic reforms are concerned, I think the state must be much more active in sectors such as health, education and social security. Also in agriculture, the state should pay attention to the slowing down of growth. Industrialisation in India i s not playing the historic role it played in Britain and other countries, where a lot of people were withdrawn from agriculture. Here the share of agriculture in total output has fallen, but its share in employment has not.

In the three budgets presented by the two BJP-led governments, do you see them getting the priorities right on revenue or expenditure, or any one of these? Or are they getting both wrong?

What they say is no different from what we were saying. I would have liked, for example, since nine years is a long enough period, a certain restructuring of spending. It is not happening. I looked at the Budget figures, for example, on how much we are s pending on social sectors, and they are roughly where I left them.

Are you suggesting that you were making incremental progress which has now been halted?

The point is that we were in the midst of a deep crisis. When I took over as Finance Minister, I think people said that India will go under the weight of the crisis like the Soviet Union. We had to do a lot of firefighting. The first two years were spent in restoring the minimum credibility of India's economic management. There were only a limited number of things we could do. But when we left, the economy was in reasonably good shape. That was an opportunity which should have been used to push forward the fiscal restructuring at a faster rate. That has not happened. I am not blaming anybody. Maybe all these uncertainties like political instability and lack of social cohesion in the country have been preventing them from doing this. But that is the cru x of the matter.

There was a key moment in 1997, when tax rates were cut dramatically and there was a general sense of euphoria over the acceleration of reforms. But that year turned out to be the worst in terms of tax revenues...

Those things are very easy to do. I have always believed in moderation in taxation. But there is more to fiscal reform than merely reducing taxes. If you are reducing taxes, it is all the more necessary to see that the tax ratio does not behave in the wa y it has.

So you feel there is reason for unease on both sides now - on both revenue and expenditure we are unable to get the priorities right?

Yes, social services and infrastructure, which are very largely in the public sector, continue to be badly managed. Maintenance is suffering and investments are not taking place in areas where it ought to be taking place. Railways, roadways, ports and ai rports are not able to match the requirements of a more dynamic economy. And all these activities would continue to be in the public sector. There is a role for the private sector at the margins but the bulk of the investment would still have to come fro m the public sector. On the revenue side, I do believe that we must raise the tax-GDP ratio by at least three percentage points.