Whither economic reforms?

Print edition : September 16, 2000

India's Economic Performance and Reforms: A Perspective for the New Millennium by Subramanian Swamy; Konark Publishers, 2000; pages xi + 339, Rs. 400.

BY now there are quite a few books on India's economic reforms, and presumably there are several more in the pipeline. Usually these tend to be collections of papers written by different authors. Typically the papers outline the reforms undertaken in spe cific sectors since 1991 and the unfinished agenda. However, because they are written by different authors, a holistic view is missing, no matter how good a job the editor does through an introductory chapter. Hence a single-author volume like the presen t one has advantages. The proposition in Subramanian Swamy's book is the following: If the reforms continue and India focusses on exports (of processed agricultural products, textiles, services, information technology, and so on), a 10 per cent growth in GDP (gross domestic product) is possible.

The book has four chapters - dealing with the initial conditions (1950), the phases of growth and the results (1950-90), the economic reforms since 1991 and future projections. There is also a mathematical appendix. Since I happen to consider this a good book and agree with the argument, let me first mention the four minor criticisms I have. First, the preface should have been worded more carefully. Some assertions (about East Asia and World Trade Organisation-compliant agricultural subsidies), although not strictly incorrect, are too sweeping and may divert attention from the academic merit of the rest of the book. Secondly, the Indian Penal Code dates to 1860, not 1870 (page 5). Thirdly, there is no need for the appendix table on human development in dices taken from the Human Development Report (HDR). It gives figures from HDR 1999 although the Report for 2000 has now been published. It does not belong, is pasted on and looks like an after-thought. Fourthly, the mathematical appendix has technical p roblems.

Having got these criticisms out of the way, let me turn to the good points. The two strongest chapters are those dealing with the initial conditions and the future potential. The former actually begins with the British period and there is a useful India- China comparison, especially with Subramanian Swamy's expertise. The differential in agricultural performance and hence overall growth is explained by the colonial government's land revenue policy. (As a minor point, in 1950 the literacy rate in India wa s 20 per cent, not the illiteracy rate as mentioned on page 30.) Thus, in 1952, China was better poised for industrialisation. And India moved to capital goods-based heavy industrialisation. "The grafting of this model on Indian planning was done by a ph ysicist turned statistician who had little or no formal education in economics: Professor P.C. Mahalanobis, founder of the Indian Statistical Institute, Calcutta. Mahalanobis, a confirmed Left intellectual, had lifted a Soviet growth model of the 1920s a uthored by Fel'dman, and introduced it into Indian planning without acknowledging the original authorship. For years, Fel'dman's model was passed off in India as "Mahalanobis' Growth Model", till MIT economist Evsey Domar discovered the truth, and laid i t bare."

The second chapter is on growth performance during the period of import substitution (1950-90) and the critique is by now fairly well established in the literature. Swamy highlights five elements that contributed to lost growth opportunities - distortion s caused by planning, lack of agricultural modernisation, high cost industry, inefficient resource allocation and lack of fiscal reform. It is impossible to disagree with this, although the critique can also be articulated in a slightly different way. Ho wever, one again wishes the wording had been more careful. "By all objective accounts, during the last 53 years the percentage of people living under the poverty line had not gone down despite nine large Five Year Plans. Unemployment had actually increas ed." The thrust of the argument is true. But as stated, the proposition quoted is incorrect. The percentage of the population below the poverty line has indeed declined. What is presumably meant is the absolute number.

This takes us to the third chapter on the economic reforms since 1991. "As a result of this economic schizophrenia, economic reforms which ran out of steam by 1996, have now become half-hearted. Reforms have yet to touch the really essential areas of Sta tes and city corporations. Deregulation measures have to date been confined to the Central government, and even here it has been piecemeal. Privatisation, financial institutional reform, and synchronisation with WTO, require changes, which however have b een put on hold. The setback to investment has been serious, causing a drop of three per cent points in the rate of investment to GDP since 1996." Agreed. The argument will be stronger if one singles out public sector investments. Incidentally, the numbe r of items under QRs (quantitative restrictions) is now 715 at the eight-digit level, not 1,429 (page 142).

Since the fourth chapter is about India becoming a global economic power in the new millennium, it is in many respects the most interesting chapter. For this to happen, India needs to have the following as objectives - an appropriate low interest rate, a competitive and predictable real exchange rate, a low and stable inflation rate, a low fiscal deficit and a viable current account deficit as a share of GDP. A 10 per cent growth rate can ensure these targets, and for such a growth rate to materialise o ne needs an investment rate of 30 per cent and an incremental capital/output ratio (ICOR) of 3. The break-up of the 30 per cent investment rate is: 22 per cent from household savings, 5 per cent from the private corporate sector and 3 per cent from forei gn savings. Although public savings do not have a share in this, this is in fact an improvement on the present dissaving. How are household savings stimulated? By abolishing all direct taxes. Buoyancy in indirect taxes will compensate for revenue losses. How will private corporate sector savings be stimulated? Through fiscal incentives. For foreign savings, one obviously needs a more open policy towards foreign investments. And public dissaving can be brought down to zero through privatisation and disin vestment. One might disagree with the nitty gritty. But an ICOR of 3 and an investment rate of 30 per cent are reasonable enough.

The chapter then moves on to the question of what needs to be done to reform agriculture. There is nothing objectionable there except the statement, "Subsidies for agricultural products like foodgrains, inputs like fertilizers and pesticides should be co ntinued." It is true that there is no WTO-driven compulsion to phase out input subsidies because India is below the threshold limit. However, there are internal arguments for reform and the Swamy blueprint also envisages market-determined output prices, with the public distribution system (PDS) replaced by a system of food stamps. There are also sections on textiles and garments (no position is taken here on the dereservation of the small-scale sector), information technology ("The new Ministry of Infor mation Technology is wholly unnecessary and antithetical to the concept of downsizing government"), services, education, infrastructure and good governance. Except for the head of good governance, familiar territory is covered under the other heads. For good governance, Subramanian Swamy says, "there should exist (1) a political leadership sufficiently educated and experienced to absorb concepts and formulations of the academia; (2) a democratic environment, based on issues; and (3) the scholars should enjoy academic freedom to fearlessly contribute ideas to the leadership." It is true that good governance is a difficult term to define, but Subramanian Swamy's prescription does not say much.

Where does that leave us? "In the year 2000, there is a substantial gap between China and India, but if India were to concentrate on producing a significantly accelerated growth in agriculture, information technology, and exports during the next two deca des, the gap in qualitative terms can be quickly bridged. Clearly, India will have to make strenuous efforts fiscally, to raise the rate of investment to reach or cross 30 per cent, as a minimum condition for commencing on closing the China-India gap. Th e task of course is within reach and it is a target for which the people would be willing to make a sacrifice. 'Catching up with China' is a worthwhile slogan for India's new millennium, along with a national commitment to grow at 10 per cent per year. B oth goals are feasible and attainable, and within India's grasp and at striking distance. The only question is whether the polity is up to it."

I am not sure whether "Catching up with China" is indeed a worthwhile slogan. In terms of purchasing power parity, India is the fourth largest economy in the world now, after the United States, China and Japan, in that order. India recently overtook Germ any. By 2010 or thereabouts, India should be in a position to overtake Japan. I am extremely sceptical about the possibility of India overtaking China in the next 20 years. However, the India-China trade-off or comparison is hackneyed and unnecessary. In the next 30 years, there is room for both countries to explore and contribute to world economic growth. Rather remarkably, an increasing number of commentators believe that in the next 20 years India's real GDP can potentially grow at 10 per cent if ref orms are carried out and can grow at a trend rate of 8 per cent even if the reform process is hesitant. The percentage of the population below the poverty line is likely to come down to less than 15 per cent, the adult literacy rate is likely to go up to 85 per cent and the infant mortality rate is likely to come down to 35 per thousand. Of course, there will be inter-regional and inter-State variations and this will lead to heightened socio-economic tensions. The inter-State aspect is missing in the bo ok.

In recent months, Subramanian Swamy has been quite prolific. This book meshes neatly with India's Labour Standards and the WTO Framework (also Konark). Both are worth reading.

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