The Budget '98 Commentary/Dilip Thakore
Transforming major problems into opportunities
Following Union Finance Minister Yashwant
Sinha's uninspiring visit to Washington where he confabulated with officials of the International Monetary Fund and the World Bank on the thrust and direction of the new Bharatiya Janata Party-led 18-party government's economic policies, great expectations
are being built up for the Union Budget which will be presented on
June 1.
Quite obviously the visit to Washington has had a sobering effect
on Sinha. Suddenly, the BJP's swadeshi rhetoric has been
put on the back burner and Sinha has identified reduction of the fiscal
deficit (6.1 per cent of GDP in fiscal 1997-98 against the budgeted
4.5 per cent) and greater foreign direct investment (currently a modest $3 billion annually) as the top priority items on his Budget agenda.
A substantially greater inflow of FDI in fiscal 1998-99 is vital
if the economy, which is experiencing all the pains of a full-blown
recession, is to be kickstarted into life. Industrial growth in
the recently concluded fiscal year was barely 5 per cent, agriculture
output growth was negative, and export earnings grew by less than
4 per cent.
If, despite all this, the economy recorded a GDP growth
of over 5 per cent -- very commendable in the circumstances -- this was
due to the good performance of businessmen in the services sector
of the economy. But now even this sector in endangered by infrastructure
constraints. Electricity and telephone shortages, banking sector
obsolescence, and bureaucratic obstructionism are slowing down
the service sector entrepreneurs and professionals.
Meanwhile, compulsions of reducing the fiscal deficit (which rules
out large-scale government borrowing) cancels out government pump-priming
(spending). Hence the critical importance of stimulating China-style
FDI ($ 45 billion last year).
In the history of nations, the worst times can often be the best
of times to address the structural or fundamental problems of
an ailing economy. It's important also at this juncture to bear
in mind that the annual Budget formulation exercise of the Union
government is not meant to be a routine presentation of the revenue
and expenditure accounts of the government. Ideally, the highlight
of this much hyped event should be the presentation and parliamentary
examination of new plans and policies to replace those which have
failed the nation.
Unfortunately, no Union finance minister except perhaps Dr Manmohan
Singh when he presented the path-breaking Union budget of July
1991, has seized the budget presentation opportunity to make a
sharp break with the past and unveil a grand design to the nation.
On that historic occasion, Dr Singh bit the bullet and scrapped
industrial licensing, the moribund monopolies legislation, and
rolled out the red carpet for foreign investment. But probably
exhausted by the effort of the sharp break in 1991 with his socialist
past, Dr Singh sent the other four years of this term as finance
minister in forgettable shallows and miseries.
Now, the opportunity squandered by Dr Singh has presented
itself to the new incumbent of this office. Circumstances have
combined to give him a another opportunity to take the economic
liberalisation and deregulation process to its logical conclusion.
Here is his chance to devise a radical national reconstruction
plan which will transform India into a respected economic powerhouse
within the next two decades. Don't laugh. The People's Republic
of China has achieved this within the past two decades. And anything
the Chinese can do, we can do better!
Of course, the finance minister's job is unenviable and it's hardly
surprising that most incumbents of that office tend to be disoriented
by its complexities. Most finance ministers end up spreading themselves
too thin, making sub-optimal allocations to myriad projects and
schemes to no worthwhile effect.
This is because no Union or state finance minister -- despite many
of them being distinguished economists -- has had the business (as
opposed to economic) literacy to focus upon the fundamental problems
of the Indian economy and to mount a frontal attack backed by
the artillery of heavy resources on clearly identified basic problems.
In business management parlance, division of problems and objectives
into primary, secondary, and tertiary priorities is known as ABC
analysis.
If we apply the rigour of ABC analysis to the Indian economy,
it shouldn't take us long to discover that its fundamental infirmity
is mass illiteracy. All the seemingly intractable problems of
the nation -- high population growth, low industry and agricultural
productivity, mass unemployment, poor civic manners, etc -- are rooted
in the stark reality that half the population of India is absolutely
illiterate and another quarter quasi-literate. As long as this
fundamental or A grade problem persists, it is futile to conceptualise
grand designs for meaningful rates of economic growth.
The other fundamental or A grade problem of the Indian economy
is the public sector. Over the past five decades, an estimated
Rs 3,000 billion ($ 75 billion) of taxpayers' money has been
invested in public sector enterprises owned by the central and
state governments. On the massive investment, the annual rate
of return has rarely exceeded 3 per cent (as against the average
12 per cent annual return on investment recorded by the top 500
private sector companies). And even this meagure annual return
on investment of PSEs is attributable to public sector monopolies
in various industries, particularly the oil refining sector. Moreover,
grossly inefficient PSEs in the infrastructure and utilities sectors
have been slowing down and hurting the Indian economy for over
three decades.
Yet, these two fundamental or A grade problems of the Indian economy
can be linked up and transformed into a great opportunity. If
he is bold and innovative, Sinha could initiate the overdue process
of putting the nation's bleeding PSEs on the auction block and
canalising the proceeds into the mass building of thoroughly modern
primary schools, and into the retirement of the public debt. Establishing
a linkage between these two fundamental problems of the Indian
economy offers the chance of transforming these two A grade problems
into an overdue economic restructuring opportunity.
That's the type of pathbreaking Union Budget we need -- one that
addresses the fundamental problems which have hobbled the Indian
economy for over five decades and which transforms these a grade
problems into economic restructuring opportunities. But alas,
given the petty politicking problems of the BJP-led coalition,
it's not the Budget we'll get.
Dilip Thakore
Budget '98
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