Ducking the reform wave

Entrenched industrialists, who have exploited the control regime and who have adjusted to the prevailing inspector raj, complex regulations, and institutionalised corruption, are loathe to see new competitors emerging, while outwardly projecting themselves as advocates of liberalisation. A new entrant finds it impossible to start a venture on his own. He seeks to either emigrate or explore possibilities outside India. Hence the concern that domestic investment in industry is not picking up and for the stock market there are few new offerings. Focus on getting FDI appears disproportionate to the energy expended. Foreign investors see the changes in policy with every election, the signals emanating from abolition of the disinvestment ministry, the red tape, and the corruption much more clearly from afar. Hence there are no big ticket investments flowing from abroad. The quaintly titled Press Note 18 effectively enslaves the foreign partner of joint venture to his Indian partner, denying him freedom of movement and even an exit.

The second major area of reform undertaken in early ’90s was in the power sector. Delegations led by the then principal secretary to the PM toured the world soliciting investment. Many investors came; most have gone back disappointed. The complexities of the purchase agreements neutralised the attraction of counter guarantees and assured returns. The loss-making State Electricity Boards remain an obstacle to reform and growth in this sector, the woes of which are epitomised by the colossal failure of the Dabhol project. A first rate modern plant lies shut for the last three years, closed because of refusal to meet additional demands, refusal to kow-tow to local politicians and bureaucrats, and the petulance of local politicians to embarrass the central government.

The central government, which has stood sovereign guarantee to the Dabhol Power Company, is currently facing arbitration in London involving a demand of $5.2 billion (Rs 25,000 crore). When this meteor hits North Block some time next year, the fiscal deficit and budgetary projections will lie in tatters. Take other areas of reform. Small traders mistakenly oppose the entry of super markets; the SSI ministry supports their cause and obstructs FDI in the retail sector. Courier services were vehemently opposed by the Postal Department. After a prolonged battle, these have come and are providing better service and, more importantly, employment to large numbers. The urban development ministry continues to oppose FDI in real estate, does not remove archaic ceiling laws, or modernise land records and titles. The civil aviation ministry vehemently protests against any increase in flights by foreign airlines or investment by them in related infrastructure. The telecom sector was opened up only on a directive from the PMO.

The tussle between liberalisation and the determination to retain control, is best illustrated in the meetings of the Foreign Investment Promotion Board (FIPB). Each proposal for foreign investment is invariably opposed by the concerned ministry because it is incapable of looking beyond its own domain. The finance ministry would oppose as a matter of principle any innovative financial instrument, which was unknown to the RBI. The situation became so bad that the FIPB, instead of being a facilitator, became an impediment, and there was a demand to abolish it. Since nothing ever gets shut down, the FIPB was transferred from the industry ministry to the finance ministry. During this writer’s stint as chairman, FIPB, the only refreshing approach was that of the IT ministry. Almost 40 proposals every week were cleared within minutes. The results are there for everyone to see. A huge fiscal deficit makes investors wary of committing their funds. The finance ministry continues to bail out failed financial institutions with taxpayers’ money, to the direct benefit of big defaulters. Creation of special purpose vehicles and issuing of ‘budget neutral’ bonds to make bad debts vanish miraculously fools no one. Eventually it is taxpayers who pay.

From the upgrading of the Planning Commission, it would appear that hopes have been pinned on this institution to deliver a double digit GDP growth rate. It seems to have been overlooked that in the past 50 years since the Planning Commission was set up in a particular economic context, much of India and the world have changed.

Although we have at the helm of affairs today eminent persons who have impeccable credentials for being reformist, discordant voices on policy issues are likely to decelerate the reform momentum. The benefits of liberalisation and free market economy, despite numerous roadblocks in the last 13 years, are quite apparent. It would be a pity if the resolve to move ahead on this road was weakened. For heart bypass surgery, before the first incision is made, the entire team of doctors, anaesthetists, surgeons, nurses, technicians, and the required range of instruments are ready and at hand. We did not have such a team in 1991. Fortunately, the patient is resilient and is still alive. It requires clarity, fresh thinking, co-ordination and, above all, fierce determination, to get him up and running.

The writer is a former finance secretary and former secretary, Industry