Let’s innovate, Dr Singh

The country expects the new prime minister to make it grow faster, and reduce disparities too. As he comes with an awesome reputation for expertise in economics, that expectation will be high, possibly higher than what the situation will allow or, at any rate, the politics of governance will allow.

Consider, for example, the rich-poor disparity. At the current rate of progress, the country’s GNP will increase by 40 per cent over the next five years. Then, if we divide the population into five groups, the lowest should become as well off as the next higher, the second quintile, is today. Likewise, the second quintile should attain the current level of the third quintile and so on until the top quintile scales new heights. On that basis, in five years, there should be virtually no one below the poverty line.

For the bottom quintile to rise above the poverty line, the productivity and incomes of the bottom 80 million jobs should be raised 40-50 per cent. In metropolitan cities, for the second quintile to acquire the status enjoyed currently by the third one, 20 per cent of the population, around 10 million people, should get out of slums and get proper housing. That will need two million new dwellings in the metros alone. If, on top, we want to avoid disparity between large cities and small habitations, at least 40-50 million homes will have to come up all over the country.

These are typical of what the economy will have to achieve over the next five years to ensure that it not only shines but shines on the poor as well as it does on the rich. In theory, given the expected rate of growth, all these improvements are realisable; in practice, they are almost impossible. Let us consider the problem of new homes. It is said that in Mumbai alone there are enough vacant flats to house a million people. They are lying vacant only because rent control laws have made it risky for house owners to let them on hire. Hence, if rent control laws are repealed, a million people will get improved housing. The actual number of beneficiaries will be many more because when these vacant flats are occupied, they will empty an equal number of slightly poorer dwellings into which others can move in. That cumulative process will continue until a million people living on pavements or equally worse accommodation move to better shelters. Further, when the draconian rent control is abolished, private investors would start building houses for the poor and not for the rich alone, as they are doing now.

Then, it will be sensible and just to repeal rent control laws. Unfortunately, thanks to these laws, there are millions paying abysmally low rents. They will lose that privilege when rents are rationalised. Thus, due to political pressures from a relatively well-off population, many more that are far poorer will be forced to live and die on the pavements.

Here is a typical example of the adverse forces that the prime minister will face in the coming months. Similar contrary pulls will make life difficult for him to come to grips with other forms of disparity too. That is why he carries a crown of thorns.

He starts with another handicap. Conventional macroeconomic solutions for accelerating growth are two: increasing fiscal deficit and reducing interest rates. He has inherited unsustainable fiscal deficits; interest rates are so low that the political pressure will be to increase, not decrease, them. Hence, classical economic remedies are virtually denied to him.

As conventional solutions are unlikely to help much, he will have to look for innovations. Not only does he need innovations, he will have to persuade both sceptical politicians and a deeply conservative bureaucracy to accept them, and implement them effectively.

Every new prime minister is entitled to, and generally gets, a honeymoon period of three-four months. That is the time to introduce radical reforms. Once that period is over, antibodies develop; innovations tend to be rejected. Hence, as a first-term prime minister, the next few months will make or mar Manmohan Singh’s entire tenure. The country’s fate will depend on what new reforms he will introduce here and now.

India’s problems are less to do with economic scarcity and more to do with organisational and administrative deficiency. There is a surplus of capital, in rupees and in foreign exchange. There is surplus labour too. In economic jargon, India’s problem lies not with scare resources but with excessive transaction costs. Although Manmohan Singh is a great economist, his best hope for success will be in administrative and organisational reforms.

Archaic financial rules are the worst culprits that have tied up hand and foot both government administration and private initiative. When he became finance minister, the “mild” Manmohan Singh surprised everybody by ruthlessly cutting down a Gordian knot by abolishing gargantuan regulations about foreign travel. By one stroke of the pen, he removed a festering sore and did so against strong opposition from entrenched bureaucracy. He has to repeat that exercise on a larger scale this time. Once he does so, he will be on a smooth ride for a better future for himself and for the country.