The limits of reforms

The mantra of the reforms process is that the fiscal deficit be contained. It was, therefore, not in the least surprising that the Finance Minister’s only answer to the Economic Survey having confirmed that performance in the eighties as decade was significantly superior to the nineties on all the parameters of what is perceived as growth GDP, per capita income, savings rates, agricultural output, industrial growth, exports, poverty reduction was to sneer at the achievement by pointing to the sharp increase in public debt and fiscal deficit which accompanied the better performance of the eighties. That is to mix up the financial problems of the government with the economic problems of the country. The fact is economic performance in the nineties showed little improvement over the eighties and was significantly worse in many respects.

Except on three counts, all to be commended. The fiscal deficit is lower, if still pretty high. Foreign exchange reserves are considerably higher. And inflation, at any rate for the present, seems to be running low. Otherwise, GDP growth rates are the same as in the eighties, and several key sectoral growth rates are disturbingly lower. In the light of this, the Finance Minister’s answer should have been that while economic performance in the nineties had indeed been no better than the eighties and in some respects worse, the potential for faster growth rates could be greater at the end of the nineties than the potential at the end of the eighties. Instead, Sinha preferred to mock. It reflected a narrowness of comprehension and a blindness to reality which augurs poorly for the future of reforms.

The argument for reforms is two-fold. First, that it is the way out of the cul-de-sac of the failures of socialism. Second, that reforms are the road to miracle rates of growth. Do either of these arguments apply to India? As for the alleged failures of the socialist path, I can do no better than yield the floor to an arch-reformer, Bimal Jalan, Governor of the Reserve Bank of India, and his assessment of the economy in 1989 as detailed in his Introduction to the book charting the path to reforms which he edited in 1992, The Indian Economy: Problems and Perspectives: “As recently as 1989, India was being universally praised for its sound economic management.

National income was growing well above the historical trend. The upbeat mood about India’s prospects was captured well by The Financial Times, London which declared "India would soon find place in the ranks of Asia’s fast-growing newly industrialised countries". Before reforms. Governor Jalan, not sycophant Aiyar.

It was to attain tiger rates of growth that we embarked on reforms. There was some slight hope of becoming a tiger when growth rates rose to 7.3 per cent in Manmohan Singh’s last year as Finance Minister (1995-96) and persisted up to 7.8 per cent in Chidambaram’s first year (1996-97). Then came Chidambaram’s superman Budget of 1997-98. And the tiger became a pussy cat. Gr-owth collapsed to just ab-ove 4 per cent, and has averaged below pre-reform levels in the three years that have followed. There has been no miracle. Reforms have not delivered what was expected of them. But, unfortunately, reforms for reformers is something of a religious mantra.

They are offended at the blasphemy of even the suggestion that the reform path be thought through again in the light of our ground experience of the first decade of reforms.

First, let us recognise that the reforms formula has worked best in authoritarian conditions; our political system calls into question the assumed political morphology of reforms. The rejection of the Finance Minister’s proposal to cut food and fertiliser subsidies (which amount to no more than 5 per cent of the government’s non-Plan outlay) is reflective of the great underlying reality that reforms have not impacted on the poor, the poor are our voters, and kicking them in the belly is not the best way of ensuring that they will vote for us next time round. Ours is a democracy in which elections are lost on the price of onions: either we become a heartless dictatorship and get all the reforms we want, or appreciate the limits to imitating in our democracy the economic policies of autocracies, however spectacular such policies may have proved in their conditions.

Second, let us recognise that it is public goods more than private income which determines the standard of living of the poor. That includes, above all, food security. Would the rich vote for an increase in income tax? Moreover, economic policies which call for sharp cuts in employment in the name of efficiency may be sound in theory but are impractical in implementation. Third, there is a cost to both liberalisation and globalisation. No citizen from Singapore to China was permitted to question the individual and social sacrifices needed to eventually work the Asian miracle. In our democracy, unless a miracle is believed possible, and the nineties have given no evidence of this, the people will not be ready to make the sacrifices that seem self-evident to economists and editorialists of a certain persuasion.

The slogan of garibi hatao was believed by the poor because the poverty ratio in rural India tumbled consistently from 55 per cent to 35 per cent in the years from Indira Gandhi to Rajiv Gandhi. There is little trust in reforms because the poverty ratio has stagnated at the end-80s’ level through all the years of Manmohan Singh and his successors. Breaking this voodoo is the real challenge before Yashwant Sinha. He does not seem to know it.