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Friday 25 November 2011

SLOWING PATH OF GROWTH - Weak political leadership has caused economic decline

- Weak political leadership has caused economic decline
Commentarao: S.L. Rao
Dalit pride
The prime minister lectured the Group of 20 nations, primarily the United States of America and the European Union about the need to control their deficits and their national debts. Few among his audience must have been aware of the dire straits of the Indian economy. They banked on his reputation as a reformer, who reformed the Indian economy, unleashed the entrepreneurial ability of India’s private sector, slashed taxes on income, goods and imports, removed the restrictions on starting new industries through rigid licensing of product, technology, capacity, location and so on and, by raising tax revenues, brought down the deficit.
Like the Congress, which has forgotten its erstwhile prime minister, the audience did not recognize the role of P.V. Narasimha Rao, who used a manageable foreign exchange crisis to liberalize the economy and remove the restraints strangling it. He wanted an economist as finance minister to do the necessary technical things. Bright young Indians in the World Bank and the International Monetary Fund as well as brilliant civil servants like L.K. Jha had ready papers on necessary actions. Montek Singh Ahluwalia in 1990 published an anonymous article in TheFinancial Express (A.M. Khusro was editor) that was a blueprint of what needed to be done.
Since 1991 India has experienced unprecedented growth and prosperity. All human development indicators showed improvement: life expectancy reached 61 years, literacy grew to 64 per cent, and numbers below poverty line were around 30 per cent. At constant prices, the gross domestic product has risen from Rs 2,24,786 crore in 1951 to Rs 44,93,743 crore in 2010 and per capita from Rs 5,708 to Rs 33,731. Agricultural production has grown by over four times and industrial production by 45 times; foodgrain production by about 4.5 times, steel by 60 times, cement by 100 times.
But economic growth has been erratic with dips every four years or so. Inequalities have risen sharply. The current account in the balance of payments has almost never been in surplus and is now in deficit, around three per cent. Exports have never kept pace with imports. With many very poor people, our GDP is dominated by GDP in services, not the real economy. Agriculture continues to be the main occupation of 60 per cent of the people, leaving most of them in abject poverty. All human development indicators put India almost at the bottom of the list in Asia. The country has prospered; most people have not.
Growth may now be 7.6 per cent or even less. With the US and Europe in crisis, next year shows little promise. Inflation, especially of food products, has crossed 12 per cent at the wholesale level. Only the Reserve Bank of India has tried to tackle it by raising interest rates 13 times in 18 months. The government has expressed hope of a decrease in prices but has done nothing to contain its expenditures or deficits. Private investment has declined. Various social welfare schemes, despite large leakages, have enabled consumption, not investment, to rise and drive the economy. Foreign investment, both as portfolio and as direct investment, has fallen. Exports are well behind imports. The decline in the price of crude oil is more than made up for by the decline of the rupee in relation to the dollar, forcing repeated increases in retail prices of refined products, such as petrol and diesel, with their multiplier effect on other prices. Industrial production has been declining and low investment means little new capacity is being created. The services sector is also showing reduced growth for the first time in years.
Unlike the US and the EU, India needs many years of substantial and effective government investment in physical and social infrastructure: roads, railways, power, airports, ports, ships, waterways, telecommunications, irrigation, water enhancement and conservation, health and education services, trained doctors, nurses, midwives, paediatricians (to serve the over 10 per cent of the population which is below four years of age), immunization programmes, sanitation, safe drinking water, maternal and child care, nutrition and unemployment protection. Our erratic growth is owing to the serious deficits in each area of infrastructure availability, quality, and affordability.
We require massive investment from governments, the private sector and foreign investors. Our policies should welcome investment; instead, our policies, procedures and inspectors make it difficult for an investor to start something new or buy a going enterprise. In spite of ‘reforms’ the climate is not investment friendly. It is taking us too long to have a clear and consistent set of laws and rules on land acquisition, environmental clearance, rehabilitation of displaced people and so on. In every case there are government servants or fixers out to profit from helping an investor to invest.
The United Progressive Alliance II has produced corrupt ministers at the Centre in almost every ministry. Most do not appear to have clear ideas on what needs to be done and how to do them in their ministries. Civil aviation is a good example of a ministry that has managed to make the national airlines totally unviable and has done the same with some private ones. The health minister seems to have no clue to the challenges facing his ministry but is busy mishandling his assigned party responsibilities in some states. A key ministry, power, has a minister who seems to have little capacity either to understand the issues or to do anything about them or even to negotiate with state governments that have driven state electricity boards to bankruptcy. This is a major bottleneck to growth. Coal is another badly run ministry without much idea of how to bring down costs, improve efficiency and the quantities produced. Oil and gas seem to have been badly mishandled (according to reports from the comptroller and auditor general) and has left the country short of the expected gas. The agriculture minister might be an expert (the prime minister) but he has been unable to improve the productivity, storage, irrigation, or to control the massive overuse of groundwater and declining water tables. Other ministries are little better.
The state governments, with a few exceptions, are also poorly led. Of our three women chief ministers, the newest seems the most illiterate in economic administration. All that she knows is populism for Bengal. The Tamil Nadu chief minister bankrupted the Tamil Nadu state electricity board with free power to farmers and, in her power-hungry state, has supported an anti-nuclear plant agitation at Kudankulam, not to demand more safety measures but because church groups and foreign environmentalists say it is dangerous. The chief minister of Uttar Pradesh at least wants the monolithic state to be broken into four. She has invested in Dalit pride with her Dalit parks, not objectionable in a state that invested heavily in the Nehru-Gandhi family. The massive road projects and new power plants in the private sector are to be commended. She has failed on law and order and corruption and in reaching social programmes to the poor. Gujarat, in spite of its chief minister’s arrogance and the charges against him, has shown growth, more equality, and better reach for more of the population. Chhattisgarh, Himachal Pradesh, Kerala and Bihar also appear to have done a better job for more of their populations. But Maharashtra and Karnataka, like others, are laggards.
Clearly the inexperienced party in coalition in Delhi in the National Democratic Alliance delivered better with less theft and corruption. The separation of the offices of prime minister and the Number One in the party has failed in the UPA and must not be repeated. The experiences of successful states must be transmitted to the bureaucracies and political leaderships of other states. The Centre should use its financial clout better by demanding essential reforms and performance from the states. It is doing this by asking banks not to lend to bankrupt state electricity boards that suppress electricity tariffs. Decentralization to panchayats and capacity building are priorities. This may not eliminate corruption but will make it more visible.
(The author is former director general, National Council for Applied Economic Research)

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