Economic reforms: The third dimension

BACK TO BASICS

Economic reforms have been elected back to the agenda of the government. The Prime Minister's Office is busy working out 30 odd priority items which are to be put on the fast track.

Most of these relate to economic administration rather than policy changes. However, if ones reads the 'economic' message coming through in the elections "" especially from Madhya Pradesh where decentralisation had been pursued very seriously "" it is for a change in the design of economic reforms.

At the grass root level, the biggest problem facing decentralisation "" in Madhya Pradesh and other states where it has been pursued with some degree of success "" is that it has been seen only in terms of delivery of welfare services.

In most cases, the major role of local bodies and panchayats has been to identify beneficiaries of government programmes. There is no serious involvement of the panchayat in the management or control of basic public services like primary education, public health and sanitation.

Evidently, in an overall environment of inadequate growth of industry and infrastructure, this is not good enough. Hence the results in Madhya Pradesh and Rajasthan.

The lesson from the results for the economic policymakers is to institute a system which will use the third tier of governance for fostering local business development.

And it is here that economic reforms come in: the most critical issue of reforms today is to design the reforms in such a manner that they foster local business development.

If done, economic reform will get into the arenas of the local informal sector industries and touch the lives of many more people than the corporate sector.

For the last 14 years, reforms have been preoccupied with macro-economic issues like the fiscal stabilisation, external trade, foreign investment liberalisation, and industrial investments.

The package of reforms hasn't even as much as recognised the administrative mechanism of delivery of public services in the area of human development which even though is seriously deficient, exists as an important and legitimate route in the delivery of crucial public services.

It is unfortunate that even though economic reforms and the 73rd and 74th Constitution amendments were passed almost at the same time, there has been no effort to link the two.

They have moved more or less on parallel tracks; indeed, neither has recognised the existence of the other. Reforms were, so to say, a superimposed pre-reform governance structure. And local bodies have been functioning in a pre-reform economic regime. This has to change.

The third dimension of reforms is to find and strengthen the potential links between economic reform and decentralisation "" be it the management of local infrastructural projects like roads and irrigation or that of small-scale projects, particularly rural industrialisation.

It is these areas which have the maximum potential for growth and impart dynamism to the economy.

What we require is redefining the programme of economic reform that involves encouraging micro-finance and marketing channels, developing and facilitating skill-based small-scale and medium-scale industries and providing the 'positive' and 'negative' incentives of Chinese-style decentralisation.

This has the potential of opening the floodgates of small-scale entrepreneurship in India.

It is this that also holds the key to the most politically sensitive deadlock of reform "" the collapse of employment growth.

It is a serious , though largely ignored fact, that the aggregate employment elasticity in the economy (the extent to which additional output creates additional demand for jobs) has dropped from 0.68 in the period 1983-88, to just 0.16 per cent between 1993-2000. A 76 per cent drop over 17 years!

The redesigned economic reforms package will have to ensure decentralisation with functional devolution. And to make sure that these functions are met adequately, these should be financed through a system of fiscal devolution which seeks to make them fiscally autonomous units.

At present, the decentralised fiscal system has not led to any convergence in the inter and intra-state variation in local resource generation. Those state governments that had low initial own revenues have poor rates of growth in own local body revenues.

This has happened despite the setting up of State Finance Commissions which have also failed to expand the pre-existing local fiscal domains.

Most of the state finance commissions have chosen to adopt the soft option of recommending revenue-sharing by state governments even for the performance of local 'core' functions.

This has burdened the already stretched state governments, resulting in low level of financial support and hence poor delivery of services by the third tier.

The only way to make reforms popular, politically sustainable and sensitive to local needs is to integrate decentralisation with reforms. That is the future direction economic reforms should take.

haseebd@business-standard.com