Bibek Debroy: Despite the Centre

OFF THE RECORD

The Iran episode has resulted in the Gita being quoted. This is part of verse 2.47 from the Gita, a segment that most Indians are familiar with. It says, "You have the right to action alone, don't claim its fruits. Don't be motivated by the fruits of action, but don't be attached to inaction either."

Perhaps this last part, about not being attached to inaction, deserves wider dissemination. While on the Gita, there is more. The first part of 4.16 says, "Even the wise are deluded about what is action and what is inaction." The first part of 4.18 talks of the wise seeing inaction in action and action in inaction.

The intention is not to enter into a discussion of the Gita, certainly not in BS. However, interpret action as reforms and inaction as lack of reforms. Since perceptions about reforms vary, and there is delusion to compound matters, it is possible to see reforms in non-reform.

For instance, social security for the unorganised sector, right to information, right to education and even a rural employment guarantee can be construed as reforms.

On the other hand, because of the adieu that has been bid to fiscal rectitude, non-implementation of assorted agenda items in the National Common Minimum Programme (NCMP), increased public expenditure, a flurry of legislation (and executive decisions) representing greater government intervention and a spate of Commissions, Committees and Task Forces, it is possible to see non-reform in reform.

Apparently, a foreign newspaper is planning a story on the future of economic reforms in India. That is apt. Because, on balance, reforms have no present. They can have only a future. In this context, reforms are anything that leads to competition and efficiency improvements, thereby improving consumer choice.

Had it just been a matter of privatisation/disinvestment of public sector enterprises and the Industrial Disputes Act, one might have blamed it on the Left. And the coalition government. The Left, equated with the CPM/CPI, has a high decibel level and, courtesy the electronic media, is very visible.

To paraphrase what a Left leader once said, the bark is not only worse than the bite, it is possibly also worse than the byte. We know what the Left stands for, although we are sometimes confused about what it stands for in Delhi, as opposed to Kolkata. If we have this diagnosis of the Left stalling reforms, we will simplify and tilt at windmills easy to pinpoint.

After the elections in Kerala and West Bengal, public posturing will die down. After mid-term elections at the Centre, the Left may have less clout. And so on. What this diagnosis fails to recognise is that this Left malaise is fairly well-entrenched in the mindsets of other UPA allies, including the Congress. The Congress mindset is a non-reform one. The present populism is not just tactical, it is strategic.

The present phase is not the aberration. The phase 1991-96 was the aberration. The Congress is therefore returning to its roots of the late 1960s and early 1970s. There are two elements that distinguish the Congress from the BJP, economics and politics.

In the economic domain, as product differentiation sets in, the Congress occupies the left of Centre space and the BJP right of centre. As was once famously stated, the citizen is faced with a choice between communism (broadly defined) and communalism. We ought to be therefore sceptical about the future of reforms.

What is said in Davos or Washington won't materialise in Delhi. Having said this, let me advance a heretical proposition. When we are sceptical about reforms, we focus on the Centre. However, if we draw up a reform agenda, and there will be some consensus there, most items on the agenda will be state government subjects.

We are no longer talking about trade and exchange rate policy changes of the early 1990s, or even industrial licensing. The heretical proposition is the following. For a trend rate of GDP growth of around 7.5 per cent, the Centre is completely irrelevant.

The Centre can certainly mess things up and bring India down to 5.5 per cent. Manna may descend from heaven and the trajectory may be pulled up to 11 per cent.

Both these scenarios are possible, but implausible. As more and more states reform, 7.5 per cent will automatically happen, regardless of what the Centre does. This leads to another proposition. All projections about future GDP growth are under-estimates, because they not only factor in monsoon prospects and agricultural growth, as they should, but pessimism about central government reforms, as they shouldn't. The year 2005-06 is a case in point.

In Q1, real GDP growth was 8.1 per cent (advance CSO estimates), but no forecaster dares project more than 7 per cent or thereabouts. And this pessimism also characterises the future, leading up to, say, 2015. How many people dare suggest trend growth of more than 7.5 per cent?

However, with a savings rate of 30 per cent, an investment rate of 32 per cent and an ICOR (incremental capital/output ratio) of 4, we get 8 per cent purely on account on capital input.

The demographic dividend, reflected in declining dependency ratios, should bring an increment of 1 per cent, if not the 2 per cent of East Asia. Despite inaction by the Centre, we will accelerate to 9 per cent.