Shankar Acharya: Bad Ideas are Winning

A PIECE OF MY MIND

Six months ago (Business Standard, June 22) I noted the "intriguing contrast" between the "exceptionally high calibre" of this government's top economic management team (Manmohan Singh, Chidambaram, and Montek Ahluwalia) and the "poor quality of economic ideas swirling around in the Common Minimum Programme and ministerial pronouncements".

I went on to predict that "such tension between bad ideas and good economic managers cannot persist indefinitely. Economic governance over the next few months should be a fascinating battle between good men and bad ideas, a battle which will yield winners and losers".

Half a year later, it's time for an initial stocktaking. With profound sadness I have to record that Bad Ideas seem to be trouncing Good Men. Let me substantiate. And let me organise the dispiriting evidence under some policy categories.

Employment creation

Most economists agree that our complex and inflexible labour laws are probably the single most important cause of stagnant employment in the organised segment of the economy, especially industry.

The CMP dimmed hopes of progress in this area. And sure enough, there has been none. Correspondingly, the prospects for rapid growth of good jobs in modern factory employment remain dim.

Instead, the government has opted to fulfil the CMP promise of an Employment Guarantee Act and has tabled a Bill in Parliament last fortnight.

I will not repeat my profound concerns about its onerous fiscal consequences (Business Standard, November 30). Others have also emphasised the large scope for corruption and "leakages" and the costs of diverting scarce resources from social and economic infrastructure.

Many analysts agree that the new Act will, over time, develop into a horribly expensive gravy train for political patronage with little durable benefit for the poor.

Political expediency will dictate the expansion of the "benefits" of the scheme, quite independent of its efficacy in serving the avowed objectives.

Restructuring the public sector

Public enterprises continue to dominate large chunks of the Indian economy, especially energy, banking, insurance and transportation.

This is despite almost a decade of ministerial pronouncements to the effect that "the business of government is not business". As envisaged in the CMP, the privatisation process is pretty dead in the water.

Predictably, talk of selling loss-making enterprises remains just that, talk. Even disinvestment, in the sense of selling minority shareholding to the public, is taking the slow train.

Indeed, a new Board for Reconstruction of Public Sector Enterprises has just replaced the old Disinvestment Commission. Apparently, its focus will be on reviving PSEs.

No matter that many years and many thousands of crores of wasted government money have demonstrated the utter futility of pursuing this objective. Ask any of the last ten Union expenditure secretaries.

What's more, the new Board has been established even before the old BIFR has gracefully left the stage, prompting this newspaper to editorially coin (December 23) "a new Parkinson's Law which stipulates that sick public sector companies will not only not die but bodies to revive them will proliferate"!

Infrastructure

The follow-through on the Electricity Act (2003) remains painfully slow. Indeed, there is some question as to whether the "review" threatened in the CMP is really behind us or not.

Railway finances, organisation and operations remain as immune to reform as ever, notwithstanding the metronomic regularity of major accidents.

National highway development continues as a bright spot, even as state and rural roads languish for lack of funds and maintenance.

The decade-old plans to privatise the national airlines seem to have been shelved, while the good intentions to induct the private sector in metro airport development remain vulnerable to political hurdles, regulatory uncertainty and state government caprices.

Telecom is forging ahead despite regulatory favouritism but urban infrastructure development continues to be mired in dismal municipal finances and governance.

In energy, coal continues to be a political football, while oil and gas is still hostage to administered prices, political whims and oligopolistic behemoths, public and private. Not much is being done to forestall the water wars in our future.

The Planning Commission has been struggling manfully with these key infrastructure issues, although it did get distracted temporarily by a weird and unworkable scheme to use forex for infrastructure finance.

In short, the policy thrusts to address the country's immense infrastructure needs are still incremental and inadequate.

Financial sector

Whatever happened to the brave new world of financial sector reforms? Well, the NDA government in its final year rolled back earlier progress, by boosting "directed credit", proliferating interest rates and pursuing pointless mergers of government-controlled financial intermediaries.

The UPA government appears distressingly comfortable with these retrograde tendencies. Government ownership of PSU banks has been firmly reiterated.

A confusing flirtation continues with the issue of higher foreign ownership in private banks. What is patently lacking is a long-term vision for the banking sector.

If the dominant elements of the implicit game plan are government control, heavy directed credit, and significant interest rate controls, then the campaign slogans about a modern financial sector should be quietly buried.

The private insurance sector is maturing steadily. Growth would be faster if the last Budget's commitment to raise the equity cap on foreign ownership through an amendment of law had not run into implacable opposition from the Left and a tetchy BJP.

The Left is also successfully blocking the lifting of the cap on foreign shareholding in telecom and foreign participation in the retail sector.

The government's weakness in this area is also shown by its apparent flip-flop on the dilution of Press Note 18, which is currently tilted in favour of the domestic partner in foreign collaborations.

Tax reforms

The last Budget did not help the cause of tax reform. A bad tax on stock transactions was launched somewhat clumsily.

The taxation of long-term equity capital gains was abolished, creating a distinctly uncomfortable situation (for a poor country) in which owners of (equity) capital are neither taxed on dividend earnings nor on capital gains, while all forms of labour income are taxable.

If the Left was less preoccupied with outdated sloganeering and a little more thoughtful, it might have raised cogent objections to such proposals.

While the date for inducting state VATs has been reset for April 1, 2005, the reports about the likely design are quite disconcerting.

In particular, a wide dispersion of rates and the slotting of a very large number of commodities at the concessional 4 per cent rate do not augur at all well for this VAT experiment.

And whatever happened to the Kelkar ideas for a national goods and services tax? The government has not encouraged any serious debate.

Well, that's quite a lot of Bad Ideas for just six months. There isn't much of a clarion call for economic reform in any of the above. Where are the Good Men in all this? Overwhelmed, under siege or complicit?

Perhaps a bit of all three? Is there no silver lining? Well, maybe there is. It's in the resilience of the Indian economy and the dynamism of its people.

As we look forward to a new year, let us hope that this resilience and dynamism reinvigorate the Good Men to fight the good fight and subdue the Bad Ideas ... and perhaps even implement some good ones!

(The author is Member, 12th Finance Commission and a Professor at ICRIER. The views expressed are strictly personal)