Surjit Bhalla: Reforms by any other name

CALLING THE BLUFF

Non-Indian spin doctors, beware. You are going to be outsourced to India in the near future. The United Progressive Alliance (UPA "" Union of Parliamentary Activists?) has just released its Common Minimum Programme (CMP) "" a vision thing the new government will help make reality. (But whose government is it? That of the cabinet ministers led by Manmohan Singh or that of the Congress party led by Mrs G? There is no previous instance of party rule in a democratic economy, though example of its prevalence in communist dictatorships is not uncommon, for example Soviet Union till the mid-1980s, and China even today).

There are political tones/policies in the CMP that are sensible, desirable, liberal; these goals/policies do not involve any masking gloves, or face-lifting spin, and hence, do not require comment other than "right on".

The likelihood of these socio-political policies (repeal of Pota, autonomy for educational institutes, etc) being adopted is high.

The same is likely to be true of the economic reforms component of the CMP, but it is difficult to be as confident because of double spin at all times, and occasionally, even triple swing. (like the Mak ad about making everything possible, the ball turns right, then left, and then right, and all in the same delivery!)

The CMP can only be read between the lines, but I guess that is necessary when you have communists who want to act like China but also want to appear Stalinistic "" why that has to be the case is for psychologists, not economists, to ponder.

As a document of economic vision, the CMP scores heavily, and indeed outscores all of its rivals peddling analogous wares today or any yesterday.

It believes in growth and prosperity for all, but especially for the poorer sections of society. There should be solid and sustainable growth, the growth should be pro-poor; the subsidies that benefit the rich should be phased out, and taxes on the rich should also be increased; the productive capacity of the state owned sector should be improved, and loss making units should be sold; the fiscal deficit should be reduced from its commanding height of 10 per cent; education expenditures should be increased to 6 per cent of GDP, and health to 3 per cent of GDP.

Anyone who believes that the goal should be health, wealth and prosperity for all, and especially for the poor (the fact that the latter is contained in the former is not relevant in political documents) please raise their hands. Twelve billion hands go up (the world's population is six billion). That is how beautiful and universally accepted the CMP vision is. But let us examine the CMP a bit more closely.

Labour reforms: In what has been widely viewed as a major concession to the Left, the CMP states that there will be no "automatic hire and fire policy".

Note the clever use of the word automatic. Its insertion allows any practice prevailing in the world (let alone India) today. Who hires automatically?

When is fire automatic? If a firm goes belly up and fires its workers, presumably the speed is slower than that registered by Formula I drivers. Nothing automatic here.

The CMP also states that "some" changes in labour laws are desirable, and that these will be implemented in consultation with the trade unions. The probability of reform of India's labour laws has just increased to its highest levels. The Left is essential to any labour market reform; recall that West Bengal was the state that banned labour strikes during waking and/or working hours.

Financial market reforms: Credit to farmers will be "doubled" and financing will be at lower interest rates. The Indian government raises approximately half of the resources needed to finance its 10 per cent deficit at market rates of 5 per cent; the other half is financed via administered interest rate "scam savings programs" that cost the government 10 per cent.

A large part of the present fiscal deficit is caused by these past scam policies, which Manmohan Singh did not rectify in his earlier avatar. The NDA government boldly set the ball rolling in reducing scam interest rates; technocrats at the RBI have led the charge for removal of this scam. It is very likely that Mr Singh will accelerate this NDA-initiated process.

Therefore, interest rates in the system are likely to be lower; therefore, the farmers might get the loans at lower rates without an increase in subsidy! Further, the CMP itself says that interest rate for loans to states will be reduced "" that cannot happen without reducing scam rates!

Disinvestment and privatisation: Partly because the Congress felt it would never get back to power, and partly because of the influence of leftists within Congress, its manifesto argued against privatisation of profit making firms.

This absurd oxymoron policy resonated with Stalinist rhetoric of the Left and led to policy statements of the "graduate student in the coffee shop" variety. But the CMP says something different "" it leaves several doors open.

"Generally, profit making firms will not be privatized". In other words "" somewhere down the line, the general will command the troops. In addition, the CMP goes out of its way to state that resources can be raised by profit-making state firms. The process can go on forever, as long as the "character" of public sector firms is maintained.

Read that as continuation of the NDA policy of disinvestments. There is lots of money to be raised by selling profitable public sector units while retaining the character. The spin is brilliant and should not escape astute fund managers.

Taxation: The CMP states that "tax rates will be stable", that VAT will be introduced, and that tax revenue to be increased via better compliance. Read all about it in the mother document released by the NDA finance ministry "" the Kelkar report on taxation.

There are several reasons why major direct tax reform is in the offing "" it is an idea whose time is over-due, it is unfinished business both of Manmohan Singh and Chidambaram.

The latter's dream budget missed the historic opportunity of reducing both tax rates and the for the rich only exemptions. Reduced tax rates and near elimination of exemptions are necessary for raising tax revenues and for helping trim the fiscal deficit.

Education expenditures: The CMP has boldly announced the need for "user charges" in order to increase education expenditures to 6 per cent of GDP. In order for India to effectively compete in global markets, education expansion is absolutely necessary.

In the next article, it will be shown that government expenditures have not shown much correlation with education expansion. Indeed, West Bengal is one of the worst state in the Union in this regard "" so much for the Left's model state.

Even "reforms with a human face" advocates like Amartya Sen and leftist NGOs like the World Bank have argued that the loss making public sector education units (government schools in short) should be reformed. Why?

Because of corruption, government teachers not teaching and not being (automatically!) fired and general failure to deliver education to the poor. Mercifully, the CMP does not announce the time frame for adopting the West Bengal model. Again, the vision is appropriate and there are enough reality bumps to guide expenditures in the right direction.

India, and the world, is much different today. It demands transparency and efficiency. There are several checks and balances, and if delivery is poor, execution of the deficient deliverers is immediate via elections. This is the primary reason I am optimistic that acceleration of economic reforms will happen, regardless of the laboured spin.

ssbhalla@oxusresearch.com