Misguided policies

DIRECTIONLESS ECONOMY

In twenty years the Indian economy has been transformed: Few recall that the ‘Hindu rate of growth’ was 3 per cent per annum for over two decades. Direct and indirect taxation have been rationalised and despite lower rates, tax revenues have boomed.

Economic growth and higher tax revenues allow much greater social welfare expenditures than at any time in India’s history. Exports are showing a healthy trend. India’s economy has raised its stature in the world. As the London ‘Economist’ wrote in the early 1990s the Indian Tiger was let out of the cage of licensing and control raj and is now roaring. Many even dream of India as a superpower.

But many of those who manage our economy today were the same reformers who had executed policies of the command and control economy. Most of our higher bureaucracy and politicians were brought up to suspect the private sector, prefer ex-government servants for key positions and for advice on policy. Despite apparent change, these old mindsets remain. In addition is the fixation to match China’s growth miracle.

High economic growth is the goal. Double digit inflation might hurt the poor, growing inequalities, corruption, black money, illegal holdings abroad, are undesirable, but will not be controlled because that will hurt growth. Getting volatile foreign institutional investment is easier than foreign direct investment, and loopholes are provided to encourage it.

Policy legacies include a predilection for government ownership of key infrastructure and manufacturing sectors and a preference for disinvesting shares than privatisation and giving up control. Also an unwillingness to distance government ministers and bureaucracies from management of government owned enterprises. Results are the loot of public enterprises (for example, Air India and formerly Indian Airlines), technological backwardness as in BHEL, Coal India, Indian Telephones, energy shortages because of unforeseen shortages of coal, etc.

Continued misguided policies like product reservations for small-scale sector and labour laws that discourage labour intensive industries to go for scale, adversely affect manufacturing competitiveness, and exports. Reluctance to give up government control also has led to preference for foreign shareholdings (institutional investments, also used to launder illegal earnings, and volatile foreign fund inflows) over foreign direct investment.

The worst legacy is the power of the bureaucracy and its capture of most influential positions in government and independent regulatory bodies. High levels of corruption at every level of government and unwillingness to close the policy loopholes that enable it are a result, encouraged by vast and tempting government expenditures.

Expensive procedures

The other important impediment is the time consuming and expensive procedures making India one of the most difficult countries to start a business in. Privatisation of state owned enterprises would add to non-tax revenues, eliminate government support to inefficient undertakings, and improve the overall efficiencies in the economy.  State electricity boards, BHEL, BSNL, and most other public enterprises could then benefit the economy.

A pitiful neglect is of agriculture, employing 60 per cent of population, adding less than 20 per cent to GDP, and a major cause for mass poverty. Declining productivity, backward technologies, inadequate storage and transportation facilities, exploitative government pricing, export bans, are responsible but corrective action is absent because of vested interests.

China, despite absence of private land ownership, does far better and agricultural productivity is lower in India for almost all produce compared to most Asian countries. Absence of policies for farmer oriented procurement, fragmentation of land holdings, contract farming, conserving ground water, utilising and pricing irrigation waters, are some major areas demanding corrective policies.

After the Left withdrew support, the UPA government targeted high levels of economic growth (10 per cent has been mentioned), almost ignoring any other problems. Inflation especially of food products, consequent raising of interest rates, large volatile foreign fund inflows and resultant large swings in share prices and the external value of the rupee, large illegal fund out flows, many other issues that affect the macroeconomic balance, were given far less importance.

India unlike China has been unable to focus on labour intensive industries since any sizeable employment is subject to stringent labour laws that make the industries uncompetitive. Nor has it, unlike China, encouraged foreign investment in assembly industries with small value-added, which in China ultimately became advanced technology oriented industries. This policy has made China the largest manufacturing country in the world and absorbed much rural labour.

Indian  bureaucracy is not accountable and has captured all the key levers in government including those of investigation and regulation. The result is massive waste in public expenditures, poor quality of work and non-inclusion of many deserving people in social benefits.

Schemes are so designed as to enable vast siphoning off of funds by different levels in the bureaucracy. Instead of appropriate targeting and letting beneficiaries pay and be reimbursed for benefits, we continue to procure and deliver them physically.

We need a transformation in mindsets of those in government. The young should replace the aged with their old mindsets. We must have strong institutional mechanisms for individual accountability, investigation, prosecution and more severe punishment for corruption. For this we need a younger and more savvy political leadership.