Themes > Current Issues
08.02.2001
C.P.
Chandrasekhar
The usually dormant Prime Minister's Economic
Advisory Council (EAC) has chosen February, the budget month, to submit
a report to the executive head of the nation. But do not be misled.
This is not a report providing advice on what the government can do
at budget time to resolve the crisis in agriculture, stall the slump
in industry, or reduce the appalling deprivation that still haunts the
nation. Blandly titled "Economic Reforms: A Medium Term Perspective",
it is a collation of policy recommendations of the kind that the World
Bank and the IMF have been gratuitously providing India over the last
decade, and the official economic establishment has been regurgitating
at periodic intervals.
The thrust of the document is that, skepticism about the gains from liberalization in a limited circle notwithstanding, the government should accelerate the pace of economic reform. It is replete with recommendations covering a wider range of areas, but makes little effort to argue the case for individual policies. Most of the recommendations are those routinely advanced by advocates of the view that private investors responding to market signals should be allowed to determine investment and its allocation, in the belief that this would magically deliver growth with equity. It recommends that the average rate of tariff on India's imports, which has come down from 87 per cent in 1990-91 to around 34 per cent in 1998-99, should be brought further down to 12 per cent over a five-year period. It supports the government's privatization drive, and suggests that it should be accelerated. It calls for a reduction in subsidies all round by increasing prices and user charges. It demands that reservation of areas of production for the small scale sector should be withdrawn, allowing existing units in these areas to grow to economic sizes. And so on.
A nation subjected to policies of this kind for over a decade and yet to experience the benefits they were expected to deliver, is unlikely to respond enthusiastically to more of the same. This is not to say that a document on the so-called "economic reform" process in India is not in order. This July, the accelerated reform effort launched in 1991 would be 10 years old. That is a period long enough to make an assessment of its fall-out in terms of both realizing its objectives and triggering unintended consequences that are adverse from the growth and welfare points of view. In particular, it would be useful to understand why the promise of launching India on a new growth trajectory, relative to the 1980s, has not been redeemed; why industrial growth has been sluggish in all but three years during the 1990s; why despite evidence of stagnation in per capita foodgrain production and availability the government is stuck with an embarrassingly high level of foodstocks rotting in its godowns; why exports which were to provide the new stimulus to growth during the last decade have on average languished; why employment growth has been far less than warranted by the rate of growth recorded; and why, if we ignore the extremely controversial and non-comparable data yielded by the NSS 50th Round survey of consumption expenditure relating to 1999-2000, the evidence points to a setback in the process of poverty reduction during the last ten years.
An assessment which honestly addressed these questions could have provided the basis for a more reasoned public debate on the benefits of reform that can be the only basis for generating, if at all possible, what the EAC presumes already exists: a "nation-wide and broad-based consensus" on the need to further accelerate reform. However, elsewhere in the document there is evidence that the EAC is not so sanguine. The fact that it recognizes the growing disillusionment, being expressed, in all manner of forms both within the country and abroad, with the type of policies it seeks to advocate comes through in a small section sub-titled "Misgiving about Reforms". However, while listing some of these misgivings, the report responds to them in a manner that reveals that the EAC's intentions are not all sincere.
For example, while noting that a common misgiving is that reform has not touched the poor, the document states that poverty predates reform and that the latest NSS data for 1999-2000 show a decline in poverty, bearing out earlier surveys conducted by the NCAER. This bland statement conceals the facts that (i) till the 1999-2000 survey the NSS data indicated that the pace of poverty reduction during the 1990s had slowed relative to what was achieved during the 1970s and 1980s; (ii) that the revised questionnaire adopted for the 1999-2000 survey is controversial to a degree where even the Planning Commission had recommended that an expert committee should be set up to examine the comparability of estimates yielded by that survey relative to earlier ones; and (iii) that the NCAER surveys are primarily targeted at gathering data on durable consumption for private sector clients, do not collect much information on necessary consumption and none on food and are completely unsuited to making estimates of poverty in the country. The evidence that the poverty alleviation effort has suffered during the years of reform is still strong and cannot be dismissed.
There are other instances of a cavalier attitude when dealing with evidence. Consider the following statement made in the course of discussing misgivings that liberalization threatens a loss of national sovereignty: "It is worth examining how China has succeeded in achieving a high rate of growth and virtual abolition of poverty on the basis of billions of dollars worth of exports of a wide variety of goods." It definitely is worth examining why China's reforms have delivered export success and India's have not. That the document does not do. But it is also worth revealing that China's success in eradicating poverty predates its reform effort and recent evidence suggests that the loss of employment that has accompanied reform in China threatens a return to poverty among some sections of the population.
Incorrect, or even dishonest, assertions of this kind indicate that the intent of the document is not to prescribe the way ahead to the Prime Minister of a country sitting on a consensus over reform with little knowledge of what to do with that consensus. Rather it is to pack a set of slogans into a pamphlet, which the authors presume would be credible because of their own stature. Unfortunately, the validity of that belief would not be judged by the market that the authors hold so dear, since the document is available free of cost to those eager to read it.
Even if there is some substance to the EAC's belief in its own credibility, some far-reaching recommendations in the report are bound to test it severely. For example, the document recommends that the procurement policy should be drastically revised and replaced with a support price policy that limits government purchases to that required to prevent a sharp fall in prices. As a corollary it suggests that the role of the FCI should be reduced to maintaining a minimum targeted buffer stock of say 10 million tones and the PDS should be supplied with grain obtained on the basis of tendering by private traders. There is an obvious short-term problem with such a policy recommendation. Since the government is currently burdened with stocks close to 40 million tones, reducing stocks to the 10 million level would require offloading huge volumes of the stock in the open market, which would result in a collapse in prices. But the EAC could argue that this process could be spread out over time, and that the 10 million tones target should be seen as a medium term one. Even if that be so, the problem of price stability would remain. It hardly bears stating that the monsoon-dependent supply of foodgrains fluctuates much more than demand. So if the intention at all times is to maintain a buffer stock of 10 million tines, in years of good harvest open market prices would tend to fall sharply, and in years of bad harvest they would tend to rise. A support price policy of the kind being advocated can hardly ensure stability in food prices.
Another area in which the EAC has been rather bold in its recommendations is the labour market. Interestingly, while the report refers rather approvingly to the controversial and non-comparable NSS 50th Round consumption expenditures for 1999-2000, it does not mention the more acceptable employment estimates that emerge from that round. They point to a very significant deceleration in employment growth in both rural and urban areas, with the annual rate of growth of rural employment falling to as low as 0.67 per cent over the period 1993-94 to 1999-2000. This is less than one-third the rate recorded during the period 1987-88 to 1993-94. In fact, it turns out that this is the lowest rate of growth of rural employment in post-Independence history. What is more, the employment elasticity of rural output growth or the responsiveness of employment growth to output growth during 1993-94 to 1999-00 was also a third of that during 1987-88 to 1993-94. Clearly, the period of liberalization has been characterized by a setback on the employment front.
This however does not feature as an issue in the EAC report. It is more concerned with increasing the flexibility of labour markets confronting the organized sector. In its view, the requirement that government permission should be obtained for closure of units should be abolished or at the most restricted only to units employing 1000 workers or more, as opposed to its applicability to units employing 100 or more workers currently. This would supposedly provide "employers with sufficient flexibility to reduce the volume of employment or restructure producing units (or in extreme situations even close them down) when changes in market conditions and technology make it unavoidable." Given the trends in employment reported above, none can take seriously the EAC's view that such flexibility would generate new employment opportunities in the organized sector to an extent required to balance for the obvious deterioration in employment trends. The EAC is not just blinkered in its vision, it is clearly partisan.
What is of interest are the motives driving the EAC's decision to issue a document of this kind at the present moment. The intention could not have been a sudden desire to collate all reformist policy propositions in one document to provide the Prime minister with a reference book that aids quick recall. In any case, if it was, an index at the back would have been of much help, as the quick-reference manuals, produced for profit and sold to facilitate easy use of mass-market, packaged software has taught all of us well. One possibility is that, despite assertions to the contrary, it is the disturbing lack of consensus about reform that seems to have driven the EAC to produce this report and discuss, however inadequately, at least some of the misgivings about reform. With the tenth anniversary of the reform in sight, discussion about the gains from reform is bound to revive. That discussion can prove embarrassing for a coalition whose political backing is to be tested in the assembly elections that are imminent. The EAC report is possibly an early salvo aimed at muting the damage that such a discussion can have. Which is why it is surprising that some sensible people like Dr. Bimal Jalan, whose organization is more circumspect in its analysis of economic trends and cautious in advocating policies has signed this report. At least he should have realized that a good start to the task of downsizing government, which he advocates, would be a ban on the production of such poorly reasoned and totally futile pamphlets with funds drawn from an increasingly cash-starved exchequer.
The thrust of the document is that, skepticism about the gains from liberalization in a limited circle notwithstanding, the government should accelerate the pace of economic reform. It is replete with recommendations covering a wider range of areas, but makes little effort to argue the case for individual policies. Most of the recommendations are those routinely advanced by advocates of the view that private investors responding to market signals should be allowed to determine investment and its allocation, in the belief that this would magically deliver growth with equity. It recommends that the average rate of tariff on India's imports, which has come down from 87 per cent in 1990-91 to around 34 per cent in 1998-99, should be brought further down to 12 per cent over a five-year period. It supports the government's privatization drive, and suggests that it should be accelerated. It calls for a reduction in subsidies all round by increasing prices and user charges. It demands that reservation of areas of production for the small scale sector should be withdrawn, allowing existing units in these areas to grow to economic sizes. And so on.
A nation subjected to policies of this kind for over a decade and yet to experience the benefits they were expected to deliver, is unlikely to respond enthusiastically to more of the same. This is not to say that a document on the so-called "economic reform" process in India is not in order. This July, the accelerated reform effort launched in 1991 would be 10 years old. That is a period long enough to make an assessment of its fall-out in terms of both realizing its objectives and triggering unintended consequences that are adverse from the growth and welfare points of view. In particular, it would be useful to understand why the promise of launching India on a new growth trajectory, relative to the 1980s, has not been redeemed; why industrial growth has been sluggish in all but three years during the 1990s; why despite evidence of stagnation in per capita foodgrain production and availability the government is stuck with an embarrassingly high level of foodstocks rotting in its godowns; why exports which were to provide the new stimulus to growth during the last decade have on average languished; why employment growth has been far less than warranted by the rate of growth recorded; and why, if we ignore the extremely controversial and non-comparable data yielded by the NSS 50th Round survey of consumption expenditure relating to 1999-2000, the evidence points to a setback in the process of poverty reduction during the last ten years.
An assessment which honestly addressed these questions could have provided the basis for a more reasoned public debate on the benefits of reform that can be the only basis for generating, if at all possible, what the EAC presumes already exists: a "nation-wide and broad-based consensus" on the need to further accelerate reform. However, elsewhere in the document there is evidence that the EAC is not so sanguine. The fact that it recognizes the growing disillusionment, being expressed, in all manner of forms both within the country and abroad, with the type of policies it seeks to advocate comes through in a small section sub-titled "Misgiving about Reforms". However, while listing some of these misgivings, the report responds to them in a manner that reveals that the EAC's intentions are not all sincere.
For example, while noting that a common misgiving is that reform has not touched the poor, the document states that poverty predates reform and that the latest NSS data for 1999-2000 show a decline in poverty, bearing out earlier surveys conducted by the NCAER. This bland statement conceals the facts that (i) till the 1999-2000 survey the NSS data indicated that the pace of poverty reduction during the 1990s had slowed relative to what was achieved during the 1970s and 1980s; (ii) that the revised questionnaire adopted for the 1999-2000 survey is controversial to a degree where even the Planning Commission had recommended that an expert committee should be set up to examine the comparability of estimates yielded by that survey relative to earlier ones; and (iii) that the NCAER surveys are primarily targeted at gathering data on durable consumption for private sector clients, do not collect much information on necessary consumption and none on food and are completely unsuited to making estimates of poverty in the country. The evidence that the poverty alleviation effort has suffered during the years of reform is still strong and cannot be dismissed.
There are other instances of a cavalier attitude when dealing with evidence. Consider the following statement made in the course of discussing misgivings that liberalization threatens a loss of national sovereignty: "It is worth examining how China has succeeded in achieving a high rate of growth and virtual abolition of poverty on the basis of billions of dollars worth of exports of a wide variety of goods." It definitely is worth examining why China's reforms have delivered export success and India's have not. That the document does not do. But it is also worth revealing that China's success in eradicating poverty predates its reform effort and recent evidence suggests that the loss of employment that has accompanied reform in China threatens a return to poverty among some sections of the population.
Incorrect, or even dishonest, assertions of this kind indicate that the intent of the document is not to prescribe the way ahead to the Prime Minister of a country sitting on a consensus over reform with little knowledge of what to do with that consensus. Rather it is to pack a set of slogans into a pamphlet, which the authors presume would be credible because of their own stature. Unfortunately, the validity of that belief would not be judged by the market that the authors hold so dear, since the document is available free of cost to those eager to read it.
Even if there is some substance to the EAC's belief in its own credibility, some far-reaching recommendations in the report are bound to test it severely. For example, the document recommends that the procurement policy should be drastically revised and replaced with a support price policy that limits government purchases to that required to prevent a sharp fall in prices. As a corollary it suggests that the role of the FCI should be reduced to maintaining a minimum targeted buffer stock of say 10 million tones and the PDS should be supplied with grain obtained on the basis of tendering by private traders. There is an obvious short-term problem with such a policy recommendation. Since the government is currently burdened with stocks close to 40 million tones, reducing stocks to the 10 million level would require offloading huge volumes of the stock in the open market, which would result in a collapse in prices. But the EAC could argue that this process could be spread out over time, and that the 10 million tones target should be seen as a medium term one. Even if that be so, the problem of price stability would remain. It hardly bears stating that the monsoon-dependent supply of foodgrains fluctuates much more than demand. So if the intention at all times is to maintain a buffer stock of 10 million tines, in years of good harvest open market prices would tend to fall sharply, and in years of bad harvest they would tend to rise. A support price policy of the kind being advocated can hardly ensure stability in food prices.
Another area in which the EAC has been rather bold in its recommendations is the labour market. Interestingly, while the report refers rather approvingly to the controversial and non-comparable NSS 50th Round consumption expenditures for 1999-2000, it does not mention the more acceptable employment estimates that emerge from that round. They point to a very significant deceleration in employment growth in both rural and urban areas, with the annual rate of growth of rural employment falling to as low as 0.67 per cent over the period 1993-94 to 1999-2000. This is less than one-third the rate recorded during the period 1987-88 to 1993-94. In fact, it turns out that this is the lowest rate of growth of rural employment in post-Independence history. What is more, the employment elasticity of rural output growth or the responsiveness of employment growth to output growth during 1993-94 to 1999-00 was also a third of that during 1987-88 to 1993-94. Clearly, the period of liberalization has been characterized by a setback on the employment front.
This however does not feature as an issue in the EAC report. It is more concerned with increasing the flexibility of labour markets confronting the organized sector. In its view, the requirement that government permission should be obtained for closure of units should be abolished or at the most restricted only to units employing 1000 workers or more, as opposed to its applicability to units employing 100 or more workers currently. This would supposedly provide "employers with sufficient flexibility to reduce the volume of employment or restructure producing units (or in extreme situations even close them down) when changes in market conditions and technology make it unavoidable." Given the trends in employment reported above, none can take seriously the EAC's view that such flexibility would generate new employment opportunities in the organized sector to an extent required to balance for the obvious deterioration in employment trends. The EAC is not just blinkered in its vision, it is clearly partisan.
What is of interest are the motives driving the EAC's decision to issue a document of this kind at the present moment. The intention could not have been a sudden desire to collate all reformist policy propositions in one document to provide the Prime minister with a reference book that aids quick recall. In any case, if it was, an index at the back would have been of much help, as the quick-reference manuals, produced for profit and sold to facilitate easy use of mass-market, packaged software has taught all of us well. One possibility is that, despite assertions to the contrary, it is the disturbing lack of consensus about reform that seems to have driven the EAC to produce this report and discuss, however inadequately, at least some of the misgivings about reform. With the tenth anniversary of the reform in sight, discussion about the gains from reform is bound to revive. That discussion can prove embarrassing for a coalition whose political backing is to be tested in the assembly elections that are imminent. The EAC report is possibly an early salvo aimed at muting the damage that such a discussion can have. Which is why it is surprising that some sensible people like Dr. Bimal Jalan, whose organization is more circumspect in its analysis of economic trends and cautious in advocating policies has signed this report. At least he should have realized that a good start to the task of downsizing government, which he advocates, would be a ban on the production of such poorly reasoned and totally futile pamphlets with funds drawn from an increasingly cash-starved exchequer.
© MACROSCAN 2001