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May 30, 1998


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The Budget '98 Commentary/Dilip Thakore

Transforming major problems into opportunities

Following Union Finance Minister Yashwant Sinha's uninspiring visit to Washington where he confabulated with officials of the International Monetary Fund and the World Bank on the thrust and direction of the new Bharatiya Janata Party-led 18-party government's economic policies, great expectations are being built up for the Union Budget which will be presented on June 1.

Quite obviously the visit to Washington has had a sobering effect on Sinha. Suddenly, the BJP's swadeshi rhetoric has been put on the back burner and Sinha has identified reduction of the fiscal deficit (6.1 per cent of GDP in fiscal 1997-98 against the budgeted 4.5 per cent) and greater foreign direct investment (currently a modest $3 billion annually) as the top priority items on his Budget agenda.

A substantially greater inflow of FDI in fiscal 1998-99 is vital if the economy, which is experiencing all the pains of a full-blown recession, is to be kickstarted into life. Industrial growth in the recently concluded fiscal year was barely 5 per cent, agriculture output growth was negative, and export earnings grew by less than 4 per cent.

If, despite all this, the economy recorded a GDP growth of over 5 per cent -- very commendable in the circumstances -- this was due to the good performance of businessmen in the services sector of the economy. But now even this sector in endangered by infrastructure constraints. Electricity and telephone shortages, banking sector obsolescence, and bureaucratic obstructionism are slowing down the service sector entrepreneurs and professionals.

Meanwhile, compulsions of reducing the fiscal deficit (which rules out large-scale government borrowing) cancels out government pump-priming (spending). Hence the critical importance of stimulating China-style FDI ($ 45 billion last year).

In the history of nations, the worst times can often be the best of times to address the structural or fundamental problems of an ailing economy. It's important also at this juncture to bear in mind that the annual Budget formulation exercise of the Union government is not meant to be a routine presentation of the revenue and expenditure accounts of the government. Ideally, the highlight of this much hyped event should be the presentation and parliamentary examination of new plans and policies to replace those which have failed the nation.

Unfortunately, no Union finance minister except perhaps Dr Manmohan Singh when he presented the path-breaking Union budget of July 1991, has seized the budget presentation opportunity to make a sharp break with the past and unveil a grand design to the nation. On that historic occasion, Dr Singh bit the bullet and scrapped industrial licensing, the moribund monopolies legislation, and rolled out the red carpet for foreign investment. But probably exhausted by the effort of the sharp break in 1991 with his socialist past, Dr Singh sent the other four years of this term as finance minister in forgettable shallows and miseries.

Now, the opportunity squandered by Dr Singh has presented itself to the new incumbent of this office. Circumstances have combined to give him a another opportunity to take the economic liberalisation and deregulation process to its logical conclusion. Here is his chance to devise a radical national reconstruction plan which will transform India into a respected economic powerhouse within the next two decades. Don't laugh. The People's Republic of China has achieved this within the past two decades. And anything the Chinese can do, we can do better!

Of course, the finance minister's job is unenviable and it's hardly surprising that most incumbents of that office tend to be disoriented by its complexities. Most finance ministers end up spreading themselves too thin, making sub-optimal allocations to myriad projects and schemes to no worthwhile effect.

This is because no Union or state finance minister -- despite many of them being distinguished economists -- has had the business (as opposed to economic) literacy to focus upon the fundamental problems of the Indian economy and to mount a frontal attack backed by the artillery of heavy resources on clearly identified basic problems. In business management parlance, division of problems and objectives into primary, secondary, and tertiary priorities is known as ABC analysis.

If we apply the rigour of ABC analysis to the Indian economy, it shouldn't take us long to discover that its fundamental infirmity is mass illiteracy. All the seemingly intractable problems of the nation -- high population growth, low industry and agricultural productivity, mass unemployment, poor civic manners, etc -- are rooted in the stark reality that half the population of India is absolutely illiterate and another quarter quasi-literate. As long as this fundamental or A grade problem persists, it is futile to conceptualise grand designs for meaningful rates of economic growth.

The other fundamental or A grade problem of the Indian economy is the public sector. Over the past five decades, an estimated Rs 3,000 billion ($ 75 billion) of taxpayers' money has been invested in public sector enterprises owned by the central and state governments. On the massive investment, the annual rate of return has rarely exceeded 3 per cent (as against the average 12 per cent annual return on investment recorded by the top 500 private sector companies). And even this meagure annual return on investment of PSEs is attributable to public sector monopolies in various industries, particularly the oil refining sector. Moreover, grossly inefficient PSEs in the infrastructure and utilities sectors have been slowing down and hurting the Indian economy for over three decades.

Yet, these two fundamental or A grade problems of the Indian economy can be linked up and transformed into a great opportunity. If he is bold and innovative, Sinha could initiate the overdue process of putting the nation's bleeding PSEs on the auction block and canalising the proceeds into the mass building of thoroughly modern primary schools, and into the retirement of the public debt. Establishing a linkage between these two fundamental problems of the Indian economy offers the chance of transforming these two A grade problems into an overdue economic restructuring opportunity.

That's the type of pathbreaking Union Budget we need -- one that addresses the fundamental problems which have hobbled the Indian economy for over five decades and which transforms these a grade problems into economic restructuring opportunities. But alas, given the petty politicking problems of the BJP-led coalition, it's not the Budget we'll get.

Dilip Thakore

Budget '98

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