There is yet another major source adversely affecting the long term growth rate. This is what I call the curse of growing subsidisation and cross subsidisation. The growth in subsidies has been very high. In 1971, the total explicit subsidy provided in the budget amounted to three per cent of gross domestic product and within two decades or so this share has increased almost four times at 12 per cent of GDP. According to recent research the subsidiesnow perhaps account some as much as 16 per cent of GDP. Of course, not all subsidies are bad. There are the subsidies where social benefits are higher than that of the social costs. But these are even less than 1/3rd of the total subsidies of which we are talking about. Subsidies essentially imply under-recovery of costs. These are being showered by both the Centre and states through direct budgetary outgo or through foregone revenues. Similarly, there are implied subsidies through under-performing of public sector as well as other forms of indirect subsides through cross subsidisation.

I would submit that this ubiquitous and growing subsidy-culture reflects a distortion of the vision of our founding fathers who aimed at accelerated development and increasing living standards of all our people through higher and higher incomes. What we are getting instead, is a new grammar of Indian politics where subsidies have become a full stop for growth acceleration.

If these direct subsidies are bad enough, theimpact of the curse of indirect subsidisation is deleterious. Not only are these subsidies non-transparent, as these are not made out from the Budget, being effected through differential pricing of public sector produced goods and services. Further, they also lead to loss of international competitiveness of many of our major industries. The working of the curse of cross-subsidisation can be seen in all major sectors, such as, electricity, railway transport, petroleum sector, telecommunications and so on and so forth. It is felt that charging prices differently to different class of consumers promote the goal of social justice. Ruefully, what happens is exactly opposite. Giving power free to the agricultural sector not only knocks out any incentive for efficient use of electricity on demand side, but also on supply side, it leads to a deterioration in the quality of electricity supplies. In a market economy, you can either fix price or fix quantity but cannot do both over a period of time. Consequently,farmers get intermittent power supplies which adversely affects his economies while simultaneously affecting the SEB's financial health. This has further adverse implications for the industrial sector. The electricity charges for industrial sector are many times higher than that paid by agricultural and household sector. This higher than cost price phenomenon is seen only in India and not anywhere else in the world. This adversely affects the competitive strength of our industry and once again weakens the growth of exports and employment. Similar phenomena exist in railways and, till recent reforms in tariffs, in the telecom sector.

Finally, one of the biggest drafts on India's development has come from the growth of Government consumption which is expenditure on current consumption. This is because of the size of the government and the compensation given to employees of government and employees of semi-government organisation. With successive Pay Commissions, the compensation of the government employeeshas been revised upwards not always consistent with the states' capacity to pay or with the underlying quality of supplies.

With the recent Pay Commission decision, the public consumption will go up by as much as two per cent of the gross domestic product and this ha become the major source of fiscal stress for both the Centre and state government finances.

These growing revenue and fiscal deficits lead to enhanced market borrowing by the government. This leads to squeezing our private sector borrowing as well as to higher interest rates. Currently, almost 80 per cent of private financial savings are being absorbed by higher inflation by printing money or higher interest rates which choke investment and employment growth. The ultimate outcome is, of course, lowering growth rates. Clearly, the key to India's prosperity lies in reversing these factors.

If the analysis presented so far is correct, then the policy initiatives that are required are obvious. The first wave of reforms launched in 1991 byManmohan Singh and Narasimha Rao were essentially crisis-driven. This time round we can have consensus-driven reforms so that we can act in anticipation of a crisis which would definitely visit on us if the present trend is allowed to continue.

The foremost reform measure that is required is to ensure fiscal health. It is possible for Parliament to adopt Fiscal Responsibility Act, which would limit the revenue deficits and budgets deficits and safeguard the economy from a debt trap. Of course, merely passing the Fiscal Responsibility Act will not achieve the fiscal balance. What is required is simultaneous action both at the Centre and the states to increase user charges particularly of electricity, water, transport, etc. so that resources are generated to services. These measures would encourage private investment in these sectors and cut costs of consumers and improve quality by promoting competition.

Towards this, the most important reform would be redefining the role of government and down-sizing thegovernment while improving the quality of governance. The down-sizing of the government will also mean privatisation of non-strategic public sector enterprises including banking sector. To my mind, the only strategic public sector enterprises should be those dealing with atomic energy, space and defence production. While in all other areas, we should privatise the public sector enterprises. Government also will have to play a critical role in promoting transparency and good governance.

Equally, the new Parliament will need to review the policies regarding size of the government and also the principles of compensation to employees of government and semi-government agencies. Such new initiative alone can ensure that the fiscal situation of the states and the Centre becomes sustainable and also ensure that tax-payers get their moneys worth.

One of the major implications of reforming the role of the government would be to create a new institutional architecture for the management of the Indian economy. Byrecognising that we are now aiming to become a full-fledged modern market economy, where stability, predictability and transparency of policies are of fundamental importance. Such a new institutional architecture will have to have an independent monetary authority by giving greater independence to Reserve Bank of India on the lines of autonomy enjoyed by the Federal Reserve in USA or The Bank of England in UK.

The new institutional architecture will also imply strengthening of independent regulatory agencies such as Sebi, Trai, CERA etc and start treating their independence at par with the independent judiciary. This will inspire confidence amongst both investors and consumers and promote competition in these sectors. What one also will be achieving is the reduction of distributive politics of cross-substitution.

The most important outcome of the fiscal correction would be reduction of both short-term and long-term real interest rates in the economy. Currently they are at unprecedented levels of betweensix - eight per cent. No country in the world has achieved sustained growth rate with such high interest rates. Bringing the real interest rates in the neighbourhood of three - five per cent can trigger a spectacular growth boom throughout the economy.