Re-learning lessons of the nineties

Where is the spirit of change today?

Saumitra Chaudhuri

Ten years back this day, with the economic reforms barely six months old, how many people believed that India could actually grow at seven per cent per annum for three years in a row? That six per cent growth would come to cause dissatisfaction? I doubt that there was anybody who would have even dared to dream as much. But we did cross the bar of seven per cent. And without a fiscal stimulus, no thank you; without running up unsustainable levels of current account deficits; without floating on a flood of foreign investment. It was largely a domestic effort, achieved in the midst of much cleaning of the Aegean stables in the banking sector and the first serious attempt to reign in the runaway fiscal horse. So, what was the agent of growth? Unlocking the forces of enterprise, of the market and of competition.

Sure, many of the new manufacturing investments were not particularly well conceived. They were configured in the style of the late seventies and early eighties, not the commodity economics of the late eighties and early nineties. As Indian households poured their savings into the equity market, cheap financing from overpriced public offerings enabled companies to obtain leveraged finance to venture into fields well beyond their abilities. One can find many faults in the process, but it would be foolish to lose sight of the fact that Indian business did come of age in the period. Many Indian companies — some of them little known in the eighties — flourished in the cut and thrust of a globally competitive market. And this list extends beyond the Infosys’ and Wipros of the world. In one short decade, Indian business has made a big leap from queuing at the perennial durbar of Udyog Bhawan, to seeing themselves as players governed by the economics of producers in distant lands and opportunities in faraway markets, just as much as those at home.

In all learning, expensive mistakes are made. And these have to be paid for — not accumulated as non-performing loans in public sector financial institutions and banks. The quicker and the more dispassionate the loan workout, the better. But in the land of the Holy Cow, there are too many bovines that may not be touched, and the restructuring of these bad assets has not happened. Had Enron been an Indian company, it would have surely taken thirty years, not thirty days, for it to go bust. This foot-dragging certainly is not in the spirit of the reforms of the 1991-93 period. Surely otherwise, the de-licensing would have been subject to ad hoc interpretation of a committee and the prudential norms imposed in the banking sector would be subject to flexible adaptation at the instance of government or a Parliamentary standing committee.

What stands out as the big difference between policy in the early nineties and that in the latter part of the decade and currently, is the attitude to discretion. The economic reforms drew their strength from the abandonment of the most coveted prize of state power — discretion. That is, the ability to interpret the rules and, thereby, effectively recast them. Private business and the market never gels with such shifting lines in the sand, we know that. But there is an even more debilitating characteristic of such exercise of state power: it is over-cleverness. The apparatus of the State, in so far as it concentrates power, is eternally short on humility. In the arena of economics it is always convinced that it can do better than the “dumb” market, run as it is by such a crass bunch of money-grubbers.
So for the past several years, the ritualistic offerings at the altar of reforms have been negated by the reinsertion of discretionary state intervention in policy design and intervention. Is it such a surprise that more than five years after the central and all the state governments committed themselves to cleaning up the mess in the power sector, things continue to be as bad as before, if not worse? The losses of the public electricity sector are estimated to be over 1.5 per cent of the gross domestic product. Please add that to the fiscal deficit. As also, the cost of the ridiculous system of grain procurement that has created a 62 million tonne grain mountain funded from the banking system.

What is lacking in the letter of reform today, is its true spirit. One of the few places it still can be seen at work is in the efforts of the department of disinvestment, which has succeeded in flogging more public assets than was done through long years of pious statements. And done despite the loud wailing and mourning from both side of the Parliamentary aisle. One can only hope that if a part of government has got things right, others might just follow suit in the not so distant future.

Saumitra Chaudhuri is economic advisor to ICRA (Investment Information and Credit Rating Agency) and editor of Money and Finance, the ICRA bulletin