FOCUSSED ATTENTION ON SELECT AREAS CAN PUT THE ECONOMY BACK ON RAILS

Indian Economic Association points to reform gaps

P Vinod Kumar

As the old adage goes, it is difficult to get two economists to agree on a single, simple hypothesis. But the just concluded 84th Annual Conference of the Indian Economic Association, for a change, did the impossible. There was a consensus among the country’s economists about the sorry state of affairs of the economy—slowdown in overall growth, output, employment, fiscal slippage, challenges posed by the opening up of the external sector et al.

The theme of the conference was set by C Rangarajan, governor of Andhra Pradesh and Tamil Nadu and former governor, Reserve Bank of India, in his ‘Cap lecture’ on ‘Economic Reforms: Some Issues and Challenges’. Giving a quick run-down of the major reform initiatives post-July 1991, Dr Rangarajan identified a common thread running through all reform measurers which, according to him, was the “single objective to simply remove the barriers to entry and the restrictions on growth of firms”. While the industrial policy sought to bring about a greater competitive environment domestically, the trade policy was aimed at improving international competitiveness subject to the protection offered by tariffs.

AP Governor C Rangarajan: ‘More market’ does not mean ‘less government’

There is, however, nothing in the new economic policy which takes away the role of the state or the public sector in the system. “The New Economic Policy of India has not necessarily diminished the role of the state; it has only redefined it, expanding it in some areas and reducing in some others. As it has been said paradoxically, ‘more market’ does not mean ‘less government’, but only ‘different government’”, Dr Rangarajan affirmed.

The performance of the economy measured in standard parameters since the new economic policy, barring the outlayer year of 1991-92, has justified the policy initiatives taken by the government. From 1992-93 to 1999-2000, the average annual growth comes to around 6.3 per cent. Other variables, like inflation measured in terms of the wholesale price index, current account deficit, foreign exchange reserves etc., showed an improvement in the post-reform period.

However, a disturbing trend was that growth in post-reform era was not uniform, with trend growth rate of GDP showing a pronounced break in 1997-98. While the growth rate between 1992-93 and 1996-97 was 6.5 per cent, in the subsequent four years, it has been 5.8 per cent, with the outlook for fiscal 2002 looking grim.

The slowdown since 1996-97 has evoked constructive criticism from some circles, which has four aspects that deserve attention. A major criticism was that the higher growth achieved during the period was dubbed as ‘jobless’ growth as it failed to make any dent on the poverty level and unemployment. While some earlier data pointed toward an increase in poverty ratio since 1993-94, more recent data available on consumer expenditure for 1999-2000 shows a decline in poverty ratio.

However, the decline in the employment growth rate was pronounced. This led to the reference of ‘jobless growth’. A major reason for this phenomenon was the slowdown in agriculture since 1990s. This had implications for the strategy to be followed in the coming decades.

A second criticism was that the reduction in fiscal deficit was brought about by scaling down capital expenditure. While this was very much true, there has been no effort to bring down revenue expenditure. Also, part of the answer lies in the failure to raise tax-to-GDP ratio, which has remained stubbornly at the same level as in the pre-reform period.

The third area of concern was that investment in social infrastructure was being neglected all through the reform years. The fourth area of concern was the growing income disparity among the states. The populous states saw weak growth in the last decade and this was one of the reasons for the rise in the number of people living below the poverty line.

To sum up, it is a truism that the economy has shown marked improvement in the post-reform period. But if the growth momentum was to be maintained, some areas needed focussed attention, most participants in the conference said. First, a comprehensive agricultural policy encompassing a higher level of public investment, a pro-active programme to foster exports etc., need to be thought of. Since agriculture has the highest forward and backward linkages, growth of that sector has several vital implications, like reduction in poverty level, greater expansion in employment and a more broad-based growth.

Second, the constraint on infrastructure availability has to be removed. As the future infrastructural investment requirements are expected to be massive, a definitive, transparent and concrete policy framework, with focus on increased commercialisation of infrastructure services, appropriate legal and regulatory framework etc, should be put in place.

Third, investment in social infrastructure needs to be stepped up and education and health must receive priority attention. Fourth, the public sector would continue to dominate the economy in several important sectors. Even as attempts are being to disinvest wherever possible, an attempt should be made to improve the efficiency level of public sector enterprises.

Fifth, fiscal consolidation is a necessary pre-requisite for sustained growth. Appropriate level of the fiscal deficit is related to the level of savings by the household sector, especially in financial assets. A disturbing trend here is that almost the entire savings by the household sector in financial assets has been appropriated by the government. This is an unhealthy trend. The government should shift its emphasis in favour of capital expenditure and should contain the galloping revenue expenditure.

In short, both in the short- and long-term perspective, the key elements that need to be addressed are agriculture, social and physical infrastructure development, public sector reforms, fiscal consolidation and last, but not the least, enhanced investment in both public and private sector are essential.

Against this backdrop, the future challenge facing the Indian economy is formidable. Economic growth, which is caught in the trap of a slow growth rate of 3.5 per cent for nearly four decades broke out of it in the 1980s and moved on a higher growth path. However, the government needs to set before itself a minimum growth rate target for the coming years. One way to address this issue is to focus on a growth rate which would enable the economy to absorb in productive employment, the increase in labour force and also clear the backlog of unemployment.

It has been pointed out that employment elasticity to output has been coming down. Here, one should keep in mind the point that growth in employment is not just the function of output alone, the composition of output also has a significant effect. However, taking into account a certain pattern of composition of output, it would be safe to assume an employment elasticity of 0.22 for the coming decades.

On this assumption, it was seen that a growth rate of 7 per cent to cover the next 15 years would ensure that at the terminal year of 2015, unemployment would be eliminated. This is also based on the assumption that the labour force will be increasing at a rate a little lower than 1.5 per cent per annum.

However, for achieving 7 per cent growth in a sustained way, the investment rate of the economy has to move to 28 per cent of GDP against the current level of 23 per cent of GDP. Assuming that 2 per cent of GDP is the fitting level of the current account deficit consistent with the maintenance of the current account balance, this will require an increase in domestic savings rate of 26 per cent from the current level of 22 per cent.

Achieving 7 per cent growth in a sustained manner, therefore, is a Herculean task. The government should try to stabilise economic growth initially at 6 per cent and later take it on to 7 per cent. That would transform India from a sleeping elephant to a roaring lion.