From my cottage close to a nature park, far away from Delhi, the happenings in our Republic in recent weeks appear to reflect the Roman circus. Hapless victims, including one officer whose integrity I certified and will do so again if ever called to, are thrown before the hungry lions as the media gladiators guard the show. Sometimes the Spartacus gladiators are also the victims. Reasoned arguments are casualties. Institutional responses to some of the real problems we face, however, are not on anybody?s agenda.
As the dust settles, it is likely that it will be accepted that we have enough persons of integrity such that the rot can be contained but that amongst them there is unease and the ability to strongly contest wrongdoing is weakening. This, then, is a problem and we must strengthen systems to counter it. We also need to appreciate that we are no longer in the era of strong central leadership and must develop rules for more effective coalition regimes. A zero-corruption tolerance rule has to be the centrepiece but a lot can be done around it to allow those who want to be honest to continue to be able to do so.
On a narrower plane, rule-based economic policies and frameworks of accountability in this context may help. The transition to a market economy, initially reasonably smooth, was a rule-based phenomenon. The Narasimhan Committee, set up in Mrs Gandhi?s time, laid down the framework. It turns out, now that the period documents are being declassified, that this was much to the chagrin of the Bretton Woods institutions, which had their own rules. The rules were first to bring about domestic reform and prepare Indian industry for the more general reform expected in the early 1990s. Output, import, investment and price control was to be abolished and substituted by tariff, dual pricing and tax policies. As a member of the Narasimhan Committee and chairing the BICP, we prepared the ground rules for the decontrol of major industries, steel, cement, aluminium and so on. Machinery industries were placed on tariff protection instead of import controls. Efficient Indian industries with negative protection, since their inputs were inefficient, required tariff protection in a harmonised manner in what were called inverted tariff structures, popular with developed countries in the stimulus packages after meltdowns. For example, if components got 60% protection and machine tools needed 30% protection, the nominal rate would be 90%. Apart from harmonisation, phasing rules were in place since Indian industry was expected to face greater competition globally in three to five years. In a well known paper, Raja Chelliah estimated that around 60% of Indian industry was deregulated by 1989. Dual pricing for some industries like cement was practised as an interim measure but industry was ensured a reasonable rate of return on long-run marginal-cost principles, which led to the modernisation or weeding out of inefficient units. The desired price was aimed at by experimenting with the share of output in the free market and the control price. Some extraordinarily competent economists, later high flyers and big names worked as consultants to devise detailed structures. The processes were transparent and reports published. When contested, the courts upheld the process.
The reforms now are far more general and, in principle, should be more accepted since they should be following market-based rules. There are two flies in the ointment. First, in many non-tradables and controlled industries, the system of regulators, which replaced the earlier mechanisms, consists of retired bureaucrats, in many cases somewhat innocent of economic principles and also not always very competent (as a number of studies have shown). There is also the anomaly of the earlier controllers later becoming regulators, who tend to be secretive, and sitting in judgement on what they were themselves doing.
There is the more damaging phenomenon of reform being systematically scuttled, either by bureaucratic inertia, political meddling (on account of unsavoury pressures) or just incompetence. So, the preferred variants of fertiliser pricing reform suggestions were jettisoned and alternatives accepted. Again, the market rules suggested newer products; balancing investments and the expansion of capacity were put on the back burner for years. This protected inefficient units or input suppliers but cost the country dearly. For example, the preferred policy of a single producer price or at the most two prices, one for gas-based units and the second for the others (Report of Working Group on Urea Policy, page 64) was jettisoned, even though the savings in energy costs on account of powerful incentives for cost reduction were estimated at thousands of crores. Stop-go in fertiliser pricing is bewildering to put it mildly. Similarly, the advantages of moving to a market-based policy for energy, with some exceptions for equity considerations, is well known from the time of the R Group?s report but is systematically set aside and periodical changes are without any explanation. The damage to investment and operating climates is incalculable.
A degree of transparency, consistency in policy rules and a design of reform with established guide posts would help clear the air and lead to the required level of confidence for higher growth.
The author is a former Union minister