As we move over to policy regimes in which market interventions rather than allocations and fiats matter, it is important to fashion tools which help in the process. Otherwise, the attraction of falling back into the old mindsets is seductively great. We have free imports, but then we subsidise it, so the local producer legitimately says, ?Hey, it is my competitor abroad you are paying with my tax money.? We ban exports when prices rise, so the doodhwali has egg on her face. We import an important industrial commodity without tariffs because a particular minister is cheesed off, so he does not give the local boys the protection of countervailing excise duties, thus coolly subsidising the producer abroad.
We prepare careful global bidding processes, and then ask GoMs to decide. Of course, we also swear by liberalisation and transparency. On Independence Day, Arvind Panagriya wrote on the reforms process starting in the mid-1970s, slowly proceeding in the 1980s and accelerating in the 1990s. I was there, and always worried about a simple economic rule discovered 40 years ago at the LSE called ?the second best?, which is that in an imperfect economy, implementing a market rule by itself may make you worse off. In the mid-1990s, I wrote a long technical essay arguing that the old models, the development of many of which I was associated with, were counterproductive. But a particular kind of reforms expert, despite being discredited the world over with the East Asian meltdown, was being welcomed warmly in India. On a recent visit to Delhi, I asked one of our sensible modelling types, no longer in The Planning Commission, why reforms-consistent modelling was not on. He said if people like you write your models in Sankhya Series A, which is the theoretical statistics journal of the Indian Statistics Institute, don?t expect to be taken seriously in a media dominated world. I could only add sheepishly that the argument appeared in a volume in the honour of Professor Mahalanobis, and since he walked away smiling with a told-you-so look, I decided to write the argument in plain English.
When you subsidise imports either through the Budget, as in wheat, or by encouraging imports without countervailing duties, or sitting on investment policies, as in cement or fertilisers, you are obliged to ask yourself at least two questions. The first is who benefits today. The second is what will happen tomorrow, even though it may come after the next election. The first question is easy to answer. In the 1970s, while setting the poverty line, we had also studied the responses to price changes by the rich and poor separately in rural and urban areas. We used this earlier to model the behaviour of prices in an economy which has both a PDS and a large free economy. But at that time, we did not freely import stuff. Now, we can use the same method and procedures with some easy modifications to model the PDS, open market operations and imports with subsidies. Some back-of-the-envelope calculations show that in some of the poorest states, the benefits of the EGS are eroded because crop prices and rural wages are driven down, but more important, better policy options can be developed.
When you wake up in the morning and decide to hit fertiliser, cement or milk exports in a happy-go-lucky mood, it would be prudent to ask how much we may need tomorrow, because these are important intermediates in which we can be marginal exporters or importers.
We had developed a technique called the long-range marginal price, which forced us to look at the real options available to us in producing our requirements in an efficient manner, largely working through price mechanisms. Capital costs generally rise in these processes on account of lumpy technical change, but working costs fall on account of technical progress in material and energy use. Our policies should take all this into account. Those who produce at higher cost should be forced by negative price signals to close down, but those who can compete should be provided the framework to do so. The costs of ignoring these possibilities are hidden and run into thousands of crore.
Finally, we need some understanding of the impact of monetary policies on the real economy, as we chug along. The RBI does a good job, but the others, C Rangarajan being an exception, show little awareness of, say, the impact of interest rates and exchange rates. We lost a lot of output in the second half of the 1990s on account of this.
We are now targeting a below 5% inflation rate. A visitor we?d invited to IRMA last week, a distinguished American of Indonesian origin, with notable work on the East Asian crises to his credit, showed that the modal inflation rate in the developing countries was 2.5%. He also said somewhat gloomily that the next crisis is coming, I don?t know when and where, but it is. I hope he is wrong, but we need to prepare for the possibility.
?The author is a former Union minister for power, planning and science, and was vice-chancellor of JNU. Write to alagh@icenet.net