It is five years since India grew at over 7 per cent, and that too three years in succession. For 40 years of Independence, we were raised on a gruel of planning, licences, control and the virtues of the public sector; an omniscient State knew just what was good for hapless us ? which car to queue for, which cloth to buy, from whom, and at what price. The gust of fresh air that swept the land in 1991 exchanged the oligarchy of the licence raj for the democracy of the market place.
Those who were part of that oligarchy, enfeebled by decades of privileged living, mostly failed to survive in the turbulence of the market place and the heat of competition. Economic activity exploded, and so did productivity ? for how else did our share of manufactured exports rise from 0.5 per cent in the early nineties to over 0.8 per cent in 2001? And that for commercial services also from 0.6 per cent, to 1.2 per cent in 2000?
History exacts its price however. Forty years of controls, planning, and mai baap sarkar fundamentally changed the idiom of electoral discourse. As the ethical attribute in the political class eroded, the desire to turn into intermediaries in the distribution of State largesse mounted. Improvement of material living conditions is the birth right of every citizen ? and for that sensible policy and good execution are needed; instant gratification and exclusive constituencies are the very antithesis.
But it is this ersatz and spurious populism that, having borrowed the grammar of socialism, became the common political idiom. The quality of leadership is that it changes ?what is? into ?what should be?. So, even when bad ideas are hegemonic, all is not lost. As it was not, in the first half decade of reforms. But thereafter, there has been too much drift ? and in the process, elements of the old oligarchy have made a successful bid to claw some advantage back. But history is not on their side, so they will lose what gains they have extracted. The cost has however been in the form of much time lost.
1998 to 2002 ? five long years of an average of 5.4 per cent growth, with industry slowing to a virtual crawl. We had actually done a tad better in the second half of the eighties. Even the uninitiated would smell that something was badly off.
The large stable of domestic expertise in the most part however does a poor job. Investment rates are too low, they argue; since private sector investment has not been forthcoming, the government should step up spending. And that, not necessarily from the market-failure-as-a-first-principle bunch. Never mind that, in 1999-00 and 2000-01, real investment rates were over 27 per cent, the highest ever. Lower the interest rates, was another outcry ? India has about the highest real interest rates in the world. The statement is not true, and our G-sec yields have actually fallen by half since 1998. The Greenspan manoeuvre was about increasing market liquidity through reserve reduction to lower short-term rates. Long-term rates in the US have hardly budged.
Facts, however, count for little. Anyway, the strategy of cutting short-term rates works if the problem is mostly about excess inventory build-up, not when it involves structural roadblocks to growth. Who in his or her right mind would want to invest where the outlook for profitability is not adequate? In the power sector, state utilities manage to collect money for less than half of the electricity they generate and distribute. For some years, leveraging on the assurance of government guarantees that seemed to indicate a commitment to reform, selective private investment did occur. But the pace of power sector reform would do a snail proud, while the state of public finances would make a strong man weep. Similar sloth is evident in urban infrastructure. Between them, these two sectors account for the bulk of investment requirement and the strongest backward linkages.
In manufacturing, profitable firms can enhance capacity either through acquisition or through new asset creation. In the past five years, by our standards, there has been a surge in growth through acquisition. This has helped partially restructure the sector, certainly enabling a significant increase in productivity. For how else was profitability maintained, with very low manufacturing inflation, for three years in a row? More aggressive loan workout of the non-performing loans of the financial sector can further help the process. As long as inefficient loss making units continue to remain in the market, the intelligent thing for profitable companies would be try and acquire them, instead of rushing in with new projects.
The best thing about Budget 2002 thus, was that it did not buy the abundant bad advice on offer. It accepted as its principal task, bringing public finances back on course, and on reform it has avoided drawing new lines in the sand, which would give comfort to the interests opposed to reform.
Saumitra Chaudhuri is economic advisor to ICRA (Investment Information and Credit Rating Agency) and editor of Money and Finance, the ICRA bulletin