Nearly 21 years ago, a troubled finance minister told a hugely subdued parliament that the economy was in deep crisis. It was July of 1991, and the nation’s parliament listened to Manmohan Singh in stunned silence as he presented his budget to a nation teetering at the edge of a catastrophic debt repayment default.
Singh’s speech was so solemn, that it was actually bleak. The balance of payments situation was precarious, international confidence in the economy was weak, to say the least, and the road ahead was uncertain. Capital inflows from commercial borrowing and NRI remittances had dropped sharply and the country was left with just Rs 25 billion in foreign exchange reserves, enough to finance imports for a mere fortnight.
The government had borrowed so much, that one-fifth of its total expenditure was going in interest payments on those loans. Short on funds, the government had run up a fiscal deficit of Rs114.3 billion, a dangerous 8 per cent of the GDP, and double-digit inflation was beating down on demoralised Indians, forcing Singh to say: “We have not experienced anything similar in the history of independent India.”
The subsidy burden was extremely high and the tax system was full of loopholes, the public sector was grossly mismanaged and had little or no investible surpluses of consequence, according to Singh’s budget speech. The weaknesses were systemic-the industry was poisoned with excessive and indiscriminate protection, and as a result, exports were paltry (Rs 325 billion).
Singh laid out a detailed, 3-year strategy for steering the economy back on track, primarily by adjusting, controlling and managing its income-expenditure mechanism. “But there can be no adjustment without pain. The people must be prepared to make necessary sacrifices to preserve our economic independence and restore the health of our economy,” added Singh in his trademark sombre tone of voice.
The years ahead were tough, but Singh and his crack team of economists put together a revival plan that opened up the economy to foreign investment, eased restrictions on doing business within and without India, and took a host of never-before steps that would help restore the world’s confidence in India and its economy. The fiscal and macroeconomic measures not only revived the stricken economy, but eventually went on to make it one of the best performing in the world, in the two decades since.
Cut to March 2012
Singh is now the Prime Minister of a government whose finance minister Pranab Mukherjee seems to be saying almost the same thing as Singh had said 21 years ago. There is much water under the bridge, and yet, it seems a lot hasn’t changed.
Mukherjee recently made an impassioned appeal to UPA allies and even the opposition, to cooperate “in the national interest” to restore India’s economic health. Addressing the Federation of Indian Chambers of Commerce and Industry (FICCI), Mukherjee said bluntly that a looming crisis was “staring us in the face” and that restoring economic balance was “a question of broad national interest.”
He said he was committed to protecting the credibility of plans in his budget, stemming the growing fiscal deficit and pruning burgeoning subsidies. But Mukherjee said cutting spending “will involve tough decisions that we will have to take collectively”, referring to coalition and opposition members who have been obstructing economic reforms at a time of slowing economic growth.
The government is grappling with a slowing GDP growth rate of 8 per cent or less and the fiscal deficit is still the highest among emerging markets—5 per cent in 2011-12 and nearly 6 per cent before that.
Among the hard decisions Singh had suggested in 1991 was reducing crippling subsidies. This government seems to be at the same crossroads—whether to raise prices of the highly subsidised fuel and fertilisers. The government’s dilemma is just as political as it is economic—raising the prices will definitely reduce the sizeable subsidy burden, but the resulting inflation always impacts the bottom-of-the-pyramid more than any other stratum. That can hurt politically, especially when general elections are less than two years away.
That sounds like a crisis, all right. But more than half a century ago, John Kennedy had made a speech in Indianapolis, in which he had spoken of Weiji, the Chinese word for crisis. He’d said there are two parts to the word—danger and opportunity. Contrasting, but complementary, like the colours red and green.
In India, we know contrasts rather well. This is a nation of glaring contrasts. There is dream-like wealth right in its midst of mind-numbing poverty. Its population is massive, infrastructure sparse, opportunities limited and aspirations high. Three-fourths of its people still live in villages, literacy is slow to catch up and education, health and banking are largely limited to cities.
There was a time when the world’s economists worried about India’s rising population and how the nation would feed, house and clothe its teeming millions.
That was then. The population is still quite high, at more than 1.2 billion, but India is now among the world’s ten largest economies, has nearly a billion mobile phone connections, the largest milk output and seventh largest automobile market in the world, among other things.
How did a nation, that was “at the edge of a precipice,” in its own finance minister’s words in 1991, manage so much in just two decades?
The ministry of rural development, that administers MGNREGA, was allocated nearly Rs 880 billion this year This is 15 % of the entire government expenditure for the year, and three times the ministry’s allocation of 2006-07
“By introducing a host of targetted reforms and staying on top of them,” says Rishikesha T Krishnan, IIM- Bangalore.
The thrust of the reforms process was to increase industrial efficiency and its international competitiveness, according to Singh’s budget speech of 1991. The government moved away from restrictive protectionism and opened the economy up to foreign investment, modernised the financial sector and abolished the crippling licence Raj by deregulating the domestic business sector. The liberalised economy began to acquire a more free market-like appearance, became more amenable to development and yet, ensured that one half of all the money was spent on agriculture and rural development.
Since then, the economy has consistently posted a growth rate of 7.5 percent. Per-capita income has almost quadrupled compared with 1991. Economic liberalisation has greatly affected Indian attitudes toward money, business, development and politics, and opened doors for the ambitions of millions of young people.
Rural India, where three-fourths of the population still lives, is growing the slowest. The economy grew at an average of nearly 7 per cent between 1991 and 2011, but agriculture grew at less than 3 per cent. By contrast, just the four southern states constitute nearly one-fourth of the GDP and nearly 30 per cent of the employment. Volume hasn’t necessarily meant share, however. In 1991, agriculture contributed nearly 30 per cent to the economy. Twenty years later, its contribution is just half—15 per cent. The rural population, however, has burgeoned from 640 million to 810 million.
Income and development disparities between urban and rural, and industrial and agrarian India were pulling the economy in different directions. To set the balance right and to turn the energies from opposing to complimentary, the government introduced a series of development and uplift schemes.
MGNREGA: Generating Rural Employment
Among the many schemes and programmes that the government launched, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) has been its most ambitious and perhaps the most talked about. Launched in 2006, it is the government’s flagship rural development scheme, and the largest programme run by the ministry of rural development. The ministry of rural development, that administers MGNREGA, was allocated nearly Rs 880 billion this year. This is 15 per cent of the entire government expenditure for the year, and three times the ministry’s allocation of 2006-07. Rs 400 billion of this allocation is meant for MGNREGA, which generated nearly 2.6 billion man days of work nationwide during the year.
States with larger populations of people below the poverty line (BPL), generated less employment, compared with states that had lower BPL populations. With 60% of the country’s total BPL population, Uttar Pradesh, Bihar, West Bengal and Madhya Pradesh generated just 34% of the total employment the scheme provided. On the other hand, Andhra Pradesh and Tamil Nadu, which together account for 8% of the country’s rural BPL households, provided 23% of the total MGNREGA employment.
MGNREGA is a demand-driven scheme. Every year, states provide details of anticipated demand for unskilled manual work and draft a plan for providing employment to workers. 90% of its funds come from the government. At least half of all the MGNREGA work is executed by Gram Panchayats.
Although several types of works are undertaken under MGNREGA, in 2010-11, water conservation and water harvesting accounted for the largest share of MGNREGA works at 20 percent, followed by rural connectivity and irrigation, at 18 percent each.
MGNREGA provides at least 100 days of paid work each year to every household, mandating 33 per cent participation for women. More than 52 million households benefitted from it in 2009-10.
Rural India, where three-fourths of the population still lives, is growing the slowest. The economy grew at an average of nearly 7 % between 1991 and 2011, but agriculture grew at less than 3 %
The wages that villagers earn under MGNREGA, have risen steadily, especially when you adjust for rising prices. As a result, analysts are afraid that the rising wages will fuel the inflationary fire and make farming more expensive in India. “That’s not the case, really,” argues Dinesh Singh, a successful farmer in Muzaffarpur near Patna, in Bihar. “We have seen in the past few years that these government-sponsored schemes have made better wages possible for farm workers right here, in the village. Because of that, fewer people are moving to the cities for better job and income prospects,” he added. Even before MGNREGA came along, farm labour was becoming scarce, as the able bodied men and women were moving to the cities, and were dissuading their children from working in the fields. Those that stayed back, were exploited—their wages weren’t good enough and they had to work longer hours for lesser money. With the coming of MGNREGA and similar welfare schemes, true, wages have risen, and true, our cost of production has risen, too. But then, what was happening earlier was exploitation of poor farm labourers—an unnatural advantage that the better off farm owners had over the poorer, needy labourers. They are now getting their due. So, if you need farmhands now, you will have to match their wages with what they are getting elsewhere. These are market forces in action, and will eventually correct the scales in everyone’s favour. The sooner the farm owners learn this, and the sooner they adjust to this change, the better it is for them and for everyone, in general.
Early last year, the government had benchmarked the wages under the scheme as Rs 100 per day. Replying to a question in parliament recently, Rural Development Minister Jairam Ramesh said states differ in their minimum wage bars, and therefore, keeping a uniform minimum wage for MGNREGA wasn’t an easy thing. He said the government might bring in legislation to delink MGNREGA wages from the minimum wages of states.
In a recent interview to Live Mint, Ashok Gulati, Chairman of the Commission for Agricultural Costs and Prices, said “The society should get ready to pay higher prices for agricultural goods as this (higher MGNREGA wages) will certainly increase the demand for higher minimum support prices.”
Of India’s 28 states, only seven have minimum wages that are on par with MGNREGA wages. The rest lag far behind MGNREGA, including the agricultural centres of UP, Punjab, Haryana and Bihar. As a result, MGNREGA is a far more attractive proposition for rural labour. The agriculture ministry has raised the red flag over this matter, saying the scheme is pulling away hordes of farmhands, causing widespread labour scarcity. This has led to suggestions that MGNREGA should be suspended during peak farming season to ease the pressure on farmers.
But Abhijit Sen, a member of the Planning Commission, says rising farm wages through MGNREGA are what is called routine indexation. Planners use indexation to fine-tune the economy by linking wages to the cost of living—higher cost, higher wages, and vice versa. It cushions the impact of inflation on the poorest sections of the society.
Sen explains that indexation is a universal economic tool that guards everyone against rising prices. It is meant to help, but indexation itself also pushes prices up, because wages go up and people’s purchasing power improves. “Any form of indexation adds to inflation,” Sen added.
NRHM: Promising Health
Launched in 2005, the National Rural Health Mission (NRHM) is the government’s largest public health programme, having received more than Rs 180 billion in 2011-12. This is more than half of the government’s total spending of Rs 300 billion on health in the same year.
But India spends a very small percentage of its GDP on health—in 2009, it was 1.4%, lower than China (2.3%) and Brazil (4.1%).
In spite of the NRHM, however, the health sector suffers from a serious human resource deficit. More than half the primary health centres (PHCs) in Madhya Pradesh and one-fourth in Uttar Pradesh are short of doctors. In Uttar Pradesh PHCs report a 23% shortfall. Uttarakhand reported a significant reduction in shortfall between March 2009 and March 2010 from 47% to 2%.
India is urbanising rapidly. Nearly 40 per cent of its population will be urban by 2011, against less than 30 percent in 2001. Covering 63 large cities, the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) is an ambitious government scheme for developing infrastructure, employment opportunities, housing and basic services for the urban poor. The government has committed Rs 500 billion over 7 years for JNNURM. Analysts agree that there has to be better tuning within the Ministry of Finance and with those who implement these schemes. The success of the projects depends on how the state governments work with the Centre and local bodies. There are problems in fund release as gaps exist at various stages between funds committed and actual releases. The reasons can be poor implementation. Sometimes the funds released are far lesser than the commitment by both the Centre and state governments. The gestation period of infrastructure projects is long and even so, before completion of ongoing projects, new projects are constantly being approved. The Mission encourages public-private partnerships (PPPs) in its projects, but in practice few projects have involved PPPs.
The government’s Total Sanitation Campaign (TSC) has seen some improvements. They are slow but can’t be denied. The number of rural households without toilets has dropped from nearly 80% in 2001 to less than 30% in the data collected in the beginning of 2012. Rural development and drinking water and sanitation minister Jairam Ramesh, admits that the TSC is a “failure that is…neither total nor sanitation nor a campaign,” and is now seeking to revamp the scheme with a higher budget of nearly ` 67 billion. The revamp will help boost this scheme. The key could lie in decentralisation. Panchayats should empowered with training, financial and technical support to enable them to draw up a develop a complete sanitation plan, for their regions. The revamp intends devolve toilet construction subsidy directly to panchayats, doing away with bureaucratic intermediaries. Data on rural sanitation in India is rather shameful especially when compared to a far weaker economy as that of Bangladesh. In 2008, Unicef made an approximation that a mere 21% of rural India was using improved sanitation compared with 52% of rural Bangladesh. India contributes 58% of the world’s population defecating in the open. The budget revamp is long overdue.
In 1991, agriculture contributed nearly 30 per cent to the economy. Twenty years later, its contribution is just half—15 %. The rural population, however, has burgeoned from 640 million to 810 million
Ensuring Education for All
SSA is the Central government’s programme aimed at universal elementary education across the country. It is implemented jointly with state governments, who contribute 45% of the corpus. With education being put in the forefront of reform processes in India funds are pouring in from the government and from the World bank. The budget for Sarva Shiksha Abhiyan (SSA) has trebled from a little more than Rs 71 billion in 2005-06 to Rs 210 billion in 2011-12. Yet, the education levels are depressingly stagnant.
The World Bank has approved a $ 1.05 billion soft loan to fund India’s ongoing education projects, particularly those aimed at universal elementary education. The challenge lies in the optimum utilisation of this giant corpus. Experts feel strongly about the need to fix the problems in the existing programmes. This is a bigger need than raising the money to pump into an already weak system. State governments are unable to meet their commitments to the Sarva Shiksha Abhiyan. There aren’t enough teachers and certainly not enough infrastructure. Even three fourth the quantum granted to the states towards education is not used. It is found that since the modalities of this scheme are decided by people sitting in Delhi, they often have no idea about the ground reality at the state levels. Increased expenditure is important considering the size of our country and its burgeoning population. But increased expenditure will only lead to satisfactory results if a concerted effort is made to reorganize education governance.
The Mid-day Meal Scheme works closely with the Sarva Shikhsha Abhiyan to educate India. The idea is lofty, to provide nutritious and hygienic meals to children who agree to come to school, empowering the literacy movement and reducing the dropout rate. There are more than 133 million students in India’s primary schools. It has been seen that half of the children drop out of school between class 1 and 10. Poverty and hunger drives them to work. The meal scheme is largely funded by the 2% education cess. In 2011, the Centre allocated nearly Rs 95 billion for the scheme with the cess contributing 63% of the total allocation, according to an analysis of MMS by the Accountability Initiative of the think tank Centre for Policy Research. Institutional apathy and lack of focussed effort has led to inefficiency in implementing this extremely important programme effectively. The issues range from lack of hygiene to teachers having to cook the meals instead of teaching.
But PPPs in this area seem to be successful. In a recent programme on NDTV, Infosys founder N Narayanmurthy spoke of the success of the Akshay Patra, India’s largest mid day meal Scheme which recently crossed its 75 crore cumulative meal mark. Murthy said the success stems from the involvement of the private sector. Akshay Patra began 12 years ago, feeding 1,500 children. It is currently feeding 1.3 million underprivileged children per day at government schools in 8 states across India – including Assam, Orissa, Chhattisgarh Uttar Pradesh, Rajasthan, Gujarat, Andhra Pradesh and Karnataka. An AC Nielsen impact study of the programme reported an improvement in school enrolment, reduced dropout rates and an improved student performance. It is generally the view that PPP can help greatly in the implementation of government schemes.
According to the reputed US-based Institute of International Education (IIE), that administers the premium Fulbright Programme and Gilman Scholarships, India has sent more students to the US in the last six years, than any other nation. Only in 2010, China wrested the top spot that it had lost to India. “This is driven largely by the spirit of the great Indian middle class. It educates itself, arms itself well, plans out its life path carefully, and then, little by little, edges up. That’s why, even in the US, Indians are the most successful immigrant community, who send their children to the best schools, own the best houses and cars and live a life of moderation,” says Ajay Gupta, Professor of operations research at the Delhi-based Management Development Institute. An IIT-IIM product himself, Gupta hails from a middle class family, and says he understands the mindset of the class.
Vikram Nehru, Chief Economist and Director of the Poverty Reduction and Economic Management and Private and Financial Sector Department for the East Asia and Pacific Region of the World Bank, says “Growth of the Indian middle class is associated with better governance, pro-growth reforms, even better infrastructure. It appears that as people gain middle class status, accumulate savings, and educate themselves, they are likely to use their greater political clout to press for accountable government. This includes the rule of law, property rights (they now have more to protect!), and greater public goods supportive of growth, including better infrastructure, education, fewer trade restrictions, and economic stability. Interestingly, the larger the middle class a country has, the more likely it is to reduce poverty faster.”
In an article for BBC online in 2007, Kaushik Basu, Professor of Economics at USA’s Cornell University, had said: “One economic variable that eludes popular attention but is arguably the most important indicator of an economy’s long-term health is the savings rate. A nation’s savings rate or investment rate – the two are usually closely aligned – is the fraction of the nation’s total income that is saved or invested.” Basu is now the Chief Economic Advisor to Finance Minister. “In India… what has gone unnoticed is the phenomenal rise of the savings and investment rates. These now stand at 32 per cent and 34 per cent respectively. Economic theory had long taught us that savings and growth are closely connected. But it is not easy to deliberately raise a nation’s savings rate.”
Directly linking the rate of savings to economic growth, Basu said: “It gives reason to believe that the high growth of over 8 per cent per annum of the national income is sustainable.”
“There are three sources of savings in a nation—domestic savings, corporate sector savings and savings of the public sector,” explains Bibek Debroy, Honorary Fellow, Skoch Development Foundation. “Since Independence, the household sector has remained the predominant source of the gross domestic savings. In fact, until recently, it contributed nearly three-fourths of the total domestic savings. Bank deposits constitute the largest proportion of household financial savings, and continue to be the most important instrument of financial savings among households.”
The government is grappling with a slowing GDP growth rate of 8 % or less and the fiscal deficit is still the highest among emerging markets—5 % in 2011-12 and nearly 6 % before that
More than a decade after the reforms introduced in 1991 had kicked in, Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, delivered an address at the World Bank, listing a set of six lessons that India’s planners had learned from the reforms process. According to him, the first lesson spoke of the importance of home grown reforms—not new, but with Indian characteristics, as they were carried by Indians themselves. The reforms also did not include parts of established Washington Consensus thinking, such as privatisation. Policymakers were also very cautious about opening up capital accounts.
The second lesson was that highly participatory democracies forced gradualism in reform implementation. The complexity of the reforms forced planners to rethink and redesign policies after their implementation. He admitted that much of the reforms moved too slowly and should have been quickened. He noted gradualism minimised the pain, but also postponed the benefits, allowing reform opponents to mobilise.
The impetus for privatisation came from within the country, said Ahluwalia, as many public sector enterprises were losing revenue, straining the exchequer. It took time to privatise vigorously, but it happened with consensus.
The third lesson was that the complexity of some reforms compelled continual redesigns. Infrastructure was weak, and public sector constraints meant that infusions of quick capital were no longer feasible.
The fourth lesson underscored the importance of sequencing for broad based reforms, especially in the context of gradualism. Sequencing was important for tariff reform and liberalisation of the capital accounts, and he provided some background on the issue of capital accounts.
The fifth observation established the importance of the role state governments play in the reforms process. Resources go to where conditions are favourable in a liberalised environment, he noted. Enlightened state governments go after these resources and implement reforms more aggressively, and have done well. Reform implementation and results have been chequered if reviewed within the context of state implementation.
This is a nation of glaring contrasts. There is dream-like wealth right in its midst of mind-numbing poverty. Its population is massive, infrastructure sparse, opportunities Limited and aspirations high. Three-fourths of its people still live in villages, literacy is slow to catch up and education, health and banking are largely limited to citie
The final lesson is about poverty alleviation. Growth accomplishes poverty alleviation, but the debate remains as to whether growth or targeted programmes at poverty reduction are preferable. Ahluwalia says a blend of both is best.
In an engaging essay last year for an online magazine, Jyotiraditya M Scindia, Minister of State for Commerce and Industry, made a strong case for the reforms: “India followed the process of slow but steady liberalisation to ensure that the benefits percolate to the masses who need it most for improving their livelihood, and that growth is sustainable, a conscious compounding that does not remain a one-time affair. Liberalisation is therefore inextricably linked to sustainable and inclusive growth. Liberalisation of the Indian markets has helped the business and regulatory environment to move successfully towards greater transparency and efficiency.” The minister had written the essay for globalasia.org, the online publication of the prestigious South Korean sustainability think tank, East Asia Foundation.
In a paper for the authoritative eastasiaforum.org, economist Nabeel Mancheri of the National Institute of Advanced Studies (NIAS), Bangalore, said in May last year, that the most recent census data speak of all round improvement in grassroots health issues. He said the data reveals remarkable progress in human development: an increasing literacy rate, reduced population growth, and a declining infant mortality rate throughout the country. The evidence runs counter to those who argue that India’s growth is only helping the rich, thus widening the poverty gap.
The Growth Conundrum
In economic growth, Gujarat was the best performer between 2002-2009, followed by Bihar, Orissa, Haryana and Uttarakhand. The best performer in 2008-09 was Bihar, with a growth rate of nearly 17 per cent.
According to ministry of finance data, the government’s revenue expenditure more than trebled from less than Rs 3 trillion in 2001 to Rs 9 trillion in 2010. Subsidising food, fertiliser, fuel, interest and imports and price supports constitutes the bulk of this expenditure—shooting up to nearly Rs 1.4 trillion in 2010-11, only next to the interest payments and well above the expenditure on defence.
For the first time since independence, the population growth is slowing down. In the decade from 2001-2011, the growth was a little more than 17 per cent. Compare this with 21.5 per cent from 1991-2001, and it feels heartening. What is even more encouraging are the numbers from the empowered action group states of Rajasthan, Uttar Pradesh, Uttarakhand, Bihar, Jharkhand, Madhya Pradesh, Chhattisgarh and Orissa. These states have been known for their high population growth, low literacy and poor health indicators. But between 2001 and 2011, for the first time, their population growth fell significantly—about 4 per cent.
Also, national literacy levels improved by nearly 10 per cent between 2001 and 2011 from a little less than 65 per cent in 2001 to almost 75 per cent in 2011, far outpacing the pre-reform decades before 1991. Bihar is a special success story—its literacy rate shot up from 47 per cent to nearly 64 per cent in this period.
Even crises are relative. In 1991, the economy was at the brink of collapse. There is still a crisis at hand, but this is a far more robust economy with time-tested checks and balances in place, and working.
The balance of payments situation is much stronger now—there were nearly $ 6 billion in surplus as of the first half of 2011-12, according to an RBI release. The apex bank also said that India’s foreign exchange reserves stood at a comfortable $ 295 billion in February, a far cry from the paltry $ 630 million, or so, that remained in 1991. Foreign remittances, that constitute nearly 3 per cent of the GDP, had dipped to an abysmal $ 2.1 billion in 1991. Now, India leads the world in foreign remittances, having reached $ 58 billion in 2011, a World Bank report said late last year. Exports, that were struggling at $ 8 billion in 1991, touched nearly a quarter of a trillion dollars this year, a giant leap from that time. This is certainly a measure of the distance the economy has travelled since then. Had the government not carried out sweeping reforms, it would not have been possible. Little wonder then, that its industry is now among the world’s top 10, the services sector ranked fourth in the world, and it has the world’s second largest number of mobile phone users, and growing. According to the International Monetary Fund (IMF), the combined purchasing power of 1.2 billion Indians that is $ 4.5 trillion now, will cross $ 6 trillion in less than three years. Just the size of its rural market is almost half-a-trillion dollars.
Akshay Patra began 12 years ago, feeding 1,500 children. It is currently feeding 1.3 million underprivileged children per day at government schools in 8 states across India
According to a government discussion paper on its policy rationale for FDI, more than $ 40 billion flowed into India as FDI in 2008 in spite of the difficult recession. Describing the evolution of India’s FDI policy over the years, the paper said 1991 to 2000 was a watershed decade in liberalisation. In 1991, the government allowed FDI of up to 51 per cent for 35 high priority industries and also constituted the Foreign Investment Promotion Board (FIPB) to consider cases under the government route. Since 2000, the economy has really opened up, placing all remaining activities under the automatic route, including the sensitive non-banking financial companies (NBFCs). It said the insurance and defence sectors opened up to FDI with a cap (or limit) of 26 per cent and the cap for telecom services was increased from 49 per cent to 74 per cent. In 2010, the government made far-reaching reforms to the FDI regime when it consolidated all existing regulations on FDI into a single document, for ease of reference. It has also allowed non-resident companies to have 100 per cent owned subsidiaries in India.
The World Bank has approved a billion-dollar soft loan to fund India’s ongoing education projects, particularly those aimed at universal elementary education. The challenge lies in the optimum utilisation of this giant corpus
According to Anis Chatterjee, Director, Deloitte India: “For companies that want to come to India, set up operations and do business here, the low cost base, the ready availability of educated, young English-speaking workers, adds to the attractiveness quotient of the country. Returns from the investments in a lot of these areas also quite high.”
Mahendra Swarup, President, India Private Equity and Venture Capital Association (IVCA), said: “India is a great place to invest with a medium to long term horizon in mind. The underlying fundamentals have only improved over the years and this has been validated with the exponential growth in FDI. India is projected to become the world’s second largest economy by 2050, and to invest abound. Domestic savings and investment rates have improved and investors have started to make early moves.”
Dev Raj Singh, Executive Director – Tax, Ernst & Young, said: “India is today rated as one of the most attractive investment destinations across the globe and will remain an attractive market to invest for the following reasons: it is the world’s 4th largest economy, in terms of purchasing power parity; it is the 10th most industrialised economy; it has a liberal, transparent and proactive FDI policy; the economy has an expansive, progressive, mature and regulated banking system and capital market; affords among the highest rates of returns on investment; and, its trade policies fully compatible with the internationally ratified World Trade Organisation (WTO).”
When it comes to the most authentic and the most widely accepted, the annual World Investment Report (WIR) of the United Nations Conference on Trade and Development (UNCTAD) is seen as more or less the gold standard on the investment performance analysis of world economies. It is a one-of-its-kind report, taken very seriously by policy makers, CEOs and academics.WIR had ranked India second in global FDI last year saying it would remain in the top five destinations for international investors through 2012. Hafiz Mirza is UNCTAD’s Senior Economist and Chief of Investment Issues in Switzerland, and he is one of the authors of the WIR. Mirza, who is also Professor of International Business at the Bradford University School of Management in the UK, said: “For market-seeking investment, India is an attractive location thanks to the size of its market and its growth potential. In general, the country is a promising location for FDI.”
Mirza is upbeat about India’s performance and its place in the world: “Each year we conduct a survey of multinational corporations and their investment intentions over the next 3 years. India is always in the top 10, often the top 5.”
According to Jaydeep Mukherjee, Assistant Professor, Indian Institute of Foreign Trade (IIFT), New Delhi: “FDI has played direct and long-term role in boosting India’s economic growth, one of the main channels of advanced technology from the developed countries to the emerging economies. We need to sustain its momentum by making industry better-oiled”
However, if everything were going right with the economy, it would have reflected in a healthy 9 per cent plus GDP growth. It did not happen last year and does not seem to be anywhere on next year’s horizon, either. At a time when the economy should have either been highly stable, or even expanding, it has gone into remission—industrial and agricultural production are both declining. Sooner than later, this will precipitate a fund crunch and social uplift schemes will be the first to be hit. Without the propelling force of constant funding, the reforms vehicle will begin sliding back downhill at full force. We run the risk of losing all that ground if we don’t act now.
“I was much more satisfied until five years ago—the first generation reforms that meant the end of the Licence Raj and bureaucratic hurdles, removal of import restrictions and very high import duties, and therefore become more competitive. And then there were the banking reforms also that made the banking sector more competitive. There is a dramatic difference between the performance of nationalised banks then, and now,” said Pradeep Agrawal, Professor, Delhi’s reputed Institute of Economic Growth.
Two years ago, Agarwal had conducted a survey of industries in and around Delhi, asking manufacturers how, if at all, the reforms had impacted them. Most firms said they felt that the reforms gave them better access to foreign technology and made capital goods cheaper to import. But they also said that the infrastructure must improve and labour laws must get more flexible if the sector has to grow.
“As for the Licence Raj, If you keep running around government offices endlessly for clearances, you get tired of it, and stop. This hurts entrepreneurship. We have made significant improvements but there are still some bureaucratic hurdles. A significant change of attitude is needed. The government’s objective should not be to only regulate. It should primarily be a facilitator,” says Agarwal. Excessive regulation promotes corruption through touts and middlemen. Highly restrictive labour laws are also working against the interests of the manufacturing sector. The Chinese have set up special economic enclaves where you have single-window clearance of all necessary papers and within a few weeks, you can set up a business. That’s fast tracking. In Singapore, it takes a few days only to set up a business. Our clearance system is still quite time-consuming and tedious. This needs to improve drastically. “Applying norms and questioning environmental clearances retrospectively is hurting the industry. Take the case of Hindustan Construction Company’s ambitious Lavasa Lake City project in Pune, Maharashtra, or the massive Vodafone tax recovery case—they are both absolutely ridiculous,” Agarwal added.
There are more than 133 million students in India’s primary schools. Half of the children drop out of school between class 1 and 10. Poverty and hunger drives them to work
The Planning Commission had fixed a target of generating 58 million jobs in the 11th Five Year Plan (2007-12). But data released by the National Sample Survey Organization (NSSO) show that the government actually generated only 2 million jobs between 2004 and 2009. In his period, however, 55 million people aged between 15-59 years, joined the workforce, said the survey. Also, more than half the country’s overall workforce is self-employed. The survey found that between 2005 and 2009, the number of casual workers rose by nearly 22 million, while growth in the number of regular workers nearly halved in that period.
Fewer jobs hurt, and take the shape of resentment and discontent. Add to that, the charges of corruption and stories of millions upon hundreds of millions of dollars of hard-earned money ending up in the pockets and secret vaults of corrupt bureaucrats and their scheming and political masters. Honesty and accountability cannot take the back seat if India dreams of becoming one of the three largest economies of the world in the next 20 years.
The politics of coalition is an exercise in patience and Manmohan Singh’s UPA government is learning it the hard way. It’s important to keep everyone’s interest at heart when legislating in parliament, but when wrangling graduates to political buccaneering, the governance engine runs the risk of derailing. There is a code by which US Marines live. It’s simple: company, corps, country, God. What it mandates is that a US Marine always thinks in the following order of priority, giving his company top priority, then the Marine Corps, then country and then only God.
For more than 235 years, this code has worked well for the corps, making it one of the best in the world. For once, if our parliamentarians adopted this code of conduct for parliament, India would benefit tremendously. Our politicians need to shed their sectarian and regional biases and come together to put the nation’s economy back on track, working as a cohesive corps of lawmakers, rather than disrupt and stall.
Admittedly, the reforms have helped a great deal. But a lot else was possible, and there was ample time, too—20 years, in fact. The process itself needs to be revamped, redesigned and reshaped. Reforms are like an industrial enterprise—they need planning, organisation, structure, management, monitoring, reporting, evaluation and fine-tuning. If the last 20 years have been phase one of this process, then the next phase needs a brand new reforms vehicle, much smarter, better designed and more efficient. From its goals to structure to management, everything needs to be brand new.
Quoting poet-playwright Victor Hugo in his landmark 1991 budget speech, Manmohan Singh had said: “No power on earth can stop an idea whose time has come…the emergence of India as a major economic power in the world happens to be one such idea.”
Singh may not have been very far from the truth. We have, indeed, achieved a lot. But if we soon don’t come together as a nation once again, we could well be chasing the elusive chimera for a long long time.
Only Growth is Key to Inclusive Growth
Early days of the reforms, although look simple in retrospect, were otherwise quite challenging. It was a time to take difficult and bold decisions. Devaluation of the rupee was being done, which had an immediate impact on exports and imports. Since the process of devaluation takes its own time we came up with Exim Scrip scheme. That was a brilliant idea because we wanted to do away with all kinds of export subsidies. It was not long before we moved to the dual-exchange rate and then finally to market-determined exchange rate system. In fact, movement from the dual-exchange rate system to the market-determined exchange rate system went through a lot of consultations.
A question is raised in the context of the recent international financial crisis that, was an export led growth path appropriate for emerging market economies? Being an open economy is not necessarily an export led growth model. But, at the same time, we are not closing the economy; we need a system, which will impart a degree of efficiency within the system. Therefore, it would be incorrect to say that the open economy model has been falsified in the wake of recent international financial crisis. On the contrary, open economy model has made our systems more efficient.
While external liberalisation is an important part, we need to do a lot domestically too. Very often it is said that the liberalisation programme was pushed in this country without any warning, without any prior discussion. Therefore, it is all the more necessary for the political leadership, bureaucracy and economic think tanks to articulate what this liberalisation programme has meant for the country.
Fiscal reform is an integral part of the total reform process. You read the Direct Tax Code, and compare it with the old Income Tax Act, and you will see a marked difference. Credit goes to P Chidambaram as Finance Minister who made it simple and straightforward.
Growth and development has to be inclusive, environment friendly and poverty reducing. At this stage of development we cannot sacrifice growth. Growth is key to improving the living standards of our population. Even if we continue to grow at 8 to 9 per cent, by 2025 India will just graduate into a middle-income group because if you look at it in terms of the per capita income it is not going to be very large even after growing at 8 to 9 per cent. Therefore while 8 to 9 per cent growth rate does look ambitious, it is absolutely essential that we need to grow at that rate to be able to become a middle-income country.
Time to take “Hard Decisions”
The dismantling of import regulations during the early 90s was a major game changer. Pranab Bardhan had written a very interesting article those days saying that import controls are a bad idea but, in the same vain, also said that it will never change because it is difficult to imagine a person who could give them up. It is not easy to dismantle ones own discretion. But it was a time to take decision. P Chidambaram, the then Commerce Minister, took that bold step which resulted in deregulation of trade, removal of trade barriers and easing of import license policy. This, apart from anything else, boost trade, put an end to permit raj and brought relief to Indian exporters. Those were the days of “hard decisions” while introducing lasting changes.
As a matter of fact if you read the history of Indian economic thought a lot of import controls were imposed in the belief that you can’t manage the foreign exchange situation without import controls whereas the truth is if you free the exchange rate, you certainly can. Moving towards the management of liberalised exchange rate was another big decision that was taken at that time.
We have come a long way ever since. But there still is no substitute to taking “hard decisions”. In the current context, the Integrated Action Plan (IAP) in left-wing extremism affected districts is another example of a “hard decision” towards inclusive growth and inclusive development. This is a clear direction to the fact that a well-functioning administration can and does work to citizen’s advantage. I firmly believe that this is one big step towards strengthening of Panchayati Raj Institutions (PRIs) in these districts and this really is the right thing to do. This will allow our Panchayats to practically function as third-tier of the government.
At one stage I asked the District Collectors that we have two programmes – the Integrated Action Plan, which is actually run by this committee of three officials, and the BRGF, which is run through the Panchayats. I asked them,, in the 12th Plan logically lot of people are saying we should merge these two? The response that we got from District Collectors was that if at all you are going to merge the BRGF, merge it into the IAP, don’t do it the other way round. So it certainly has a lot of support in getting things done at the district level in very difficult circumstances.