44-month dilemma

Union Finance Minister P. Chidambaram, speaking at India Economic Summit on Sunday, observed that while the balance of global economic power has shifted in favour of developing countries, they8217;re still unable to compete on three pillars of knowledge, financial resources and material resources. The reference is to developing countries like India, not those in sub-Saharan Africa, and it is impossible to disagree. Stated differently, at present levels of development, India should be in a position to compete on the basis of land, labour and perhaps capital, less so on productivity increases or innovation.

Having said this, FM singled out two areas for further elaboration 8212; financial sector and delivery of public services. The latter is obvious and, subject to some inter-state variation, is never a case of paucity of resources, but inefficient expenditure and bad governance. Had that not been the case, physical and social infrastructure outcomes would have been far better. Unfortunately, it is impossible for the Centre to incentivise reforms. However, why did FM single out the financial sector, as opposed to agriculture or land or labour markets or power? Post-1991, if there is one sector where reforms have been incremental and continuous, plagued less by political economy considerations, it is the financial sector.

Apart from the obvious point that everything flows from finance, there can be three possible reasons. First, from India8217;s point of view, the immediate challenge is to maintain growth, without the spectre of inflation preventing the softening of interest rates and without rupee appreciation hurting exports. The point is that without capital controls, rupee appreciation cannot be prevented. Second, the terminal year of the Fiscal Responsibility and Budget Management Act draws near. While fiscal deficit/GDP targets may be reached and the revenue deficit target missed by only a year, the FM knows there is sleight of hand in not including off-budget items such as oil bonds. The Sixth Pay Commission will also make a dent. Third, the finance ministry agenda has been liberalisation of banking, insurance and pensions. To this can be added capital markets, especially if one brings in PSU privatisation. In 44 months of UPA, there is zero progress on these and with the country moving into election mode, the remaining 16 months are unlikely to be different.