MONEY TALKS

Railways: on track

WHAT happens when you add the worst piece of Indian infrastructure to the politician from whom people expect the least? Magic! The performance of the railways has been simply astounding. A far-reaching reforms process has been initiated by permitting the entry of the private sector into container transportation. Someday, the railways will be like roads: The government will own the rails but multiple private companies will compete in offering trains. And we will remember Lalu Prasad Yadav for having started it all.

Fiscal revolution

FOR decades, we bemoaned the Indian crisis on the fiscal deficit. Then came the rescue in the form of the Fiscal Responsibility and Budget Management FRBM Act, initiated by Yashwant Sinha, supported by Jaswant Singh and seen through by P Chidambaram. Far-reaching tax reforms were initiated, including VAT and an attack on the 8216;exemption raj8217; highlighted by Kelkar. The deficit is now down to just 3.7 per cent. A lower deficit means the government is grabbing less resources, and more money is available for investment.

Hard currency

AFTER years of a deadlock, the PM and the FM are ready to move on to the next big milestone of an India that is growing up: Opening up the capital account. The RBI is still dragging its feet, having set up a committee for 8216;8216;fuller8217;8217; convertibility, as opposed to 8216;8216;full8217;8217; convertibility. But it will be hard for the RBI to hoodwink this PM and this FM and, within 10 years, the Indian rupee could be one of the great hard currencies of the world.

Aviation: flying high

THE first stage of the revolutionising aviation has been accomplished by the entry of new airlines. In a moribund sector that was trapped in the business interests of Indian Airlines, Air India, Jet Airways and Sahara, suddenly we have competition! Prices have crashed and the middle-class is flying high. Tourism is prospering like never before. The second wave of the revolution, too, has been unleashed8212;though the results are not on the table yet8212;through the privatisation of the airport. Now we can dream that the Delhi and Mumbai airports will look as wonderful as the Delhi Metro. Praful Patel did what a Congress minister would never have been able to do.

IN THE RED

Thoughtless taxes
A GREAT part of the 8216;8216;fiscal revolution8217;8217; described above was rationality in taxation. We have slashed customs, shifted to VAT, lowered rates, and removed exemptions. But a series of wrong taxes have crept back. The education cess, the securities transaction tax and the cash withdrawal tax8212;all these are flat wrong. One expects better when an economist is the prime minister! The reformers have to now settle in for a 10-year fight to get rid of these.

Uneducated guesses
THE government is pouring huge money into its 8216;8216;flagship programme8217;8217;, the Sarva Shiksha Abhiyan SSA. But there is no evidence that SSA works. Independent tests show that our children continue to learn little at government schools. One horrible instance: Only half the students in classes II to V can subtract two digit numbers. What is needed is fundamental educational reform, not a more bloated government that spends more and more on dysfunctional institutional mechanisms.

Fuel for fire
THE world price of petrol goes up. India imports petrol. The Indian price of petrol should go up. Obvious? Not if you are Mani Shankar Aiyer or Murli Deora. Both these ministers have derailed the effort at getting the government out of price controls in the oil sector. We are doing just the opposite of what we should by subsidising consumers to use more of a scarce commodity. Men and nations will only do the right thing after exhausting every reasonable alternative.

Pay panel doubletake
AS Yashwant Sinha is reported to have said, the 5th Pay Commission 8216;8216;nuked Indian public finance8217;8217;. Now, in a shallow attempt at manipulating the next general elections, Manmohan Singh has embarked on the 6th Pay Commission. He did not need to do this. Now, the devil is in the details. If he finds good economists to drive the 6th Pay Commission, it can even do some good. More likely, he won8217;t get fiscal hawks, and the 6th Pay Commission will nuke Indian public finance again.

Employment illogic
THE National Rural Employment Guarantee Scheme is is one way of generating employment that even Communist China did not think of: Let people dig holes and let the government pay them. We have also discovered a new way of redistribution. The better off you are, the bigger the transfer to you. So a worker in a poor state will get Rs 60/day and a worker in a rich state Rs 120/day. And, as to how much will be spent after all state governments finish competing with each other to make the Centre pay whatever minimum wage they fix, even the finance ministry has no decent estimates.

Old age worries
INDIA is on the cusp of a demographic transition. Waves of young people are joining the labour force. This is the perfect time to catch them in a modern pension system, where each person can hoard wealth for his old age. The New Pension System was a fundamental reform, initiated through extensive public discussion from 1998 to 2002. The UPA has been hijacked by the trade unions8212;representing 2 per cent of India8212;and has completely stalled pension reform, including the Pension Fund Regulatory and Development Authority Bill. In the future, starving old people will remember the UPA for this.

Disinvestment delays
ARUN Shourie did yeoman service by exposing the massive scale of theft from PSUs by the political class, but his accomplishments8212;such as the sale of VSNL or TCS8212;were major victories for the NDA. The UPA has killed off privatisation/disinvestment at the central level. West Bengal continues to power its way forward through privatisation but the UPA behaves as if what is good enough for Bengal is not good enough for India. Think BHEL.

Higher ed hurdles
THERE must be something wrong with higher education8212;the NDA had Murli Manohar Joshi and the Congress has Arjun Singh. Top universities across the world are begging for permission to set up campuses in India. Instead of a mere 3,000 seats at IIT, we could have 30,000 seats at university campuses run in India by Harvard and Stanford. But all we get is a tiny increase to accommodate quotas.

Planning omission MODERN market economies do not have planning commissions. The NDA was making progress on reducing its importance: A few more years and it would have been possible to close down the planning commission. Now the UPA has undone the work by placing a key player of the Cabinet in the Planning Commission8212;and thereby resurrecting its role.

INEXCUSABLE

SEZ for who?
Cost: Rs 1,000,000,000,000. Biggest benefit: Tax exemptions to real estate developers. The Special Economic Zone Act gives exports some tax breaks too, but nothing compared to what the developers will get. Land acquisition will displace ordinary people on a scale that will make the Narmada dam look like a sand castle. With tax havens inside India, Cayman Islands will pale into insignificance.
The country does not benefit. The real estate buyer does not benefit. The government does not benefit. A huge benefit goes to real estate developers. Why this giant gift to this particular section? One can only wonder how much election funding will flow out of this trillion rupee handout.

UPA versus FRBM
INDIAN fiscal was in a nightmarish state by the late 1980s. Manmohan Singh initiated India8217;s fiscal recovery in the early 1990s. After him, every finance minister has fought on this question8212;P Chidambaram, Yashwant Sinha and Jaswant Singh. Getting the central fiscal deficit down to 3.7 per cent of the GDP has been a great achievement, and is already generating results through a higher investment rate. And the FRBM promises us the nirvana of a fiscal deficit no worse than 3 per cent by 2008-09, that too only for the purpose of capital expenditure.
Alas, this glorious achievement is under extreme attack from the UPA. The SEZ Act8212;the mother of all exemptions8212;will contaminate growth of tax revenues. The NREGS and the 6th Pay Commission will contaminate expenditures. The UPA is in a mood to roll out more and more foolish welfare programmes. By 2009-10, the entire 15-year effort of fighting India8217;s fiscal crisis could have been undone. The UPA could be remembered for having destroyed a marvellous piece of work. It won8217;t be long before Moody8217;s and S038;P catch on and the FDI-FII numbers start dwindling.