The liberalisation pill

The main opposition party, the Congress, appears to have no clear strategy but is straddling the fence opportunistically, ready to jump either way. Although it backed major reform measures such as the opening up of insurance and the patents bill, it has since seemed to muffle voices within the party like Manmohan Singh8217;s. It makes little sense, and is irresponsible to boot, to reject outright as Madhavrao Scindia does the latest privatisation measure for public sector banks. If the Congress were complaining about half-measures, it would be something. But its concern is not with the unworkability of the proposal to reduce government equity to 33 per cent without surrendering management control. Its concern is to curry favour with public sector unions who, by refusing to stay ahead of inevitable changes, are doing their members great harm.

While the case against reform on nationalist grounds continues to be made vociferously offstage by Govindacharya and the RSS, the National Democratic Alliance is a battleground for a never-ending tussle for short-term political gain. The morning after bank disinvestment plans were announced the Trinamool Congress and the DMK pronounced against them. The industry minister contradicted the disinvestment minister on the sale of Maruti stock within 24 hours of a long-awaited decision. The Shiv Sena chipped in with a supposedly nationalist line, saying Maruti should be sold to an Indian buyer. The unintended consequence of this last intervention could be an indefinite delay in disinvestment.

All this could be regarded as business as usual, producing a reform scenario in which two steps forward are followed by one step back, policy coherence is slow to emerge and underperformance remains the chief characteristic of the Indian economy. That would be a disaster for all those on the margins of the economy who are still waiting for the promise of reform and rapid economic growth to reach them. Other sectors would, as before, probably muddle through.

In the context of two recent developments, however, carrying on as usual could prove to be a major setback for the government. Given the prospect of an economic slowdown in India and the prospect of a slowdown in the US, a bigger effort to manage the politics of reform will be needed.

Yashwant Sinha has finally conceded that GDP growth will probably fall below 6 per cent. As growth slows and fears set in of another recession 8212; almost before the economy has emerged from the last three-year long one 8212; business confidence falls and investment plans are put on hold. When the prospects for new employment begin to recede and the rate of inflation tarts to accelerates, it becomes harder to axe jobs, implement labour market reforms, introduce new technology and cost-cutting measures necessary to make Indian goods competitive.

In the Finance Ministry, fingers are being pointed at factors beyond the control of the government such as the threefold rise in international oil prices since 1998, the strong US dollar, and uneven monsoon rains three years in a row. Whatever the causes, the fact is that economic recovery is faltering and there will be more trouble ahead if the US economy, the engine of global economic growth for the last decade, begins to contract as many analysts believe it will. Foreign trade and investment are not major contributors to India8217;s GDP but they are among the most important catalysts for economic restructuring and, eventually, rapid growth. The US absorbs the largest share of Indian exports of manufactured goods, software and professionals and is also the largest investor in the Indian economy. The impact of slower US growth on Indian reform prospects, the balance of payments position and business morale will not be insignificant.

An early casualty in this depressing scenario could be the reform process if a critical mass of opposition develops to policies perceived to be unfair to Indian producers or workers. The fact that opponents of reform have diverse points of view will not prevent a coalescing of forces when economic hardships multiply faster than economic opportunities. The response to Chinese imports is very apposite here. Each day has a story of small scale and some large manufacturers being hit by a flood of cheap imports. From umbrellas to tyres, crockery to generators, the Chinese are said to be capturing the domestic market and pushing Indian producers to the wall 8212; and this well ahead of China8217;s formal entry into the WTO. Indian complaints have been effective: Sinha confesses that custom duties have risen higher than WTO rules allow; and still more appear to be on the anvil.

Tariff walls are no long term answer. There is talk of special economic zones on the Chinese model. New highways, better ports and more power plants are promised. But the time for talking is long gone. Infrastructure must be built without any of the usual time and cost overruns. Secondly, the government must frankly acknowledge that there are losers as well as winners in the reform process and spell out what can be done for the losers and do it. VRS is not enough; new skills training and enterprise training must be available for those likely to lose jobs. Finally, the government needs itself to show more conviction about its reform goals.