March 7, 2009 10:34:50 pm
It is that time of the electoral cycle when political parties will draft manifestoes and they will have economic content. It is that time of the business cycle when India is on a downward spiral. The RBI has admitted the growth shock was more than was originally expected. We are on 5.5 per cent,perhaps lower if one takes away the impact of the Pay Commission. Compared to 8.5 per cent,5.5 per cent is a crisis .
As an empirical proposition,lets accept that reforms jack up growth and growth is good for the cause of poverty reduction. Outside the Left parties,and those who adjust facts to suit their opinions,no one should contest these statements. After the 1990-91 crisis,it is also true Indias growth revival was faster than in any country that introduced structural reforms. While several factors drove that revival,external sector reforms and industrial de-licensing were key. Other reforms were talked about,but rarely implemented outside the financial sector. Another increase in the growth trajectory was in 2003,driven by a decline in the cost of capital,not to be confused with broader capital market reforms. The external growth engine is now non-existent and wont recover in a hurry.
Revival of growth has to be internal in source. Studies after the East Asian crisis found the shock was less in parts that werent integrated with national and global markets. But that ought not to be an argument against reforms that encourage integration. In India too,despite lacklustre agricultural performance in Q3,what provided a cushion is agricultural growth in irrigated rice and wheat growing areas. Some back-of-the-envelope figures bear mention. Efficient physical infrastructure will add 1.5 per cent to GDP growth,1 per cent from power alone. Efficient public sector delivery (not just PSU manufacturing) will add 1 per cent to GDP growth. Rural sector reforms will provide increment of 1 per cent. Finally,an efficient legal system (including dispute resolution) will add 1 per cent. This doesnt mean social infrastructure is unimportant,but I am not aware of any back-of-the-envelope figures for that. China has just approved a huge fiscal package. Whats being debated there is: How will the money be spent? There is no debate about where the money will come from. Thats the Indian problem. There is no elbow room for fiscal expansion.
Yes,there is monetary policy,further loosened now. There are reforms that can improve transmission mechanisms and monetary policy will eventually deliver. But is there anything beyond? In manifestoes,political parties promise the moon. But there will be two problems with those promises. First,most reform areas are state subjects,with the Centre unable to incentivise states. Second,most reforms work with a time lag and once in government,one discovers promises are difficult to keep. We travel miles and then discover reforms go to sleep. Because there is a crisis,that luxury doesnt exist. We cant wait for reforms in physical and social infrastructure or rural sector to deliver. We need quick-fix solutions and low-hanging fruit. No doubt every political party will promise good governance; governments are expected to govern. However,governance also means an assorted menu low-hanging fruit isnt easy to find there either,though a case can be made for improved administrative delivery,something that seems to have worsened in the last couple of years. For instance,it shouldnt be that difficult to restart the road programme. With a good minister,how long did that take the NHDP ?
And the city refuses to recognise it. So it has outlawed it. All the houses in Dharavi are illegal constructions,liable to be demolished at any time. But when the residents are struggling simply to survive,they dont care. So they live in illegal houses and use illegal electricity,drink illegal water and watch illegal cable TV. No one needs reminding this is a quote from Q&A (or Slumdog Millionaire). There is a message in Slumdog that goes beyond the Oscars and the positive externality of awards on Indias film industry. Thats the message of Dharavi and the informal sector,not to be confused with the illegal sector. The informal or unregistered sector isnt necessarily illegal; its just that it is outside the formal or legal system.
Cross-country empirical evidence suggests that the informal sector suffers more during downturns and formal employment also turns contractual and casual. However,that evidence also suggests the informal sector revives faster during an upturn. Since 1991,the informal sector provided much of Indian growth. Thats the reason the IIP (index of industrial production),which really captures only the organised sector satisfactorily,underestimated growth during upturns and overestimated during the downswing. Most service sector growth is informal,a figure that increases if construction is included in services,as it probably should be.
If this argument is accepted,we have an agenda. Let monetary and fiscal (primarily indirect tax cuts) packages work through the organised sector,though there are spillovers,including credit. But lets tag on something specific for informal segments. Theres one kind of informal and another kind of informal,and handling these issues in Bharat is a long haul. However,there is informal India and a starting-off point is legal identity,now acceptable to both major political parties. But to make this low-hanging fruit,we need to begin with urban and semi-urban India,not a broad canvas. Lets simplify registration and licensing requirements,reduce transaction costs,start land-titling in slums and plug this in with urban planning,municipal reform,property taxes,stamp duties and JNNURM. Land issues in rural India are complicated and controversial,with acquisition,compensation,rehabilitation and conversion. Thats not the case in urban India,where large chunks of land are government-owned and underutilised. If we have an integrated urban development and poverty reduction ministry,and not two that work as separate silos,we will have a stimulus package that can immediately be started in 35 million-plus cities. As an additional point,this package is largely revenue neutral important,given the fiscal mess we are in. All we need is the inclusion of this package in political election manifestoes and subsequent good ministers to deliver. As a clichéd expression goes,a crisis is also an opportunity.
The writer is a Delhi-based economist
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