What exactly are we afraid of?

If you distill out the reforms that are likely to be pushed back, you will end up with a list of only two—labour market reforms and privatisation. And present market behaviour is mostly an adverse reaction to the last. Take labour market reforms first. What do we mean by this? Labour markets, especially in the organised sector, do need to become more flexible. Rigidities contribute to high capital intensity and a reluctance to employ labour. There are bound to be rigidities if there are 47 different central acts that directly deal with labour, with 39 different inspectors statutorily empowered, with a complete lack of coordination across statutes. There is no opposition, across the political spectrum, to this unification.

Unfortunately, labour market reforms have been equated with chapter V-B of the Industrial Disputes Act (IDA), which is why blood pressure rises whenever labour market reforms are mentioned.

The IDA does need to change. But is it really that important? The organised sector accounts for 8 per cent of the labour force and even within the organised sector, how serious is the IDA? All it says is that permission must be obtained from the appropriate government if layoffs, retrenchment or closure are contemplated. That too above a certain threshold of employment. In the reform decade, in how many instances has permission actually been refused? Very few. In other words, the IDA is only a signal and nothing more. Rarely is it a binding constraint even though foreign investors continuously flag it.

That brings us to privatisation. More precisely, privatisation through the strategic sales route and selling off of profit-making enterprises. How one defines profits for public sector enterprises (PSEs) is a moot point and indeed there are opportunity costs of such resources, especially if bailouts are provided from the budget for losses. There is both a fiscal and an efficiency argument in advocating privatisation, with the former commonly cited. However, these arguments are probably more serious at the state government level. Because state-level privatisation is less visible, it has happened, regardless of the political nature of the government.

If privatisation (not disinvestment) at the central government level is indefinitely postponed, we are talking about a fiscal burden of something like Rs 10,000 crore a year. A fiscal burden that ideally shouldn’t be there, but not something that sends the Central Government’s books for a six.

And let’s not forget, when we discuss privatisation of PSEs, we have in mind a total employment of 3 million. The country’s total work force is 400 m. Indeed, one can argue that this is a myopic view because inefficiencies of PSEs brush off on private sector growth. With greater efficiency, GDP growth may be 7 per cent instead of 6 and in the process, we may lose 1.5 million new jobs a year.

That would have been an acceptable argument had GDP growth automatically led to employment. However, as the National Sample Survey data for 1993-94 and 1999-2000 illustrate, that is not quite the case. The employment elasticity of growth has declined.

As a trade-off, suppose we have the following. No privatisation and no labour market reforms. Instead, we have the Kelkar Task Force’s recommendations. On both direct and indirect taxes. Remember, the opposition came from the BJP’s trader support base. Because of the removal of exemptions, the overall tax/GDP ratio increases from the present 15 per cent to something like 18 per cent. That enables greater public investments in agriculture, health and education. Perhaps we even end up spending 6 per cent of GDP on education and 4 per cent on health.

Simultaneously, the efficiency of public expenditure improves because decentralisation, accountability and transparency are not anathema to the new government. This broad-bases support for reforms because income and consumption growth also extend to the rural areas. Instead of the National Highway Development Programme, we have some rural roads to show. Instead of telecom, we have electricity and water.

I don’t think this is a terrible trade-off regardless of what happens to the stock prices of PSEs in the oil and gas sector. Nor should one forget that most pending reforms are state government subjects. In that sense, one shouldn’t blow out of all proportion a change in government at the Centre.

Something like a 6.5 per cent GDP growth is insulated from policy changes. Unless a new government does something incredibly stupid, like jacking up the revenue deficit or reverting to an administered exchange rate. There is no evidence to suggest that anything like this is likely to happen.

The negative vibes are probably largely a function of the expected certainty of an NDA government returning to power having disappeared. The euphoric rise of the Sensex was unwarranted and so is the present collapse.