Opinion Accounting for reform
The battle lines for the agenda of economic reform have been drawn less than a month into the UPAs second term in office.
The battle lines for the agenda of economic reform have been drawn less than a month into the UPAs second term in office. Perhaps unsurprisingly for the UPA,the loudest noise against reform has come from the treasury benches. This time round the DMK and the Trinamool have voiced objections to perhaps the only significant reformist measure the government announced in the presidents address disinvestment. There would likely be many sympathisers to this line of thinking within the Congress too. Now,with the budget just two weeks away,the government will have to decide firmly where it stands on reform.
It would do well to begin by trying to understand what explains this almost reflexive attitude against reform defined most simply as according a greater role to markets (and smaller role to government) in economic activity in large sections of the political class. The obvious explanation is vested interest. But surely,there is one interest which tops even that electoral interest.
Unfortunately,political parties have come to view any association with economic reforms as a ticket to electoral defeat. This perception first gained currency after the electoral mauling the Congress received in 1996,after serving a reformist five-year term many economists hail as transformative for the Indian economy. The second instance (which scarred even the pro-business BJP) is the defeat of the NDA,perhaps the first genuinely pro-business government in independent India,in 2004. Again,like the Congress in 1996,the NDA government ran with the reform cum growth platform and bit the dust. At the state level,the twin defeats of strongly reformist chief ministers,S.M. Krishna in Karnataka and Chandrababu Naidu in Andhra,also persuaded regional politicians of all colours to be cautious about reform.
In contrast the victory of the UPA in 2009,after a five-year period in which most economists criticised the government for not doing anything significant on economic reform,is being seen by some as a vindication of the electorates aversion to market-friendly economics.
Unfortunately,such a conclusion is much too simplistic and mostly incorrect. For one,all these election outcomes were determined by a multiplicity of factors,and not just the singular issue of economic policy,or even the state of the economy. But for the sake of argument,even if one assumed that market-friendly reforms were the core issue,it isnt clear that the outcomes were a rejection of such reform.
Perhaps the singular focus on market-friendly reform until 2004 while speeding up growth and opportunity seemed to have ignored the enormous public appetite for effective policies of redistribution.
Manmohan Singh,with the wisdom of hindsight,had in fact gone on record (in the late 90s) to express regret over the fact that spending on social sectors was cut significantly (with the objective of a stable macroeconomy) during his innings as Narasimha Raos finance minister. The NDA government may have also missed a similar trick. The Vajpayee-led government did some terrific work,particularly on improving infrastructure (telecom and roads progressed very rapidly,to the benefit of all),but again did little purposively to redistribute or spend towards the most deprived sections. Similar tales can be told about S.M. Krishna and Chandrababu Naidu who did plenty to industrialise their states,but forgot that farmers were committing suicide in large numbers. It seems obvious that in a country where 800 million people live on less than $2 a day,redistribution will be a major voter concern.
What UPA-I got right was a renewed focus on redistribution through clever programmes like the NREGA and loan waiver. And it isnt just the UPA which has reaped the benefit of this changed focus. Even non-Congress,non-UPA state governments which have focused on redistribution (Raman Singh in Chhattisgarh,Naveen Patnaik in Orissa are good examples) have done well electorally.
There is a big catch in this populist spending business the government needs the money to finance it. The last five years were particularly good for government spending because the economy did so well,thus swelling government coffers. And there is plenty of evidence that growth hit 9 per cent-plus only because of the multiple market-friendly reform efforts of the previous decade. In the absence of high growth,high spending governments will eventually lead us to a fiscal crisis of the 1991 variety,which will once again mean cutting back on all these expenditures hardly a scenario that deserves a revisit. In the current scenario of low growth,disinvestment is particularly important to raise finances.
In any case,there is no reason to believe that the people of India are instinctively against a greater role for market forces. In fact,the average person in both urban and rural areas will have multiple tales of woe to share on their less than satisfactory interactions with agencies of the state,particularly those which deliver public service. Consider the growing evidence of even poor people sending their children to private schools and their sick to private hospitals in preference to state-run institutions.
If politicians were able to shift the rhetoric from the vaguely coined phrase economic reform to the actual outcomes generated by such policy change,people may even vote in favour of market-friendly reform. After all,a very large number of people have benefited greatly from the competition that reform has brought there is no better example of this than the telecom revolution of mobile phones,which has brought cheap and reliable communications services to all manner of people. The market can be a great leveller of age-old divides.
There is also no reason to believe that the average person in India is xenophobic and anti-FDI. After all,if McDonalds brings hygienic and cheap (even if terribly fattening) food (note the popularity of the Rs 7 ice cream) to those who can afford less (it is hardly the destination of the business elite) then people will welcome it.
In essence,market-based reform delivers a larger quantity of goods and services,of high quality,at competitive prices to all manner of people all of which were absent in Indias socialist heyday. Thats what progressive politicians should highlight.
dhiraj.nayyar@expressindia.com
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