It’s still the economy
UPA must learn from the womens bill experience to fast-track economic legislation....
By getting the Women’s Reservation Bill passed in the Rajya Sabha despite considerable opposition from the ranks of its own supporters,the UPA government has once again shown that when it wants to get things done,it can. The last time the Congress-led UPA showed similar resolve was in the more fractious vote of confidence in the Lok Sabha over the Indo-US nuclear deal in 2008. Of course,while getting the nuclear deal done was a gamble that the government took with less than a year to go in office,the women’s bill is a gamble that the government has taken less than a year into its second five-year term.
One then certainly hopes that the successful passage of the women’s bill is a sign of future strength in the UPA,and not weakness. (In this regard,the government’s floor management on the Civil Liability for Nuclear Damage Bill will be seen as a key test.) And that after game-changing legislation on foreign policy and social empowerment,the UPA will finally come round to fast-tracking legislation and policy that hold the key to elevating India to a game-changing path of double-digit growth.
The Congress party,however,never comfortable with the idea of economic reform at its core,would like to believe that the economy will autopilot itself back to 9 per cent growth (and even further to double digits) without any decisive policy reform measures. And that 9 per cent growth will generate enough revenue to fund the government’s ambitious spending programmes. After all,that is what happened in the course of the UPA’s first term in office until the global crisis hit. Unfortunately,that boom scenario is not likely to repeat itself any time soon and if the UPA does not overcome its lethargy on economic policy reform very soon,there may even be trouble.
There is now a lurking danger of misunderstanding the post-crisis recovery process. The government would like us to believe that we are firmly out of the woods,and while the worst is certainly over,two significant risks remain. First,there is the persistent problem in food inflation,something that will ironically only get exacerbated if the global recovery happens very quickly. Commodity prices (which feed directly into food prices) are already booming,but that most significant commodity of all for us in India,oil,is still in a reasonable price band ($70 per barrel). If,however,oil prices shoot up (they had after all gone all the way up to $147 a barrel in the summer of 2008) on the back of a faster recovery in the US and Europe,we’ll have a twin problem of inflation and in the absence of oil sector deregulation,a busted fiscal deficit. Remember,the more the government borrows to fund its deficit,the less it leaves available for productive private investment.
A second,alternative,global scenario is of a double dip recession. That assumes that the current spurt in stock markets and commodity prices is a bubble and once the West (the US in particular) starts hiking interest rates and phasing out fiscal stimulus,there will be a second slowdown. And since a significant portion of our GDP comes from exports — add to that investment from abroad — there will be a spill-over effect.
Needless to say,we cannot control external events whichever way they turn out. That is why it is important to get our domestic policies right so that we can ride over the uncertainties that will continue to plague the global economy at least until 2011,maybe even beyond. For the moment,all the government’s calculations,particularly on its own deficit,are based on external events unravelling suitably (moderate oil prices,no double dip recession in the West,no bursting of a bubble). That’s risky.
The UPA,committed as it is to redistribution,is unlikely to cut down on its spending programmes. That makes it absolutely necessary to sustain high growth,no matter what happens outside India.
Because,as this crisis has shown in no uncertain terms,countries with big spending governments that rely disproportionately on borrowing (not revenues) to finance their spending,and do little to enhance the productivity and growth of their economies,can end up in big trouble. That is exactly the state of the PIGS (Portugal,Ireland,Greece and Spain) countries — when external events turned against them,they were found out,driving on empty.
Sections of the Congress party and UPA probably admire the big spending welfare states of Europe. But a combination of big spending governments,bloated public sectors,labour market rigidities,generous state benefits,and often a suspicion of private enterprise (familiar enough in the Indian
context too) are precisely what have led to an economic decline in Europe (to a point of dire crisis for the PIGS) over the last few decades. Even the more prosperous countries in continental Europe (France in particular,but also Germany) have struggled to reverse structural rigidities that are eroding their competitiveness vis-à-vis other parts of the world.
India is,of course,poised to be one of the countries that can grab the space that will be created by Europe’s continuing decline — and indeed the US’s relative decline,especially if the left wing of the Democratic Party ends up taking that country in the wrong direction. But we cannot do it with an unreconstructed economic model that resembles a decaying Europe.
We need to be moving in the opposite direction and quickly. Since we are still a poor country,it is perfectly reasonable to spend on social safety nets. But that’s not the same as protecting a tiny segment of organised labour at considerable cost to a big majority on the outside and the economy as a whole. It’s also not the same as the government sinking money into unreformed and bloated PSUs like Air India and BSNL that are unlikely to ever become profitable unless they are freed from government control. It is certainly not the same as giving subsidies to middle class consumers of petrol and diesel. And why not allow FDI in retail if that will help eliminate countless commission-earning and price-inflating intermediaries between farm and consumer,giving a better deal to all — kirana stores too will prosper as numerous studies have shown.
Are the Congress and UPA now willing to take calculated risks to fast-track this reform agenda,an agenda that will give a significant boost to productivity,growth and employment irrespective of what happens elsewhere in the world?
The writer is a senior editor at ‘The Financial Express’
dhiraj.nayyar@expressindia.com
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