The Hindu : Persist with economic reforms

Online edition of India's National Newspaper
Saturday, Apr 26, 2003

Business

Business

Persist with economic reforms

By C. R. L. Narasimhan

The central message of the recent RBI's Currency and Finance is that further reforms alone will accelerate economic growth, a message having an even greater validity at the current juncture marked by concerted political opposition to certain reform measures.

In its latest Report on Currency and Finance, the Reserve Bank of India evaluates the economic reform programme in its first decade. Similar analyses have been attempted by many others before. There is in fact a proliferation of literature on the subject, both in a broad sense as well as concerning specific sectors, such as the financial sector. However, any evaluation by the central bank of a process in which it is so inescapably linked naturally has a special meaning to policymakers and lay people alike. Never mind, the RBI's attempts to downplay its significance by implying that its study is more akin to an academic exercise than to a commentary on economic reform.

The economic reforms though set off by fiscal and external sector compulsions of 1991, have been sustained for well over a decade. On the positive side the reforms have helped accelerate the healthy economic growth of the 1980s in a more sustainable manner, bolstered by greater competitiveness and efficiency gains. The GDP grew by 6.1 per cent and per capita income by 3.9 per cent during 1992-93 to 2003-03, higher than the 5.6 per cent and 3.2 per cent respectively during 1981-82 to 1990-91. However, the reforms need to be strengthened further to enable India to catch up with those middle income emerging economies that were similarly placed at the time of Independence. Besides, the Tenth Plan has set a target of 8 per cent GDP growth and in the very first year the actual achievement will not be more than 4.4 per cent.

Analysing the real economy, the RBI says that the most critical issue having a bearing on the reform process has to do with the deceleration in agriculture and industry. The RBI's analyses of the causes and its recommendations are relevant even if they are not (and perhaps cannot be) very original.

Pointing out that agricultural performance in the 1990s witnessed a dip partly because of diminished public investment and inadequate diversification, the RBI makes a number of reconmmendations. Technological breakthroughs and the establishment of a proper mechanism for extension are essential for further improvements in yields. The private sector has to play a role in these. On agricultural subsidies, a most contentious issue having a bearing on fiscal consolidation also, the RBI says that both explicit subsidies (those on food and fertilizer) and implicit subsidies (such as priority sector credit, subsidised power) are ill targeted and can have an adverse impact on agricultural growth. Failure to diversify the cropping pattern has also contributed to a below par performance of agriculture. The minimum support price (MSP) policy has distorted the relative prices between rice and wheat, on the one hand, and food and non-food crops on the other giving rise to a distorted cropping pattern. In future price stabilisation of agricultural products ought to be achieved better by encouraging futures trading in foodgrains. Importantly most major economic reforms have taken place recently. Their impact will be felt after a while.

Industry has responded favourably to several liberalisation measures such as delicensing, dereservation, the opening up of foreign direct investment and the lowering of tariff and non-tariff barriers. Indian industry has become much more competitive, domestically as well as globally.

Technology upgradation took place at a rapid pace resulting in a strong manufacturing performance during 1993-97. However today the industrial sector seems to have lost its momentum .The RBI attributes this partly to the global slowdown and partly to lack of progress in the reform agenda. There are major constraints still such as high-cost and inadequate infrastructure, high interest burden and inflexibilities in the labour market. Like in agriculture, industrial development can be enhanced if the pace of institutional reforms is stepped up.

The RBI has listed a fairly long list of pending items: speedier bankruptcy procedures, flexibility in labour use, reforms in urban ceiling and small-scale reservation policies. Each of these (admittedly is a separate subject by itself) and obviously cannot be implemented without overcoming the inherent opposition. This phase of reforms is by far the most challenging to policy. It is not they have to commence afresh. In bits and pieces some of these are being attempted though obviously it will take a while before they are completed and equally significantly facilitate economic growth.

The RBI has also dealt at length with the reform agenda for infrastructure. Here again, the progress achieved so far is not enough considering the tasks on hand.

The central message of the RBI's Currency and Finance is that reforms are a must before the economy can shift to a higher growth trajectory. The validity of the statement has never been in doubt. However the current concerted political opposition to certain "settled issues" such as the disinvestment in the two oil companies (HPCL and BPCL) shows how much more distant that goal is.

Printer friendly page
Send this article to Friends by E-Mail

Business