Friday, September 28, 2012

WHY REFORMS ARE BACK - A reforms agenda born of economic conviction has few takers

By Swapan Dasgupta

There is a singularly purposeless battle being fought on television and the pages of the print media which can be given a simple title: ‘remember’. Remember what an approach paper of the erstwhile National Democratic Alliance said about foreign direct investment in retail in 2002? Remember the pronouncement of the Bharatiya Janata Party’s Vision Document on the same subject in 2004? Remember what the then Leader of Opposition Manmohan Singh wrote in a letter to a retail trade organisation in 2002? Remember what Arun Shourie said in Parliament around the same time and square it with what he is saying now? Remember the assurance given to Parliament earlier this year by the then Finance Minister Pranab Mukherjee about ‘consultations’ preceding any move to permit foreign capital in retail trade? And so on.

Consistency being the virtue of little minds, the only discernible winners in the ‘Remember’ game happens to be Communists, Mamata Banerjee and functionaries of the Rashtriya Swayamsevak Sangh who have kept away from electoral politics. Apart from them, almost every mainstream party, be it the Congress or the BJP, stands guilty of inconsistency or, as the Breaking News scroll on TV would have us believe, ‘doublespeak’.

‘There is no inconsistency’, those charged with the offence will doubtless argue, ‘there was a context to the earlier stand.’ That is stating the obvious. Every position and every political move always has a ‘context’. When the BJP cosied up to foreign direct investment during the NDA years they did so because they imagined the timing was right: India was on a high and Prime Minister Atal Behari Vajpayee was dreaming of a sustained 10 per cent growth that would keep the alliance in power for the foreseeable future. When the Congress opposed the 2002 initiative, it did so because it believed it would expose the saffron party’s swadeshi pretensions and highlight its elitist orientation. Today, the Congress wants a rash of FDI initiatives because it seeks to reassure global investors that India hasn’t lost the plot. And the BJP is back to its swadeshi ways because it is convinced that ‘reforms’ are just a ploy to divert attention from the Congress’ record of corruption and fiscal mismanagement. Additionally, there is the BJP’s loyal base of small traders in the Hindi heartland to cater to.

There is one overriding message that flows from the transition from correctness to correctness: political parties (with some dishonourable exceptions) are not committed to non-negotiable economic philosophies. This by itself is not such a bad thing. India’s experiences with economic experiments based on ideologies that have ostensibly been adapted to Indian conditions have not been encouraging. The socialistic path, for example, had run out of steam by the late-1960s when India became a third-rate, shortage economy that lived a ‘ship-to-mouth’ existence. Yet, the formal recognition that it was time to change course didn’t happen till 1991, although Rajiv Gandhi did make tentative moves in that direction.

Was September 2012 another 1991 moment, as the Prime Minister hinted in his bland address to the nation? The Confederation of Indian Industry and some other industry bodies seem to believe so, and they have extended enthusiastic support to the ‘reforms’ agenda. Unfortunately, the evidence isn’t so conclusive.

For a start, it is pertinent to ask why the UPA Government slept over much-needed reforms for a full eight years?  Mamnmohan Singh inherited an economy that was well poised to benefit from the business-friendly measures and the structural reforms, including fiscal consolidation, initiated by the Vajpayee Government. For nearly four years, the UPA-1 regime wallowed in the positive fallout of these steps. It shifted the Government’s priority from the creation of infrastructure to the creation of welfare net for the aam aadmi. The total quantum of subsidies, for example, rose from Rs 57,125 crore in 2006-07 to Rs 2,16,297 crore in 2011-12. The fiscal deficit rose from 3.3 per cent of GDP to 5.8 per cent in the same period. At the same time, the UPA halted and indeed reversed the NDA bid to roll back the frontiers of the state. Most important, the NDA Government’s attempt to facilitate entrepreneurship and make life easier for business was abandoned. The term ‘reforms’ disappeared from the official vocabulary and was replaced by a new word—‘entitlements’.

The shift in the strategic thrust of government was given a resounding thumbs-up by the electorate in 2009. A post-mortem of that election suggests that many of the UPA’s populist measures, notably the introduction of the National Rural Employment Guarantee Act, the generous waiver of loans to farmers and the freeze on prices of petroleum products helped the Congress upstage a disoriented BJP which, in any case, had dialled a wrong number on the Indo-US nuclear accord.

The UPA’s re-election in 2009 also led to a strange consensus among the entire political class. While it was acknowledged that India had changed unrecognisably since the liberalisation process began in 1991, the political class arrived at the simultaneous conclusion that reforms and market-friendly policies don’t and can’t win elections. The lessons of the NDA’s failure to secure re-election in 2004 through its ‘India Shining’ theme were imbibed by all parties, as were the implications of the UPA’s victory in 2009 on a populist plank.

The BJP responded by shifting tack from aspirational politics to espousing ‘good governance’ which covered a multitude of approaches. These ranged from Narendra Modi’s relentless quest for higher growth through entrepreneurship and infrastructure-building to Shivraj Singh Chauhan’s perusal of efficient Keynesianism. An invitee to a recent conference of BJP chief ministers was struck by how difficult it was difficult to achieve a measure of consensus on national economic priorities.

On its part, the Congress which always carried the inheritance of an over-burdened state, thought of economic restructuring in two ways. First, it was justified as a measure of expediency to stave off a crisis. Alternatively, for the more cynical, a measure of extra space to the private sector was perceived in terms of cronyism. Just as the public sector had also served as a means of patronage and a nest egg for loyalists, the private sector and, indeed, foreign capital, began to be seen as a milch cow. The commodities boom and the sharp rise in the value of real estate fuelled these tendencies and turned growth into greed, as did the maze of clearances an entrepreneur had to negotiate.

Over the past two years, industry bodies, India-watchers overseas and the ratings agencies made ‘policy paralysis’ and the absence of reforms the focal point of their dissatisfaction with UPA-2. However, despite the prognosis of a crisis of monumental proportions, it is significant that ‘reforms’ had slipped away from the lexicon of the political class. Its abrupt reappearance a fortnight ago had as much to do with a fear of the fiscal deficit running riot, the rupee sliding further and corruption becoming a battering ram against the government. The Government needed a short-term agenda to talk up the market and pool resources to fund a Food Security Bill and a possible universal healthcare scheme in next year’s Budget. A reforms agenda born of economic conviction has few takers.

This, indeed, is the problem the UPA-2 has to confront. It needs to talk reforms to instil confidence among investors and the creamy layer of the middle classes. Yet, its understanding of politics indicates that only sops, hand-outs and populism are electorally viable. Unless the mind of India undergoes a miraculous transformation, Manmohan Singh has only the smallest window of opportunity before his reformism is subsumed by political common sense. 

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