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Economy Sep 21, 2012

If these are economic reforms, I’m Amitabh Bachchan

By R Jagannathan

Anyone who's never tasted butter will be glad to accept margarine as the real thing. This is the case with reforms and the UPA government. Having never seen real reforms for more than eight years, everyone has forgotten what real reforms are all about - changing the game, not the player uniforms. The recent burst of "reforms" are actually little more than palliatives - however welcome they are as a signal of change.

Ask yourself:

How is raising diesel prices to prevent bankrupting the oil companies reform? This is like saying sending a heart patient to the ICU is a sign of rude good health.

How is the sale of public sector shares - without any impact on the management - economic reform? Is selling your silver to feed your family a sign of terrific intelligence? It is a mere survival tactic.

Have they missed the reform bus? Reuters

How is permitting FDI in aviation and big retail reform? Investment was always open to domestic investors; even foreign investors could invest in both sectors with conditions. What has really changed is that foreign airlines can now invest in aviation (earlier, only non-airline companies could). This change is thus about eliminating a stupid rule imposed by crony capitalism earlier.

As for retailing, foreign companies were permitted to invest in the back-end even earlier. They were barred only from the front end. If the main benefits of big retail are supposed to come from back-end ops (cold chains, wholesale trade, reduction of middlemen, etc), but this option was always available to the Wal-Marts of the world. So putting a Wal-Mart board on the storefront is reform? Of course, this will make them invest more, but one can only call this incremental reform, not Big Bang Reform.

Now consider what the pink press considers "more" reforms. This morning's Business Standard informs us breathlessly that there are "no signs of reforms abating", and adds that "the government is set to go ahead with its reform agenda - be it restructuring of loans to state electricity boards or a hike in the cap on FDI in the insurance sector...".

So rescuing bankrupt power distribution companies (losses: more than Rs 2,00,000 crore) with even more grants and loans is reform? And allowing foreign insurance companies to invest more is big reform. The first step is unavoidable, since you can't allow the power sector to collapse. The second measure is again incrementalism is at work. Both are needed, but hardly anything to throw a party over.

The Economic Times runs a reforms story under the ecstatic headline: "Govt's only Answer to Bandh: More Reforms." The paper says: "PM Manmohan Singh is expected to underscore the return to muscular governance when he addresses the nation on Friday to explain the economic rationale behind the government's decisions to hike fuel prices and allow foreign supermarkets into the country."

The reforms ET talks about are raising the price of sugar for below-poverty line (BPL) families by Rs 3 a kg and allowing FDI in pharmaceuticals. So raising sugar prices from Rs 13.50 to Rs 16.50 a kg when the factory price is Rs 39 is reform. The word is incrementalism again.

"Muscular governance" is not a phrase that anyone would associate with the UPA for the last eight years, and if the PM wants to explain the "economic rationale" of his recent decisions, the most obvious question to ask will be: who ran the economy into the ditch that we need all these "reforms" now?

Pratap Bhanu Mehta is trenchant in his criticism of the Congress' new-found enthusiasm for reform and the trap it has set for itself. Writing in The Indian Express, he says:

The fact that these reforms are coming after four years of colossal mismanagement is making the reform narrative problematic. Admittedly, there was a global financial crisis that required a different policy response. But politically it is not easy for the government, after running all fiscal responsibility into the ground for four years, and after stoking structural inflation, to turn back and accuse opponents of being populist. The crisis narrative is a double-edged sword: it makes the case for reform compelling. But it also exposes the complicity and opportunism of government.

Moreover, the reforms now being thought of have little to do with the kind of things India nearly needs. A reform can be defined as something that will fundamentally change the game, improving economic efficiencies, improving governance and the delivery of government services, enhancing the autonomy of economic agents (companies, job-seekers), and reducing wastage in administration - among many other things.

Loosening up FDI in this sector or that will also contribute to such efficiencies, but they are simply not game-changers.

The real game-changing reforms sometimes need even greater political will than the kinds of things announced on Big Bang Friday. Consider these reforms, some political, and others economic.

Deregulation and freedom to produce and prosper: India has simply too many regulations for business, and these are badly implemented. Whether it is starting a business or running it, there are simply too many clearances needed, and even after that there are the cohorts of corrupt officials to feed - from factory inspectors to labour inspectors to environment safety regulators to every other kind of regulator. Not to speak of excise officials and tax collectors of every kind.

Abolishing and simplifying most of these regulations and reining in the rent-seekers of the licence-permit raj will free Indian companies to compete, including the badly strangulated small and medium enterprises that create all the jobs. It is not the Tatas and Birlas and Ambanis who create lots of jobs, but the little guys setting up shop in places called industrial estates.

Creation of a single national market: In many agricultural commodities, states place their own restrictions on the movement of agri-produce by creating intermediaries like the Agricultural Produce Marketing Committees - where farmers are forced to sell their produce. This forces all sellers to compete on the same platform and reduces their bargaining power vis--vis middlemen. The APMCs also inhibit inter-state movement of agri-produce, and increase the prices for end-consumers. It is time to abolish them.

The goods and services tax (GST) - which will combine excise, service tax and state value-added taxes into one combined levy - will also create a single market, but it is the Centre that holds the key. The states, which will lose their revenue autonomy once GST comes into being, are holding out for assurances that their revenues won't fall once it happens. The Centre claims revenues will rise - but is not willing to bankroll states if it turns out to be wrong.

This reform is doable if the Centre merely promises to make good any state's projected revenue losses for, say, the next three years.

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by R Jagannathan

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