The heavens have not fallen

As our thoughts focus on the Budget due later this week, I have been looking back at some of the major changes that have been implemented over the last dozen years, and how smoothly they have gone through.

This makes one wonder whether our political masters' fascination for populism, and fear of the political repercussions of rational economic policies, are not exaggerated.

Even a partial list of the holy cows that have been converted into merely useful animals is imposing, and should give confidence to those wishing to carry the economic reforms further down the road.

The latest example is of course that of the abolition of the administered price mechanism for most oil products, in particular petroleum and diesel oil.

To be sure, even now the petroleum minister has little confidence in the ability of the marketing companies to set prices, and prefers to keep the powers in his own hands.

But the fact remains that, for all practical purposes, domestic prices of petrol and diesel are being changed frequently in response to the international prices of crude.

And, what is equally important is that the users of these products have accepted the changes in a far more mature and realistic fashion than the political masters ever gave them credit for.

It is evident in retrospect that the fears of deregulating the prices and their political impact were grossly exaggerated -- the BJP may still lose the next general election, but surely not because of doing away with the administered price mechanism.

Take, again, the removal of most quantitative restrictions on imports, and also a significant reduction in import tariffs. (To be sure, we still have some way to travel down the road, and one more step may well be taken later this week).

Contrary to the decades-old fears and apprehensions of our political masters, planners, and economic policy advisers, imports have not flooded the economy, nor has the external position worsened -- in fact, we now have, after all the trade liberalisation, a surplus on current account.

In retrospect, how foolish were we to shut ourselves up from international trade because of export pessimism. How many contortions did we go through to create, in effect, product-specific exchange rates through a plethora of complex import duties on the one hand and export incentives on the other!

And, even then, the external account was always a constraint; it is so robust now.

Take, again, the case of gold imports. For decades, official imports were banned to prevent the people from investing in such 'unproductive' assets. (On this issue, of course, we should probably blame our economists rather than political masters.)

If anything, as human psychology makes anything prohibited all the more attractive, our fascination for gold not only did not diminish but went up, and that too at domestic prices well above the international price of gold.

The ban enriched, not the economy, but the hawala market operators and gold smugglers.

(On the subject of gold import, a personal anecdote is worth narrating. In more than two decades of writing a weekly column, only one column was not published. It advocated gold imports which, for the then editor, was blasphemy.)

Well, gold imports are now freely allowed and heavens have remained firmly in their place. Not only this, we have today savings in excess of domestic investments, as reflected in the current account surplus.

Moreover, recently, when the international price of gold had shot up to close to $400 an ounce, there was a clamour to lift the ban on gold exports. To be sure, the ban on exports seems as illogical as the earlier ban on imports.

The abolition of industrial licensing, the junking of much of exchange control, the deregulation of interest rates have all been accompanied by a decade of the highest GDP growth, and lately, the lowest ever inflation and interest rates, an economy of surpluses rather than shortages, with the producer chasing the consumer rather than the latter waiting in long queues and thanking his lucky stars that he got the allotment of a scooter just 10 years after he registered his name.

It is true, of course, that correlation is not necessarily cause and effect. And yet, can we really argue that liberalisation has nothing to do with these dramatic changes?

Strangely, despite all the evidence, most of our political masters are still shy of being seen as economic reformers. The party that started the ball rolling in the early 1990s, later passed the Pachmarhi resolution, and its own prime minister no longer swears by what he himself did when in power.

Ostensible concerns about 'the poor' are too often camouflaged for inaction, if not reactionary moves. One big bull that nobody has dared to take by its horns is subsidies to the undeserving.

Given the pressures on fiscal resources, these are eating into the availability of money for primary schools, village roads and water supply schemes, port and other infrastructure.

Would we witness a change in this later this week? Perhaps that's as unlikely as the Indian cricket team winning the World Cup.

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