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Poor governance hobbles India's reform drive

After six months of political stalemate, the rave reviews for Finance Minister Yashwant Sinha's reforming Budget have given way to the despairing conclusion that perhaps India embraces change only in a crisis.

In which case, a new wave of reforms might not be far away.

For unless growth picks up substantially from last year's 5.2 per cent pace, policy experts said India would face a further deterioration in its public finances and rising unemployment that could put the world's largest democracy under serious strain.

"We can't go on without further reforms for very long because we won't be able to grow even by five per cent," said Shashanka Bhide, chief economist of the National Council of Applied Economic Research.

"So the crisis is already there. If we're not going to get six percent-plus growth rates, then it's a political problem."

There is a broad consensus -- on paper -- on the need for a second wave of reforms to build on ground-breaking liberalisation measures rushed in after a balance-of-payments crisis in 1991.

Because its economy is fairly closed, India has weathered the current global downturn much better than most of its Asian neighbours, who would be delighted with five per cent growth.

Still, output has slowed for two years in a row as post-reform momentum has petered out. And crucially, five per cent growth falls far short of the 8.7 per cent average needed over the next decade to achieve Prime Minister Atal Behari Vajpayee's goal of doubling per capita income, currently around $460 a year.

"Eight million people come into the workforce every year and a five per cent growth rate would leave large numbers of people unemployed, which means there will be greater social unrest," said P Chidambaram, a former finance minister.

"A five per cent growth rate, while statistically acceptable, is simply politically unacceptable and socially unacceptable."

COMPETITIVE POLITICS

It was to raise the economy's speed limit that Sinha unveiled in his February Budget a raft of far-reaching structural reforms making it easier to fire workers and rolling back the policy of reserving certain industries for small and medium-sized firms.

The reforms are high on the list of the many blueprints for change in India but they soon became mired in what the Planning Commission aptly calls the "compulsion of competitive politics".

On a charitable view, the slow progress is a reflection of the wondrous kaleidoscope that is India's multi-party democracy.

"This is not a country, this is a vast continent in search of a synthesis in the political domain, the social domain and the economic domain," said Amit Mitra, secretary general of the Federation of Indian Chambers of Commerce and Industry.

Less charitably, the legislative paralysis is due to the failure by an enfeebled Vajpayee to crack heads in his unwieldy 19-party coalition and force ministers to put the national interest before the myriad vested interests opposed to change.

Arjun Sengupta, a professor at the Centre for Policy Research, said the absence of a unified agenda meant each member of the coalition was ploughing its own furrow, resulting in policy inconsistency that was deterring badly needed investment.

"This is the main problem we have today: we do not have a coherent, unified policy framework," Sengupta said.

He said the reform task facing the government was all the more difficult because India's most populous and backward states were falling farther and farther behind the better-off ones.

"If the Centre cannot take care of the problems of disparity between the states, we are facing major problems which can become explosive," Sengupta, a former ambassador and IMF official, said.

Peering through the gloom, optimists point to the precedent of legislation passed without the pressure of a crisis in 1999 to open up India's insurance market to foreign firms.

They hope two equally controversial reform bills, to liberalise the crisis-ridden power sector and to make it easier to wind up bankrupt firms, will also eventually become law after they won cabinet approval last week, ending months of wrangling.

"Anybody who says reforms have been a failure in this country hasn't looked at figures on poverty very closely," said Planning Commission member N K Singh. He said the poverty rate had fallen in the past decade to 27 per cent from 37 per cent.

REFORM PRIORITIES

The list of reforms needed to sustain this improvement is lengthy. Because of its pivotal role in the economy, the power sector is many experts' number one priority. The well-catalogued troubles that foreign firms such as Enron Corp have encountered dealing with India's all-but-bankrupt state power boards have flashed warning signals to potential foreign investors.

Domestic investors have also been deterred because industrial users pay twice as much as they would in China for electricity.

Nevertheless, attempts at serious reform have foundered on twin political rocks: how to end overmanning at the power boards, estimated at 50-70 per cent, and how to charge users, mainly farmers, market rates for stolen or heavily subsidised power.

D K Srivastava, a professor at the National Institute of Public Finance and Policy, said politicians might consider tough measures if they could be assured that benefits would be visible before they have to seek re-election two or three years later.

"Any government under any minister will say to you, how can I survive unless I can show my voters jobs?'," Srivastava said. "This is one of the basic constraints on power sector reform."

T K Bhaumik, a senior adviser at the Confederation of Indian Industry, agreed and said reformers were partly to blame for having failed to sell the case for change to India's mass poor.

"We did not articulate the economic reform process to the people," Bhaumik said. On privatisation, for instance, policy-makers did not spell out the consequences for jobs.

"I don't think we really understood the issues properly. We simply followed the Washington consensus and that didn't go down well with the people," he said.

As Divestment Minister Arun Shourie knows only too well. The privatisation programme he oversees, a litmus test of India's reform will, is stalled because of what Shourie calls "fractured" politics and "noise" generated by corporate interests.

Shourie said he could only hope that fading growth would jolt India's politicians into putting the country's interests first.

"We're on the cusp at the moment on the question of reforms and I feel the real circumstances in which India is placed will force the political class to do the right thing," he said.

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