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My point of view: Looking west, you'll find a country with a big population which suffers from the same problems as China does, the disparity of rich and poor, lacking the basic welfare system, tec. Nevertheless, it can not be denied that india remains a very competitive economy and has the potential to achieve more. China and India shall learn from each other. To do this, China must understand India first.
India's economic reforms
Can India work? - India's economic reforms
Jun 10th 2004 | DELHI
From The Economist print edition
Alamy
The new government's commitment to reform is sincere enough. But can it deliver?
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THE last time the Congress party formed an Indian government, in 1991, it was soon in crisis. Foreign-exchange reserves dwindled to just three weeks' worth of imports. Some of India's gold reserves were flown to London to help secure a loan from the IMF. Salvaging the economy required the most radical reform ever seen of the “licence raj”—a creaking edifice of central planning held together by miles of red tape. The rupee was devalued; import controls were dismantled and customs duties slashed; industrial licensing was liberalised and the capital markets opened up.
It worked: the crisis was overcome, and India's economy took off, growing at an average annual rate of around 6%, up from 5.4% in the 1980s and 3.5% before that. Under every government since then, the pace of reform has been faltering, but the direction has never changed. Nor is it likely to change now, when Congress finds itself back in power for the first time since 1996, at the head of a coalition that won a surprise victory in elections last month. Two of the main architects of the 1991 reforms, Manmohan Singh, the finance minister, and Palaniappan Chidambaram, the commerce minister, are back as, respectively, prime minister and finance minister.
This time, they inherit an economy growing at more than 8% a year and far from crisis (see table). Nevertheless, there are two reasons to worry that reform may be under threat. First, the last government, led by the Bharatiya Janata Party (BJP), campaigned in the election on a platform of successful economic reform. Its defeat, and that of two reforming state governments in Andhra Pradesh and Karnataka, has led some, on little evidence, to interpret the result as an indictment of liberalisation. In fact, Congress owes its victory in part to dissatisfaction with incumbent state governments and in part to the support of populist parties from two big states, West Bengal and Bihar, which bucked the trend.
Second, Congress has only 145 of 545 seats in parliament. To rule, it is in coalition with parties identified with narrow regional interests, hostile to reform, and Congress also relies on the “outside” support of India's communist parties. The coalition's Common Minimum Programme (CMP) published last month is marked by concessions to Congress's partners—on privatisation, labour laws, and the power sector—most of which were reflected in the president's speech to parliament on June 7th, setting out the government's plans.
Yet the government is stronger than it looks, since nobody on its side wants a return of the last government, let alone another election. It can win some arguments with its leftist partners on issues such as, case-by-case, privatisation. And even if it does not, there is plenty to be done that should be less ideologically contentious. Mr Chidambaram, like a student taking a highlighter to the quotable bits of a set text, has been picking out the CMP's juicy bits. He has been telling a sceptical press, jittery investors and sycophantic industrialists that if the CMP is implemented, “our credentials as reformers will be enhanced.”
He will, in fact, have acquired a new set of credentials—as a miracle-worker. The CMP is less ambitious than Congress's economic manifesto (10% annual economic growth; “abolition” of unemployment, hunger, poverty and illiteracy). But its admirable goals—annual growth of 7-8%, alleviating poverty, helping farmers, empowering women, raising spending on health and education and so on—are so vaguely presented that it is like a child's letter to Santa Claus. Everybody can pick a desired outcome from the list, and believe that Christmas is coming. Santa, however, will find the chimney blocked by hard economic reality, in particular a fiscal deficit of around 10% of GDP and a federal system that has proved shockingly bad at implementing even the worthiest policies.
Mr Chidambaram, however, has identified the correct objective. He says he wants to be the “investment minister”. What India desperately needs is investment, public and private, above all in infrastructure, education and health. Reform is about removing the obstacles to it.
It is now to have “a human face”. The election outcome was a reminder that all the previous government's propaganda about “shining” economic successes was insulting to hundred of millions of Indians who have seen none of them. An estimated 300m Indians survive on less than $1 a day, and 160m lack access to clean water. The UN's human-development report last year reckoned that 47% of children under the age of five were underweight.
Up country
Most of the poor are in the countryside, where more than 70% of Indians live and where reform is needed most. The CMP is stacked with rural initiatives, though woolly on how they will work. Credit to rural areas, for example, will be doubled over the next three years. But many farmers have too little land and too much uncertainty about the future to be willing to invest. Mr Chidamabaram has promised complete managerial autonomy to the state-owned banks, the obvious lenders.
The CMP also promises reform of the grain-procurement system. At present, the government offers a “minimum support price” to rice and wheat farmers. In practice, this is setting the market price and represents a subsidy. The government buys from relatively prosperous agricultural areas: the states of Punjab and Haryana and parts of Uttar Pradesh. More than 220m of the poor all over the country are then entitled to cheap grain from 500,000 “fair-price shops”. But distribution is so poor that many still go hungry and government stocks of grain have reached 40m tonnes—far more than is needed and very expensive to maintain. An estimated one-fifth of the food produced in India, including one-tenth of grain reserves, is wasted.
The government also subsidises inputs. Cheap fertiliser and electricity are over-used. Subsidised power encourages relentless pumping of water, so water-intensive crops are grown in drought-prone areas, diminishing water tables. Depressingly, the first act of the new Congress government in Andhra Pradesh was to restore free electricity to some farmers. The CMP goes no further than promising to produce a “road map” on reform of subsidies within 90 days. It also threatens a review of a law passed last year that, in the hope of attracting private investment, required the “unbundling” of the generation and transmission functions of the loss-making state electricity boards.
Perhaps the CMP's most eye-catching proposal is a promise of an “employment-guarantee act”, to provide one member of each poor and “lower-middle class” family with 100 days of work at the minimum wage on “asset-creating” projects. Arjun Sengupta, a former executive director of the IMF who helped draft Congress's economic manifesto, estimates that a self-selecting group of 50m families might apply. His estimate, assuming a wage of 50 rupees ($1.10) per day, is that the scheme would cost 250 billion rupees ($5.6 billion), about 1% of GDP. But, he says, it would replace other entitlements for the poor costing 180 billion rupees.
Besides meeting the basic needs of the very poor, the scheme would bring two other benefits: jobs and much-needed infrastructure. It is thought that 40m Indians are looking for work. That is already more than 10% of a labour force growing at 2.3% a year. A vast, cheap labour force could go to work on road improvements, rainwater reservoirs, irrigation channels, dykes and community centres. Even close to the cities and highways, roads soon peter out into pot-holed dirt tracks. Three-quarters of cultivated land is unirrigated and dependent on the monsoon—whose lavishness last summer is a big factor in the booming year that has followed.
Some economists, however, are deeply sceptical. “Food-for-work” schemes have been widely used before. Critics say they have done little either to reduce poverty or to produce useful public assets. Implementation becomes swamped in a cascade of petty corruption, where elected officials at all levels seek to recoup their campaign costs. The supposed beneficiaries end up with only a tiny proportion of the public money spent. Surjit Bhalla, of Oxus Fund Management, a hedge fund, argues it would actually be better to hand out cash for no work. Just 100 billion rupees, he says, would be enough to remove poverty on current definitions. And, knowing they were entitled to cash without having to work for it, the poor would be far better placed to monitor and cut corruption.
Who will pay my rent?
However, Vinod Vyasulu, of the Centre for Budget and Policy Studies in Bangalore, capital of Karnataka, argues that such schemes can do some good, provided the works and the disbursement of money are handled at the lowest level of elected government—the village council or panchayat. This would not eliminate rent-seeking, which is taken for granted. Mr Vyasulu describes one panchayat leader, vehement in her denials of any corrupt activity, but open in acknowledging a 20% commission for awarding a bus-shelter contract. But at least at the panchayat level local people can assess the legitimate rent and, every few years, vote bad leaders out.
The troubles envisaged in implementing the employment-guarantee proposal are mirrored in every initiative. And there are plenty of them. A World Food Programme study of one poor district of Chhattisgarh state found it had 400 central and state-government schemes dealing, no doubt sensibly enough, with poverty and social services. But most rural families were unaware of nine-tenths of them.
Besides its new emphasis on the rural economy, the government has signalled a shift of spending towards education and health. Over five years, spending on education is to be raised to 6% of GDP (from about 4%), with at least half of that going to primary and secondary schools (up from about 2.6%), while health spending will go up to 2-3% of GDP.
Again, it is hard to quibble with the goals. Although India is world-famous for the quality of English-speaking technically adept engineers produced by its colleges and institutes, primary and secondary schools are lamentable in many parts of the country. The World Bank says that the number of out-of-school children in the 6-14 age range has fallen remarkably, from 39m in 1999 to 25m in 2003. But that is still one-quarter of all the world's truants. The lack of basic health care is one reason, besides poor nutrition and dirty water, why India scores so badly on indicators such as life expectancy (63) and infant mortality (65 of every 1,000 children die in their first year; 90 in the first five).
Mr Sengupta, however, points out that China, which has a literacy rate of about 85%, compared with 58% in India, spends only 2% of GDP on education. India's problem is not favouring tertiary education at the expense of younger children. A recent IMF conference in India heard research showing that, on any given day, 25% of teachers are absent. In the two states with the worst records, Bihar and Jharkhand, the proportion rises to 38%. A wonderful idea to raise enrolment, attendance and nutrition—the nationwide provision of a free cooked midday meal in schools—suffers from similarly patchy delivery.
The powerful state
If basic services in the countryside suffer from too little government, much of the rest of the economy suffers from too much. Seven of India's ten biggest companies, measured by sales, are majority-owned by the state (five oil-and-gas firms, a steel producer and a bank); state-owned banks control nine-tenths of deposits; the railways employ more people than does any other commercial organisation in the world.
Privatisation started in 1991 with the sale of minority stakes in some state enterprises. In 1999, the previous BJP-led government shifted the focus to the sale of ownership and control to strategic investors. Last year, this ran into a legal quagmire. The Supreme Court ruled that some sales required parliamentary approval. Now, out of deference to its communist allies, the government has said that “generally” profit-making companies—ie, those that investors might want to buy—will not be privatised. The president's speech hinted that the government might try to sell the idea of privatisation by earmarking the proceeds for social-sector schemes.
Nor is the private sector as free as it should be. Not only do relics of the licence raj survive—some 670 items, including, for example, 21 textile or hosiery products, are “reserved” for small-scale producers—the “inspector raj” thrives. A study by the Indian Institute of Planning and Management, a think-tank, says that each industrial unit is still visited by between 40 and 60 inspectors in the course of a month. It cites a survey estimating that Indian managers spend 16% of their time dealing with government officials.
Managers also have to cope with a plethora of investment-deterring labour laws. The president's speech recognised the need for change and much can be done short of the kind of total overhaul that the left is likely to block. Mr Vyasulu, for example, points out that Karnataka was quick to lift a ban on women working after 7pm, when the round-the-clock outsourcing industry took off in Bangalore; in communist-run West Bengal strikes in the information-technology industry were, in effect, outlawed when it was made an essential public utility.
The government has been dropping alarming hints that it might extend to the private sector affirmative-action policies, which “reserve” a proportion of government jobs and educational places for minorities and “backward” castes. This would be a further restraint on investment. It would also be largely pointless, covering only the “organised” sector of India's workforce—ie, in the public-sector or in private companies with at least ten workers, which account for no more than about 8% of employment.
More flexible labour laws and fewer bureaucratic obstacles would help Mr Chidambaram attract the investment he craves—including the three-fold increase in foreign direct investment he thinks India can absorb (a modest enough aim: that would still put FDI into India at less than one-third of that into China). Investors also need faster roads, new air- and sea-ports, reliable power, a better-educated, healthier workforce and all the other wonders promised in the CMP. But how to pay for them? With the occasional blip, India's budget deficit has been worsening ever since Mr Singh left the finance ministry. For the past six years, the public-sector deficit, including both state and central governments, has been hovering around 9-10% of GDP (see chart). Last year there was a slight improvement, albeit achieved by raising more than 0.5% of GDP from selling minority stakes in state companies on the stockmarket.
Because it is financed domestically by a timid banking system that keeps 40% of its assets in government debt, the deficit has not yet brought the crisis advertised by gloom-mongers. However, it now stands between the government and its targets like a row of soldiers. There is very little money available. Almost all tax revenue goes on interest payments, civil-service wages and pensions, defence and subsidies. The deficit also threatens to choke private investment by pushing up the cost of credit when demand for it surges.
Paradoxical as it may sound, Mr Chidambaram's best hope of achieving his goals as “investment minister” is to cut the government's deficit. He is committed to doing this by a fiscal-responsibility law passed last year. He has already pushed back the deadline for eliminating the revenue deficit by a year, to 2009. His first budget, to be delivered in the first week of July, gives him the chance to begin the serious tax reform his government has promised. As a proportion of GDP, tax receipts are actually lower than a decade ago. The present system is based on harassment, coercion and suspicion (as even the previous finance minister admitted) as well as corruption. What is needed is a simpler structure, less riddled with discretion-based exemptions, and a broader tax base.
In particular, the government needs to fulfil its pledge (and that of the previous administration) to introduce a nationwide value-added tax to replace the current hotch-potch of sales taxes and excise and customs duties. That seems a better idea than its proposal to add complexity by imposing a new levy on top of central taxes to pay for education. But it faces a problem that dogs much reform: it requires agreement with state governments, which at present impose some of the sales taxes.
Indeed, since the state governments account for almost half the fiscal deficit, and for a bigger share still of the “implementation deficit” which stops development spending actually producing development, they and lower levels of government are vital to reform's success. One hopeful approach is to strengthen the panchayat system; another is to find ways of giving states incentives for reform, and penalties for failing. That sounds like a pipe-dream—the leadership of the state that has failed worst of all, Bihar, is entrenched at the heart of the ruling coalition. But it is in this field, of centre-state relations, as much as in the nostalgia-inducing ding-dong between reformers and communists, that the real battle for reform will be fought. |
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发表于 2004-7-15 15:43:12
发表于 2004-7-16 16:47:10