Strings attached

Supiya RoyChowdhury

FOR a while now, the multilateral donor community has expressed concern that liberalisation policies at the State-level in India have not kept pace with the Central Government's overall drive towards economic reforms. As such, in the last three years World Bank loans have been provided to individual States (Andhra Pradesh, Uttar Pradesh and more recently Karnataka) under the Country Assistance Scheme (CAS). These loans are designed primarily to contribute to improving Government effectiveness and promoting private sector-led growth.

The close link between State-level liberalisation policies and World Bank loans is clear from the following statement given in a Bank document relating to the loan: ``There has been growing competition by States for Bank support, which in turn has helped create incentives for reforms. By focussing on reforming States, the Bank can use its resources more effectively for forging deeper and more focussed reforms.'' Loans, as such, are obviously meant to help the States' developmental process, only if that process moves in a certain defined direction, i.e., towards increasing marketisation. A central principle built into the loan's conceptualisation is flexibility, such that the Bank ``can intensify support when reforms build momentum, and disengage when reforms go off track.'' (World Bank Report No.P7453, dated May 25, 2001).

This, then, is the overall philosophical framework that anchors the $150-million Karnataka Economic Restructuring Loan, negotiated with the World Bank in May 2000. The economic restructuring programme has the usual components of liberalisation programmes such as fiscal discipline to rein in the fiscal deficit, business deregulation, public enterprise reform, and administrative or governance reforms, and poverty eradication by focussed spending on education, health and rural development. These are re- emphasised, but not new, policy initiatives. What is new is that, first, the Bank's future aid would be contingent on the State's ability to accelerate reforms. Secondly, Bank aid would now be available for supporting programmes such as VRS to facilitate public sector closures and privatisation. Arguably the scene is now set for a much more energetic governmental drive towards marketisation reforms than has been seen in earlier years.

Karnataka has been one of the earliest and more robust supporters of the Centre's liberalisation policies. From the early 1990s, there have been efforts here to facilitate private sector entry into business, to streamline the civil service and to create an enabling environment for privatisation. Despite a significant amount of hype surrounding Karnataka's recent economic climate, particularly the IT revolution, the ground facts do not speak of any robust achievement either along lines of growth or of equity in the last 10 years. The annual rate of growth of gross state domestic product (GSDP) was 5.29 per cent during the period from 1980-81 to 1990-91 and remained the same during 1991-92 to 1997- 98. The annual rate of growth of per capita GSDP improved only marginally from 3.28 to 3.45 per cent during the same period.

On the social development front, the State's performance shows poorly in absolute and comparative terms. For example, the total literacy rate increased in Karnataka only marginally from 56.04 per cent in 1991 to 58 per cent in 1997. This was below the national average increase, from 52 to 62 per cent, and well below the 10 per cent rate of literacy increases achieved in States such as West Bengal, Rajasthan, Andhra Pradesh. Decline in the percentage of population living below the poverty line has also been marginal in Karnataka, from 37 per cent in 1987-88 to 33 per cent in 1993-94. On other indicators of social development, such as access to sanitation, for example, the figures are equally grim.

Much of the State's economic distress has been the consequence of the Centre's liberalisation policies. The impact of import liberalisation on falling prices of agricultural products leading to escalating rural distress and farmers' suicides have been covered in these columns earlier. In urban areas, the sharp decline of the small-scale manufacturing sector has greatly increased poverty, unemployment and insecurity. Many public sector firms have been adversely affected by competition from import liberalisation and the advent of MNCs. A large number of small-scale units, which served primarily as ancillary units to the public sector, have been forced out of business in this scenario.Thus, in the Karnataka context, there is now enough evidence to show that the poor have not fared well during the reform period. These trends are supported by those at the national level. It is now more or less acknowledged in the literature on reforms in India that the rate of decline of poverty has been much slower in the 1990s (-1.29) as compared to the 1980s (-3.11).

An increase in the relative prices of food, and a decline in public expenditure, are some of the reasons for the adverse impact of reforms on the poor. Per capita public expenditure on social services (health, education, and rural development) in all States increased only from 96 per cent in 1991-92 to 97 per cent in 1994-95. Within the category of the middle-income States, which includes Karnataka, the increase was similarly nominal. The percentage of people living below the recommended norm of 2,400 calories increased from 65 per cent in 1987-88 to 70 per cent in 1993-94.

The general orientation of the new Restructuring Plan reiterates the Karnataka Government's commitment to greater social spending. But, it contains no acknowledgment of the negative impact of some features of marketisation on the poor, or any indication of how these would be handled in the context of a loan-driven marketisation programme.

It is not clear how an accelerated emphasis on marketisation reforms is going to help farmers whose product prices are falling, or workers who are losing jobs. There is not much attention in the Restructuring Plan to the broader issue of sustained lack of growth in employment creation.

Until these direct conflicts between a marketisation programme and the interests of the disadvantaged are addressed, the Restructuring Plan is unlikely to achieve its stated aim: ``Eradication of poverty, through economic growth, tempered with equity.''

However, while the loan has been criticised in some circles, it has not become an issue for the political opposition, nor has it attracted much public debate. Karnataka is characterised by a relatively peaceful labour force, weak presence of left political parties, a middle class intelligentsia focussed strongly on the sciences, technology and the IT revolution, and the relative weakness of domains of social critique (such as universities and social science research institutions) which in other contexts have typically provided the anchoring for contesting marketisation. As such, in Karnataka liberalisation was easily an ideological fait accompli. In such a context there is a danger that the loan could be seen, simplistically, as a facilitator without being problematised in the broader context of the debate over marketisation.

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