The Hindu : Reforms run out of steam?

Online edition of India's National Newspaper
Wednesday, Feb 27, 2002

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Reforms run out of steam?
By Alok Mukherjee

NEW DELHI, FEB. 26. The Union Finance Minister, Yashwant Sinha, today presented to the Lok Sabha an official report on the state of the economy where, implicitly, it has been acknowledged that the economic reforms launched in 1991 have run out of steam.

The Economic Survey 2001-2002, presented to the House, admits that the wide-ranging reforms of the 1990s, which removed entry barriers to investments, opened trade, provided free access to foreign technology, opened up foreign direct investment and removed barriers inhibiting access to capital markets, were expected to result in high growth in industrial production. It was expected that, in keeping with the country's comparative advantage, the structure of investment in industry would shift from more capital-intensive to more labour-intensive ones.

It was also expected that such a shift would provide for greater profitability and earnings growth, more export-oriented production and greater employment opportunities in industry.

However, progress in this direction has been limited after the initial growth episode. Similarly, after the exuberance of growth in the Gross Domestic Product (GDP) in the initial period of the reforms process, there has been an unmistakable slowdown in subsequent years, the survey admits.

In fact, the survey acknowledges many other shortcomings. Referring to the fiscal situation, which has been judged as the most difficult of the problems facing economic management in the country, the survey says that ``there has been a popular tendency to focus excessively on expenditure reduction, but this has proved difficult with the rigidity in the structure of Government expenditure.

Revenue enhancement now lies more in enforcing compliance in direct taxes and in exceeding the service tax''.

The survey confesses that though there has been considerable progress over the last 10 years in the reform of the tax system in all its aspects, tax revenues have remained below 10 per cent of the GDP throughout the period.

Since the potential for increase in tax-GDP ratio through indirect taxes (excise and customs) is limited, the survey points to the tertiary sector, which has been witnessing greater growth and underlines the importance of extending the service tax to this sector to improve the overall tax-GDP ratio.

As another matter of fiscal consolidation, the survey highlighted the need to reduce food subsidy considerably by reforming the existing food management system, which would see a limited role for the government in ensuring food security by maintaining adequate stocks while there would have to be more efficiency and greater investment of private trade in the overall food management. Similar comments have been made about fertilizer subsidy, which is being seen as providing no incentive for improvement in productivity or for energy efficiency of fertiliser plants.

The point has been underscored that a substantial portion of the fertilizer subsidy actually goes to inefficient high cost production rather than to farmers.

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