The Hindu : The end of economic reforms?

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Friday, Apr 11, 2003

Opinion

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The end of economic reforms?

By Pratap Bhanu Mehta

A nervous middle class, risk-averse politicians, reluctant economists, and a politics that refuses to engage with the intricacies of a complex economy are once again conspiring to take reforms off the agenda.

AMIDST THE heady fog of political activity, one fact is becoming palpably clear. Sensible economic reform is coming to a grinding halt. The recent budget was, at best, a mixed bag; the opposition to VAT (value-added tax) and the Government's own feebleness over Kelkar's recommendations has postponed taxation reform forever; the Congress is flirting with neologisms such as "neo-socialism" and harkening back to its policies of the 1970s that brought India to fiscal ruin in the first place; and the BJP itself will soon go into election gear which means mostly postponing decisions.

The objectives of reform were simple: first, to rescue the state from potentially devastating financial crisis because it was perpetually living beyond its means. Second, to dismantle that entire gamut of regulations which, taken together, added up to such a system of perverse incentives that it dampened growth and much else. The third objective was to slowly integrate India into the world economy. While FDI would still be only a small part of India's growth, the cumulative impact of this integration would be beneficial both for growth and for making India a more significant player in world politics. Fourth and most important, achieving the first three objectives would be instruments to a more secure and widely shared economic prosperity. With growth, there would be greater revenue, and this revenue could be, through appropriate measures, used to provide better basic services such as health and education, on the one hand, and compensate for areas where there were market failures, on the other. The success of the reform was always premised upon the reform of the state itself. The state would be compelled to spend less on itself, or on unproductive activities; it would not act as a source of perverse incentives that protected only special interest groups and it would refocus its attention on those core areas where its intervention was actually needed.

Judged by these criteria, we have barely reformed. In certain areas like agriculture, there is arguably a case for going slow. A more open trade policy and lower tariffs have integrated India into the world economy and some of the regulations that strangled economic growth such as licences have been removed. But when all is said and done, that is about it. The perverse incentives that flow from the state's regulation of sectors such as labour and small-scale industries remain intact. While fortune has helped India's external sector a good deal, the internal fiscal crisis remains serious. The state still spends most of our money on itself or on unproductive activities and very little on health, education and infrastructure. And India is still a very difficult place to do business.

Why have we given up on reform? This question requires a complicated answer. But in retrospect, it is clear that our political class contains very few reformers who are reformers outof conviction, rather than convenience. For most, reform is a response to a crisis rather than part of a long-term strategy, and interest in reforms is limited to avoiding crisis. Selling reform is politically difficult. The battle over rolling back government in the West, whatever one may think of its economic merits, at least had one political advantage: it came with an appropriate slogan promising to give people their money back, and with politicians like Ronald Reagan and Margaret Thatcher who meant it. But in a country where most do not pay for the state, and for many the state remains the only hope, on what basis do you sell the idea of economically reforming the state?

"Contain fiscal deficits" is the most that reformers come up with and it will hardly set the country on fire. In principle, it is possible to make a clearer economic case for the links between, say, reduced expenditure and greater expenditure on health and education. But few politicians have had the imagination to make the case. Those who do have access to state power, like the middle class, organised labour or some of our capitalists who masquerade as entrepreneurs, are often too dependent on the present state to seriously challenge it. Arguably, we have also not been served well by the depressingly few pro-reform economists we have. Economists in Government are technically competent, but by nature cautious. Academic economists within India, other than those on the Left, are curiously averse to making big picture arguments in the public sphere. Whatever one might think of their economic arguments, it is fair to say that old-style Left economists are far more active in courting the public than our liberalisers. Reformers have yet to win the battle of ideas in the Indian literate public sphere. They have not tried to imaginatively link reforms with crafting a new kind of distributional politics. Worse still, most economists have done little to counter wildly implausible assertions that people often make about the effects of reform. It is staggering that everything from starvation deaths to poor health is blamed on the reform process, as if there were anything about reform that impeded the state from distributing its food stock or spending more on health.

In fact, blaming reform for our ills has become the easiest political game in town. For the Leftists, blaming reform salvages the one institution they have always had faith in: the state. For politicians, blaming reform disguises the brute fact that our central problems are those caused by governance issues, not by reform. By blaming reform, all of us can disguise our complicities, and continue to hold on to the illusion that the economy is some kind of free lunch that can be served up at will. The debate over reform continues to be associated with the technicalities of economics rather than a debate over substantive visions of a good society. Reforms lack what used to be known as the "vision thing."

Politicians are curiously more flexible, in part because they are more inventive about ways of making money. Even in reforming the state, they can fleece it. Their own monetary compulsions are not necessarily an obstacle. Their disadvantage as reformers comes from the fact that they are politically risk-averse. Growth and social sector spending do not yield immediate political returns and most politicians simply do not care. Which politician is going to explain that there is no use asking for more from the state if the state is bankrupt? Which politician is going to explain that the reason you need to reform the state is because the state could actually achieve much more if it refocussed its priorities? Which politician is going to explain that even if you do not think growth is sufficient for a well-distributed economic prosperity, at least concede that it is necessary? Politicians will any day choose a certain status quo, no matter how bad, over any change, the political consequences of which are uncertain. They will not take a decision to reform unless they absolutely have to.

It comes as no surprise that reforms are slowing down. A nervous middle class, risk-averse politicians, reluctant economists, and a politics that refuses to engage with the intricacies of a complex economy are once again conspiring to take reforms off the agenda. Compared to the heady passions that nationalism and religion arouse, economic reform seems a venial cause; compared to the uncertain symbolic utility of measures such as reservations, bringing about genuine well-being seems always a more difficult task. But entire societies can be laid waste by the economic infirmity of their states. And it looks like we are once again all set to acquiesce in the current status quo than think about our future.

(The writer is Professor of Philosophy and of Law and Governance, JNU.)

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