The Hindu : A perspective on economic reform

Online edition of India's National Newspaper
Monday, Apr 21, 2003

Opinion

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A perspective on economic reform

A CANDID EVALUATION of the economic reform process over its first decade has been attempted by the RBI in its recently released Currency and Finance Report (2001-02). There are several useful messages flowing from such a study. Its significance is in no way diluted by the RBI's unnecessary attribution of the whole report to its economic staff and advisers. Even if it is not meant to be an official statement, its observations are extremely relevant to all those connected with the reform process. A dissertation on the economy's recent past will give important clues as to the immediate future. Besides, an evaluation of the pre-reform period, the 1980s, helps in understanding the decade of reforms better. The immediate task is to determine whether the economy can be placed on a high growth trajectory. The Tenth Plan has ambitiously projected an 8 per cent growth in the GDP in each of the five years, beginning 2002. Unfortunately, its very first year is unlikely to record a growth of more than 4.4 per cent. The RBI does not discount the potential of the Indian economy. Except that a sustained high growth "hinges critically on improvement of the domestic savings rate, increased public investment supported by marked improvement in public savings rate, higher inflow of foreign capital as well as better credit delivery mechanisms". Macroeconomic policies, including monetary and fiscal policies, should attempt to rectify the weaknesses recently seen in the ongoing reform process so that real sector reforms get a further push. Only then can the GDP growth measure up to anywhere close to the ambitious targets. Most of those prescriptions are not original. Yet, they get a certain extra validity and urgency when viewed in the context of some important lessons learnt from the first decade of reforms and the period preceding it.

During the first flush of economic reform, 1992 to 1997, accelerated industrial activity paved the way for a rapid economic growth. However, the growth momentum faltered in the latter phase of reforms .The domestic slowdown was exacerbated by the recessionary conditions in the developed economies. Hence, the trend rate of growth over the reforms decade at 6.1 per cent was only moderately higher than the 5.6 per cent recorded during the preceding decade. The real challenge is to arrest the pronounced deceleration in the manufacturing activities during the second phase of reform. A number of structural and cyclical factors are responsible. In the former category are inadequate agricultural sector reform, infrastructure constraints, labour market rigidities, and weak insolvency and exit laws. With the growing integration of the domestic economy with the outside world, the adverse impacts of global business cycles are increasingly felt in the declining aggregate demand. Other key areas of concern relate to the fiscal situation. The central bank, which has for long been a strong advocate of fiscal consolidation, points out that the process received a setback in the second half of the 1990s on account of a number of well-documented factors. Among its many deleterious consequences has been the steep and alarming fall in the public investment rate. Escalating interest payments and rigidity in subsidies and wages have pre-empted a large part of Government resources, leaving little for public investment. Basic infrastructure development has been one of the principal casualties.

The RBI study grapples with a few tantalising aspects of economic growth. In India, unlike many other developing countries, it is the services sector rather than manufacturing that has led the growth process. Neither the industrial slowdown nor the lacklustre agricultural performance hindered the spectacular growth in the services sector. However, even over the next few years, it is likely that the services sector will depend increasingly on industrial growth. The debate over the relative importance of the two, services and manufacturing, might be passe but as long as the causal connection between them is kept in view, economic growth will not falter.

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