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BW Businessworld

Pious Good Wishes

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(Pic By Bivash Banerjee) Industrial growth began to fall around the middle of 2008. Its year-on-year growth came down to 2.5 per cent in the last financial year, 1.1 per cent in the last available quarter (to April) and 0.7 per cent in the last available month. Exports rose 3.4 per cent in the last financial year, but fell 16 per cent in April-May; imports rose 14.3 per cent in 2008-09, and fell 39 per cent in April-May. GDP growth was down from 9 to 6.7 per cent in the last year, and from 8.6 to 5.8 per cent in the last quarter (to March). It included huge growth in government, which produces nothing and consumes everything. If government is excluded, growth comes down to 5.8 per cent in the last year and 3.9 per cent in the last quarter. These and similar figures never daunted finance ministers. P. Chidambaram had said in his budget speech last year that growth in 2008-09 would be 8.7 per cent according to CSO and 8.8 per cent according to himself. Last February, Pranab Mukherjee predicted 2008-09 would show 7.1 per cent growth, and boasted that it would make India the second fastest growing economy in the world. The ministers’ compulsive optimism shows the magnitude of the task facing the draftsmen of this year’s Economic Survey. The facts are uniformly depressing, but they could not pull a long face, for their task was to pose as if the government was all-powerful and all-benign: it could pull growth out of a hat. The Economic Survey is one government document which is not constrained by current government policies and positions; it can say what should be done, without regard to whether the government can do it or not. This year, it had an important prop to lean on. After his return in May, the Prime Minister had asked his ministers to give him a portfolio of reforms. The Economic Survey could bring them together. So this time it proposes a set of reforms that are exhilarating, surprising and unconvincing. The most interesting reforms are those that propose correcting the government’s own past mistakes. After it played ducks and drakes with forward markets, the survey calls for removal of bans on forward trading. After it used the fertiliser and sugar industries to subsidise voters, the survey proposes abolition of the subsidies. After it revised and then torpedoed Fiscal Responsibility and Budget Management targets and ran up a shameful 6 per cent fiscal deficit last year, the survey proposes a return to them. After it introduced the mindless dividend distribution tax, the survey calls for its withdrawal and single-point taxation of investors’ income. It similarly calls for the abolition of the wrong-headed transactions taxes that Chidambaram was so fond of. These proposals sound implausible, and will be dismissed as decorative — unless Mukherjee actually acts on them. An interesting and not entirely impractical idea is to give every villager a solar cooker and a solar lamp, and to abolish kerosene subsidy. Both products are well established; but they do not quite replace kerosene. A solar cooker is a large, unwieldy device. A solar lamp requires solar panels and electricity storage. The government may well subsidise and distribute them on a large scale. But it is unlikely to have the guts to abolish kerosene subsidy. The proposal to target kerosene, food and fertiliser subsidies better is similarly impractical; if the government introduces dual markets, it thereby creates an uncontrollable incentive to divert goods from subsidised to unsubsidised markets. It will, in these as in other fields, achieve the worst of both worlds. The government in its first term ran up unwisely largely fiscal deficits, and now needs to reduce them. That is difficult to do when the economy is sinking; in fact, the survey does not rule out more “stimulus packages” as these excesses of folly are called. Desperate for ideas in this field, the survey falls back on an idea from Manmohan Singh’s time as finance minister, namely divestment of shares in public enterprises. But being a Congress government, it cannot even think of privatisation; that would lose it the support of trade unionists. So the survey talks of selling off small stakes. This is not necessarily a bad idea; especially in fully government-owned enterprises, a private stake sometimes improves governance. But there are few such enterprises left; and given the state of the capital market, the money the government will get from stake sales is modest. The survey makes a creditable effort to look for rational policies after five years of unbridled pursuit of electoral gain. But those five years make it difficult to give credence to the ambitions of virtuosity. The government will have to prove that it can walk the talk. (Businessworld Issue Dated 07-13 July 2009)