Political confusion clouded economic vision in 1997
R K Roy
A year of great initiative but stalled consummation: that is how 1997 will be remembered. The year offered nothing to get worked up about, either positive or negative; nothing as exciting as bank nationalisation of 1969 came about. And belying expectations, reform was furthered.Yet, twice during the year, the Congress pushed the United Front Government to the brink. It managed to pull back the first time, but failed to do so the second time. Consequently, initiative froze into unrealised possibility. The budget of 1997-98 was perhaps the most optimistic presented in 50 years of freedom. The big bang budget pursued the reform dream. Corporate and personal income taxes were lowered. Import liberalisation was given a fillip. Sceptics might say that P. Chidambaram's budget failed to get private investment to fill the space vacated by public investment. It is true that private investment actually slackened. But Chidambaram was not wrong. He advanced the strategy of reform. Perhaps he was overoptimistic in
expecting quick results. And he did not reckon with the spite of Sitaram Kesri-led Congress. The consequent political instability skewed the vision of the market economy, which became cautious instead of getting bold. But the shift in the pattern of investment Chidambaram has pushed for should yield results sooner or later. Home truths came to the fore. Public investment had been cut back too rapidly under reform. The Confederation of Indian Industry, FICCI and other representative organisations of big business wanted the government's capital expenditure cuts to be restored. The cement and steel industries in particular demanded an increase in public outlays. The paradox of 1997 was that capitalists pleaded for public investment to rev up flagging investment demand! The year saw the explosion of a myth: namely, that the Indian middle class is yearning to lap up consumer goods. The dream budget cut down personal income tax rates, but this did not trigger a consumerist boom; nor did the (propective) salaryhikes of the vast bureaucracy in the wake of the implementation of the Pay Commission report. After an initial spurt, the demand for gold (believed to be insatiable) has not soared despite falling prices. The Indian middle class is not the consumerist class it has been assumed to be. It is saving the tax and pay commission bonanzas. This is reflected in rising bank deposits. Chidambaram himself has complained of consumer apathy. He did not draw the appropriate lesson: namely, the economy could perhaps afford an increase in the fiscal deficit in support of a larger public investment outlay. There was little risk of inflation rearing its head. May be Chidambaram did not get the time. Sitaram Kesri stopped him in his tracks! The great innovation, about which Manmohan Singh talked, but which Chidambaram enforced, was the end of ad hocs. This was a major step in fiscal discipline. But it has had an odd consequence. There is not enough government paper. There are no ad hocs for conversion into dated securities.Banks are putting money in securities at nine per cent against 14 per cent a year or so ago. It also follows that government borrowings are not pushing up interest rates. This is precisely what was demanded by reform. Slowing inflation has been a conspicuous feature. Even if prices rise in the last quarter of 1997-98, the fiscal year will see an inflation rate of no more than six per cent. In the wake of the 7.7 per cent rise in the official wholesale price index in 1996-97, this year's low inflation is taken for granted. Yet 1994-95 saw double digit inflation. Undoubtedly, relatively low money supply expansion (13.7 per cent in 1995-96 and 15.9 per cent in 1996-97) has retarded inflation. But there were other important reasons too. The plenitude of resources with banks and non-banking finance companies did not flow into speculative lending. This is in refreshing contrast to the East Asian bubble). The middle class is not splurging. And, finally, it would seem that the rise in administered prices
(freight, fuels, sugar, et al) left less free funds for spending. The absence of supply shocks (sudden declines in supply) has helped. Interestingly, inertial inflation (stemming for annual increases in wages, dearness allowance payments and bonus) has been on the low side. The moral of 1997 is that changes required in administered prices should not be suppressed; the unavoidable correction following suppression is inflationary. Timely price revisions result in bearable inflation. There was little by way of policy response to the rupee depreciation that took place towards the year-end. At first sight, it may seem that domestic industry has benefited from a corresponding increase in protection. However, since prices are stable and inflation is on the low side, industry cannot raise prices of goods facing import competition. But it will have to pay more for imported inputs. This unhappy situation required a reduction in import duties to neutralise the effect of the rupee depreciation. But any possible
initiative in this regard was thwarted by the lame duck status of the Government. Till the political situation becomes decisive (possibly, after three months), industry will remain disadvantaged. Yet another moral of 1997 is that political stability is essential for quick footwork in a liberalising economy. Low inflation does not make waves; nor the elimination of ad hocs; nor the absence of speculation, the sobriety of the middle class which puts a premium on saving, and the sea change in fiscal strategy in support of private investment. Nor is the realisation of the importance of the role of public investment eye-catching. Nevertheless, these are significant pointers thrown up by the year that is to end. The furtherance of reform may not be glamourous. But the rationalisation of import tariffs, the reduction in reservations for small industry and the removal of telecom roadblocks, which had hitherto seemed intractable, are plus points of 1997. Solid work has been done on the Companies Act amendment,
the Insurance (liberalisation) Bill and the Sick Industrial Companies Act (to push companies before BIFR before they actually fall sick). The common minimum programme (CMP) is viewed as obstructionist. Even so, the flag of reform was held aloft. In favour of CMP, it should be said that unlike manifestoes which make promises, the programme abjured populist talk of eradicating poverty and focused instead on improving social indicators (health, primary education et al.). Thus, 1997 will go down as the year that might have been a turning point, a year when politics failed to match the economic vision. The vision and the possibilities were raised by the United Front Government, despite the burden of its leftist baggage. Ring out the old year, but carry forward the reform dream it generated into the new year.
Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.
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