Our Economy at Crossroads: Reforms or a Slippery Slope?

There is ample evidence UPA-2 has provided to conclude that the way it has handled the economy is abysmal at best. Rising prices, failed NREGA, corruption scandals, looming fiscal deficit, passive mis-management of Baba Ramdev and Anna Hazare agitations – these episodes precipitated the alliance’s esteem and people’s confidence in the government at an unprecedented rate.

However, at this point of time when India is being watched with keen interest world over as one of the potentially formidable economic powers, we should have been debating on forward looking policy changes and the growth oriented political and economic ecosystem to complement it. Let alone contemplating on the much needed policy framework upgrade, UPA 2 has failed even in providing basic requirements at the bottom of the pyramid owing to its non- pragmatic policies that would have hardly worked even in an idealistic fictional society. This is a commendable giant leap, sadly, in a direction opposite to our liking though!

Rajiv Gandhi had already commented long back on the feel-good-pro-poor schemes and intuitively conjectured that only 15% of the allocated funds reach the targeted population in such schemes. Rightly so NREGA was not an exception. NSSO reports that out of about INR 46,000 cr (about 0.8% of GDP) allocated only INR 1, 270 cr or a measly 15% was paid as wages, the rest was spilled on capital equipment and administrative costs.

Not to mention the inefficiency layer that crops up due to the fiscal federalism angle. Such center-left schemes coming from a government headed by Mr. Singh who is the architect of the pro-market liberalization concept of 1991 is surprising in a disappointing sense. Was he aware of the schemes’ shortcomings, if so, the only reason I can conceive for it to be implemented was a politically motivated campaign to gather votes from the masses. Wait a second, does this sound a bit like cash-for-votes in disguise albeit on a much larger scale?

Now that the congress is going through credibility crisis saddled with the corruption scandals and facing voters anger due to double digit inflation what does it do appease them?

The proposed food security bill – another entitlement scheme to pander to the majority voting class. This National Food Security Bill will cover up to 75% of the rural population and 50% of urban households with a proposed monthly entitlement of 7 kg food grain per person. While the bill sounds well – intentioned, it highly unlikely the results of implementing it will differ from numerous other pro-poor schemes that failed.

The resultant food subsidies from the food security bill are estimated at 2% of GDP and the NREGA’s contribution is about 1% of GDP. This is certainly not going to help the fiscal deficit that is now estimated to be widened to 5.6% from the earlier fiscal target of 4.6%. Infact, a downgrade of Indian sovereign credit rating by noted rating agencies is being discussed at the moment. More interestingly, owing to the looming fiscal deficit pressures, the finance ministry is considering saving some of the originally budgeted NREGA spending because there is not enough capacity to absorb the funds that the center is providing. The source for such deficit is largely tax payers money and disinvestment proceeds.

Think about it – not only is the utilization of funds is inefficient with only a miniscule amount reaching the targeted people, even the process of raising these funds to meet the spending is yet more inefficient with leakages to the corrupt (2G spectrum scam et al). Wonder how remarkable ‘efficiency’ pops up out of nowhere in the systematic hijacking of the rupees in the whole process from sourcing-to-utilizing of the funds.

Guess who takes the worst hit in this circus – the patient and passive middle class that religiously pays taxes and in return does not see any tangible benefit except for the entertainment value to certain extent derived from the TV and the news papers from such news.

The elite class is least bothered about inflation and taxes. The poor are too consumed with their quotidian chores, besides the pro-poor schemes do a good job of keeping them in fine terms with the government. Well, the middle class has perhaps begun to realize this and the Anna Hazare movement bears a testimonial to this profound shift of the middle class from a passive observer to an active section of the society that can crack the whip should the government ignore its needs. At least, that is the perception this class has created so far, but whether or not it continues with the newly found momentum will decide our future.

However, Anna Hazare with his independent-policing centric ideas is perhaps only adding another layer to the existing bureaucracy and inefficiency. So the leadership vacuum in India is yet to be filled with the much required progressive, far-sighted and pragmatic ideologies.

What would be the reasons for UPA2’s failure in handling the country’s economy?

The center-left ideology behind NREGA-like massive corruption induced failures, leadership vacuum evident from the passive ways of PM’s handling of the 2G spectrum scam case, limitations enforced by the coalition politics – something that PM has been found quoting in support of his appointing the corrupt minister in the 2G spectrum scam case, or simply due to that vast section of Indian voters that still electorally favor entitlement schemes to which political parties pander in order to safeguard their power. None of the above impediments however seem to be solvable immediately either within the framework of UPA or by its opposition.

The solution to my mind begins with the long pending second generation reforms and a relentlessly demanding middle class that will not sit back until such reforms are implemented. Or, another Balance of Payment like crisis in 1991 that will provide the required political gumption and force India to further the reforms.

The second generation reforms must include, labor laws, Investment regulations, banking regulations to be liberalized along with electoral reforms and other policies that minimize rent seeking opportunities. 20 years of economic liberalization clearly shows the positive impact on our lives starting from dirt cheap telecom services to our internationally acclaimed IT service sector. As of June 2011 India has 852million cell phone subscribers that is a whopping 70% of the population and it is expected to be 97% by 2014 (as per isuppli’s research).

Left to the markets alone and along with pro-market policy framework we could achieve 70% penetration in a commodity that is far from a necessity. Why do our governments then keep going back to the failed model of entitlements in case of absolute necessities? Again, just for votes, I guess. Imagine another scheme of one cell-phone to every household in which case we would have had another failed scheme and would be accusing few more corrupt politicians rather than applauding this marvelous feat of a close to 70% subscriber base.

There is clearly a great opportunity for a new leader to capitulate on this middle class awakening with ‘minimum government and maximum governance’ rhetoric. This however is contingent up on the middle class itself realizing the merit of second generation reforms and not get swayed by the sounding-good entitlement economy rhetoric either from the political parties or the good-willed activists.

India is in a dire need of a ‘Reagan era’ – not as a panacea to all the problems but as a much required nudge that will change India’s growth trajectory in the lines of what we saw during P.V Narasimha rao’s times and right after. And that is the best available solution we have to weed out the cronies from the current crony-capitalist system we are dealing with.

Pratham is a friend of CRI.

***

The CRI UPA 2.0 Half Life Series Poll

You can tell the economy is in a mess. If the situation needs to salvaged what do you think the UPA 2.0 government’s priorities should be? Tell us in this poll – we want to hear from you! At the end of the UPA Half Life series we shall compile all the poll results and arrive at a CRI Readership’s list of priorities for the UPA 2.0. Do participate.  Click below.