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February 24, 2000

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The Rediff Pre-Budget Interview/Dr Subir Gokarn

'India needs a crisis to reform. We cannot reform without a crisis'

The Union Budget for the year 2000-01 is due to be out in a few days time, a budget that Finance Minister Yashwant Sinha has promised will be "tough". Yet, Dr Subir Gokarn, chief economist at the National Council for Applied Economic Research, a think-tank based in New Delhi that does exhaustive work on the state of the Indian economy, does not expect much from the Budget. In an interview to Amberish K Diwanji, he explains why. Excerpts:

Email this report to a friend What do you expect from the forthcoming Budget?

I expect very little from this Budget, because the reforms that are within the finance ministry's control, which is essentially what the budget is about, are more or less done. There is certainly the tariffication of consumer goods, so that we'll see some tariff rates applied to those. Thus, some 700 goods will come on to the OGL (open government list). We will also see some brave target set for divestment, but I don't expect to see too much at the end of the day, and for a number of reasons.

But the main reason is that the emphasis of continuing reforms -- I prefer the phrase next wave rather than the next generation -- is on expenditure and the finance ministry has limited control over this. It can at best set gross ceilings on the amount of money that the ministries are spending but it cannot force those ministries to accept its priorities.

So what happens is that ministries prune their overall budget but don't go through the process of prioritisation of programmes or cutting out the less effective ones. They just cut across the board, allowing inefficient programmes to remain on the agenda.

Thus, the more important projects are starved of funds. So unless the budget achieves this prioritisation, it will have a limited impact.

On the taxation side, there is very little room to manoeuvre, and now with the economy on the upswing, I see very little changes being brought in here.

Do you fear that the fiscal deficit will balloon?

The deficit is not ballooning in the sense that if you look at the new way of accounting, the deficit was around four per cent (of the GDP last year), and this year it will be five or 5.5 per cent. This is by no means a panic situation. We have been at 6.3 per cent in 1993-94. Hence it is not that much of a problem.

But the deficit on the states' side is a problem, and the deficit coming out of an inability to generate revenue from where revenue should be earned is a problem. Hence, it is not the aggregate deficit but the way that the deficit has come about that is a problem.

Would you say that more of the reforms process have to now be carried out in the states rather than at the Centre?

The Centre also has certain things to do. It should be cutting subsidies, it should be privatising, it should be increasing its revenue base, and reducing expenditure. But that requires the government as a whole to cooperate, it requires the coalition members to act together. The finance ministry is right now fighting a lone battle.

But hasn't that always been the case with the finance ministry?

No, a crisis is something that evokes this cooperative spirit. I don't think (former finance minster) Manmohan Singh in his first two years (1991 and 1992) certainly had his government behind him because he was seen as a person who could get the country out of the then crisis. But as soon as the crisis abated, politics came in.

So you think India needs a crisis to reform?

I certainly believe that India needs a crisis to reform. We cannot reform without a crisis.

High expenditure is a problem of the government. Can it be curbed?

Not unless there is a crisis. Cutting expenditure is a political decision with political costs, and hence it can only happen when we have our next round of crisis.

Do you see a crisis looming? Our economy is now booming.

Certainly right, now the economy is upward, but by the end of the present business cycle, certainly things will not be so rosy and I hope that then we can implement some hard decisions.

When will this next downward turn come about?

Indian business cycles are still not clearly understood, and it also depends hugely on the monsoons and the agricultural output. The Indian economy is still heavily influenced by agriculture which in turn depends on the monsoons, and let us see how this yearís monsoons are.

Another problem is falling revenue, so do you see a hike in taxes in the budget?

No, I donít think so. The economy is recovering and this in turn will itself mean more revenue for the government. So the government is not under pressure to raise taxes and I think raising taxes will be a big mistake.

What needs to be done is that now we have more or less reached international parity in our tax rates. But tax compliance remains at 50 per cent or less, so the need of the day is to widen the tax base. The long-term fiscal policy now has to concentrate on base widening and how it will do that remains complicated.

In the organised sector, services are taxed as corporate entities, but service transactions are not taxed. The key element to broadening the base is to emphasise formalisation, you have to try and deal with the problems as to why so much activity is at an informal level.

No doubt there are other elements to this such as licence fees and corruption at the lower levels of bureaucracy, etc. But if you donít formalise, you are not going to benefit from the expanding economic activity in the country.

Taxing agriculture as a concept has been in limbo for quite some time now. We just had the case of the BJP disowning one of its leaderís statements that agriculture will be taxed.

There is also the problem of sharing taxes between the Centre and the states, and a host of other problems, and I donít see the upcoming Budget solve any of them.

What we have noticed is that during the budget presentation, grandiose statements are made but implementation is where we falter. For instance, last budget the finance minister spoke of abolishing four secretary posts and nothing happened. Comment.

This is symptomatic of the governmentís problem. For instance, take the public sector and banks, I donít know how the government is going to convince the stakeholders -- labour and government -- to downsize, to become more efficient if the government itself cannot make these symbolic cuts.

It is a three-pronged attack on the government, on banks and on the public sector. The only way out for the government is to downsize all three areas simultaneously so that no one feels singled out.

Where, in your opinion, does Indian reforms stand today?

This is going beyond the budget because the budget is a very limited statement of policy. But I think the most significant lack of progress has been on exit (policy).

Exit can be looked at in a variety of dimensions. The government itself has a problem regarding an exit policy in the areas of banks and public sector enterprises.

In banks and the public sector, various factors are involved such as the government, labour, and the management. The lack of an exit policy creates non-performing assets because most banks loan to the public sector, and the latter cannot reduce labour to become efficient and thus suffer losses which hurt the banks. Thus, it is a chain reaction.

Now entry has been freed in all its dimensions whether it is direct investment, foreign participation, etc. For a businessman to enter into businesses, there is no problem and this can be seen in the rise of new firms being set up.

But competition is a double-edged process and to maintain the symmetry, an exit policy is needed, otherwise you are going to have sick industries, bankrupt firms that cannot close down. The only area where some progress regarding exit has been made is in terms of management, restructuring and takeovers. But you must allow labour to be released to find their most efficient use.

It is now noticed that it is the states whose financial situations are in a mess. Can the Centre play a role in disciplining the states?

I think we are seeing that happening right now. The Centre is laying down conditions which the states have to comply with such as raising taxes efficiently, setting user charges for end-user of various services such as electricity which is often given free to farmers and so on.

And only if they meet these targets will the Centre provide them with ways and means advances.

While this is needed, there is a huge political element in such conditions being laid down and hence I would have to wait and see how well it is implemented.

But let us also look at why the states are in such a mess. One reason of course is their inefficiency in raising revenue and heavy subsidisation. But another key reason is that states have very limited role in imposing taxes or raising revenue as per the Constitution.

Hence, I think we have to now empower the states to raise revenue while at the same time disciplining them. These two go hand-in-hand.

The Budget presentation is accompanied by a lot of media hype. Is this justified? After all, even in Britain the budget presentation is just seen as another policy statement rather than The Statement.

I think our budget presentations have acquired a certain symbolism because it was during the Budget presentation in 1991 that Dr Manmohan Singh chose to announce the liberalisation of the economy.

But in terms of the Budget presentationís actual impact upon the economy, unless the Budget starts to focus on the social sector such as education, health and infrastructure, it will run out of steam. There is very little that the Budget now has to state, the work now is with the government.

Anything youíd like to say to conclude?.

I think the 1990s was the decade of liberalisation, of opportunities in which the Budget presentation played a very important role. The next decade from 2000 to 2010 should be the decade of capabilities and I hope that the Budget to be presented leads towards this direction.

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