Commentary/Dilip Thakore

Chidambaram has made a good beginning

Everybody who knows anything about contemporary Indian politics knows that Chidambaram is one of the nation's great economic liberalisers and deregulators. If the Indian economy was salvaged from the brink of disaster in 1991 when the nation's foreign exchange reserves were down to $2.2 billion and the country was poised to default on its foreign debt, the credit for transforming a bankruptcy threat into a national opportunity must be accorded to three front line individuals: former prime minister Narasimha Rao, former finance minister Manmoham Singh and Chidambaram who served with distinction as the commerce minister in the Narasimha Rao administration. To his lasting credit, Rao gave the latter two technocrats a carte blanche to jettison the Congress party's useless socialist baggage and open up the closed, autarkic Indian economy to foreign investment, trade and domestic competition.

The rest is history. With its long-suppressed energies released with the abolition of the industrial licensing system, the Indian economy, which in 1991 was tottering on the brink of bankruptcy began registering year-on-year real GDP growth rates topping 5.5 per cent - a sharp contrast to the so-called Hindu rate of growth (3.5 per cent) which it had averaged for four decades until the mid-Eighties. And as the latest Economic Survey tabled in Parliament on the eve of the union budget confirms "overall economic growth of GDP at factor cost after rising to 6.3 per cent in 1994-95 accelerated further to 7 per cent in 1995-96."

There is no doubt that despite the corruption scandals which have persistently dogged it, the Narasimha Rao administration has steered the Indian economy onto the high growth path. Therefore as a committed liberaliser, Chidambaram's first priority was to ensure that these never-before rates of GDP growth are sustained. Because no matter what Left economists who dominate academia and the media say to the contrary, every committed liberaliser knows that sustained economic growth is the prerequisite of social justice rather than the other way round.

The Union budget of 1996-97 therefore is primarily a continuation of the proven 'creeping liberalisation' of the Narasimha-Manmohan era. The much-maligned surcharge on corporate income tax has been halved to 7.5 per cent; maximum import duties have been reduced to 40 per cent for all other than consumer goods imports which alas, continue to be prohibited; some relief has been provided to the salaried class in the first tax bracket and the process of piece-meal privatisation of the nation's white elephant public sector enterprises is being continued. Minor excise duty cuts on toothpaste and polyester yearn endows Chidambaram's maiden budget with the characteristics of a soft budget which has some sops for all sections of society.

Given that his first priority is to sustain the never-before rates of GDP growth Chidambaram has appropriately focused his attention on infrastructure growth and development. The soft underbelly of the Indian economy is the overwhelmingly government-owned and managed infrastructure which is buckling under the strain of supporting a 7 per cent annual GDP rate of growth. In terms of electricity supply, railway wagons availability, telecom and road networks and port facilities, the Indian economy is grossly mismanaged and creaking at the seams.

Chidambaram's response to this challenge is the promotion of the (public sector) Infrastructure Development Finance Company with an authorised share capital of Rs 50 billion. The budget makes provision for a Rs 5 billion initial contribution of the federal government which is to be matched by the Reserve Bank of India. "Among other things, the IDFC will act as a direct lender, refinancing institution and as a provider of financial guarantees. I believe that IDFC will induce investors, both Indian and foreign, to make available long term funds at the lowest possible market rates," said Chidambaram, in his Budget presentation speech.

Of course despite its inevitable staffing and other problems, the proposed IDFC will have a marginal utility value. But right now what the economy needs is not another public sector institution, but a set of simple and transparent laws and rules which will attract international construction industry majors such as Bechtel, Mitsubishi, Daewoo and others to undertake (in collaboration with domestic private sector companies) massive infrastructure building projects utilising their entire arsenal of contemporary technologies in India. In the short run massive foreign monetary and technology investment in infrastructure development offers the only hope of sustaining the high economic growth rates of the Nineties. While the promotion of the IDFC and formulation of simple and transparent laws and rules for foreign investment in infrastructure projects are not mutually exclusive, one hopes that Chidambaram appreciates the limitations of government-owned public sector corporations which at best are big, lazy and doomed fish in the small-pond Indian economy.

However, there is an architecture and attention to fundamentals in the Budget for 1996-97 which is its distinguishing characteristic. Chidambaram seems aware that if infrastructure development is a prerequisite of industrial growth, higher rates of growth in the rural sector is the prerequisite of economic growth. Despite the high 7 per cent GDP growth rate in fiscal 1995-96, agriculture output was barely 1 per cent higher than in the previous year. While this lopsided GDP growth reflects that for the first time that high GDP growth need not be monsoon-driven, it is reflective of low national productivity given that almost 70 per cent of the population is employed in the agricultural economy.

The Budget addresses this problem of low agriculture sector growth. The share capital of the National Bank for Agriculture and Rural Development has been doubled with a budgetary provision of Rs 1 billion with a further commitment of Rs 5 billion from the RBI. In addition a sizeable allocation of Rs 20.5 billion has been made to the NABARD managed Rural Infrastructure Development Fund "which provides loans to state governments for completion of projects like medium and minor irrigation, soil conservation and watershed management". Moreover in recognition that water management is the key to agricultural growth, the Budget also provides Rs 8 billion to a new Accelerated Irrigation Benefit Programme "under which the Centre will provide on a matching basis additional assistance from the federal government by way of loans to the states for the timely completion of selected large irrigation and multipurpose projects.

Which is all very well. But the problem with these higher allocations to government owned and managed banks and departments is that it's been done many times before to little avail. Under the centrally planned socialist development model huge allocations of national savings have been consistently made for many worthy causes with little to show for it. According to the per capita income and development indices of the international term lending institutions, India has shown little progress since the Fifties. Moral of the story: government is the problem not the solution. One would have expected Chidambaram to be aware of this contemporary Indian reality.

Nevertheless, making allowances for this blind-spot of all of post-Independence India's finance ministers, the other heartening feature of the 1996-97 Budget is that it squarely addresses the problem of poverty alleviation in the four bottom deciles of the population. An allocation of Rs 2.44 billion has been made by way of central assistance to state governments to initiate and complete welfare schemes for the poor. These centrally sponsored schemes include "100 per cent coverage of provision of safe drinking water; 100 per cent coverage of primary health centres; universalisation of primary education; public housing assistance to all shelterless families; extension of the mid-day meal scheme; road connectivity to all villages and habitations; and streamlining the public distribution system targeted at families below the poverty line".

All unexceptionable and long overdue objectives. But the nagging question won't go away. Will the incorrigibly corrupt and discredited administrations of the state governments utilise these allocations for the beneficiaries of these schemes? With Bihar's fodder and PWD scams fresh in my mind, I can almost hear 20 million babus chortling with glee and rubbing their hands in anticipation.

Poverty alleviation apart, the latest budget is silent about the other great issue of the five year old liberalisation era: privatisation. Chidambaram has budgeted receipts of Rs 50 billion from the sale of equity shares of public sector enterprises. Given the high visibility of communists within the United Front government, he couldn't have done more. No doubt he is biding his time to build a national consensus on privatisation.

But if the UF government is still in office in New Delhi and not in the dustbin of history next February, Chidambaram is likely to find that he won't be able to put off the privatisation issue for much longer. For the simple reason that the national consensus on infrastructure development and poverty and illiteracy alleviation can meaningfully be funded only by massive privatisation.

Indeed the arithmetic of budget leaves any finance minister committed to poverty alleviation and infrastructure development little option but to privatise the asset rich (but income poor) public sector enterprises. Against its aggregate tax and non-tax revenue of Rs 1.3 trillion, the federal government spends Rs 600 billion by way of interest on past borrowings; Rs 270 billion for defense; Rs 200 billion for administration and an estimated Rs 150 billion by way of subsidies. This leaves very little surplus for welfare and development schemes.

On the other hand the asset and market value of the federal government's public sector enterprises, which yield a miserly 3 per cent annual return on investment, is an estimated Rs 5 trillion. If these white elephant PSEs are auctioned on a global basis they could release the resources required to retire a sizeable proportion of the federal government's massive debt and finance a national drive to build enough primary schools to make the nation wholly literate (sine qua non) within the next decade.

In formulating his well-balanced political Budget for 1996-97 Chidambaram has made a good beginning. But the big question is whether he - and the UF government - have the stuffing to grasp the painful privatisation nettle and provide the nation it's long awaited deliverance from stupefying poverty which is the consequence of five decades of wasted opportunities.

I wouldn't bet on it.

Dilip Thakore is the founder-editor of Business India and Business World and former eidtor of Debonair.