Turn to radical reforms to make India grow

NEW DELHI: Please dump the Common Minimum Programme and opt for radical reforms if you want India to grow at 9% in the Eleventh Plan. This is implied rather than openly stated by the pre-budget Economic Survey.

The Left Front will be outraged. The survey lists the reforms as options rather than recommendations. But its underlying message is that India needs a new government after the 2009 elections that does not depend on the Left Front.

The key reform options are:

��� Privatise old coal mines to enhance coal recovery, and allow the private sector free entry into new mines. Similarly, sell old oilfields to private companies for enhanced recovery.

��� Decontrol sugar, fertiliser and pharmaceutical segments.

��� Allow 100 FDI in greenfield rural-agricultural banks.

��� Allow 51% FDI in rural insurance covering health, weather and such insurance. Allow 49% FDI in all other insurance.

��� Amend the Factories Act to extend the workweek from 48 hours to 60, and increase the daily working hours limit to 12 hours, to facilitate peak use of labour in seasonal industries.

��� Enact a new bankruptcy law to enable quick exit or management change of sick enterprises.

��� Introduce multi-application smart cards to empower recipients of a wide range of government schemes from employment to public distribution system and public housing. Recipients can receive remittances directly into their bank accounts via smart cards, with no leakages or corruption.

��� Freely allow the entry of A-grade foreign universities, and encourage B- and C-grade foreign universities, subject to tighter regulation. Allow private certification of skill development, besides government certification.

��� Allow foreign equity in all retail trade, and 100% FDI in branded specialty chains.

��� Permit corporate investment in nuclear power. This, in turn, means going ahead with the 123 nuclear agreement with the US.

��� Make open access in electricity a reality through credible cross subsidies and free permission of distributors to connect by wire to government electricity pillars.

��� Allow free entry of private and joint venture freight companies into new freight corridors being built by Railways.

The survey hints no more than tangentially at the possible shape of the coming budget. It highlights the need to step up spending in infrastructure and skill development. That may well be a key theme of spending priorities in the budget on Friday. The survey suggests that Fiscal Responsibility and Budget Management Act targets will be met.

In doing so, it ignores the Enronisation of the budget���the shifting of large liabilities off the government���s books. Hence, the improvement in the books is a hoax, and the underlying truth is rather grimmer. The IMF says government bonds issued to oil cos and others constitute an additional 1.2% of GDP. Over and above that, the government is in arrears of payment of fertiliser and food subsidies, and these arrears amount to another 1-1.5 % of GDP.

As oil prices rise relentlessly, these off-budget subsidies surge in the same vein. And as oil companies are forbidden to pass on higher prices to consumers, they have huge under-recoveries financed by additional borrowing from banks. This is only partly offset by issue of government bonds. This additional off-budget borrowing is entirely for subsidising consumption, not for investment, and so constitutes the worst sort of deficit. Revenue deficit, which is supposed to fall to zero, is above 3%.

The survey is fairly gung-ho on the economy���s ability to withstand the challenges of a possible global recession. It notes that savings rate has risen from 25% to almost 35%, a structural change that makes 9% growth sustainable. The main challenge is to absorb large inflows of foreign capital, amounting to 4% of GDP. That means accelerating infrastructure and skill development so that foreign inflows can be converted productively into additional investment.

The survey defends the government���s record on controversial areas ranging from handling of capital flows, inflation, interest rates and rupee appreciation. It, for the first time, quantifies the cost of sterilising foreign inflows at Rs 8,200 crore. This is a large sum, yet economists may argue that it is affordable, considering its possibly positive effects on exports, employment and growth.

The rupee may have appreciated against the dollar by 13.4% year over year, but it has risen much less against many other currencies, and has actually depreciated against the euro. Seen in this light, the main currency issue is a falling dollar rather than a rising rupee. The survey contests criticism that excessive foreign capital is flooding in to take advantage of growing interest differentials between the US and India. It shows that, if we consider one-year gilt rates, interest rates have narrowed in both nominal and real terms, and so this cannot be a cause of excessive inflows.

It argues implicitly against a Tobin tax to discourage inflows, saying they represent an opportunity rather than a problem, provided India increases its absorption capacity. Even if the inflows only go into reserves, they nevertheless have other positive effects. India is now exporting FDI as well as importing it. Outward investment from India was $14.4 billion in 2006-07 and $7.1 billion in the first half of 2007-08, so that the net FDI inflow was only a modest $3.7 billion, not excessive by any means.