March 9, 1998

There is little comfort with news of a plunging economy in a time-warped policy environment. The new government has to fire growth. Choices? It doesn't have any

By Sudeep Chakravarti with V. Shankar Aiyar with Arthur J. Pais

The Central Statistical Organisation (CSO) isn't known for speed. There's critical household income data from 1993-94, for example, that its officials are still debating. It is unlikely to be published this century. But it has now played fast and furious with a figure that has everybody sitting up and taking notice.

Advance estimates released by the agency last week confirmed an economic slowdown that everybody in the Finance Ministry knew about but was loath to admit publicly: the economy will grow by 5 per cent in 1997-98, a full 1 per cent less than what ministry top guns -- Finance Minister P. Chidambaram and Finance Secretary Montek Singh Ahluwalia included -- have been insisting for months. Agriculture is expected to register a negative growth of 2 per cent, a trend unheard of this decade.

About the only bit of good news is that in a region buffeted by the worst financial storms in years, the call on India is still generally positive. Besides, there is a new government about to be sworn in which can do something -- has to do something -- to set things right. "You need to quickly get a feel-good focus," says Tarun Das, director- general of the Confederation of Indian Industry (CII). "The priority has to be to increase growth of the economy to 7-8 per cent a year."

This point is more or less settled and the BJP, Congress and all other parties -- whether in power or out of -- are agreed on. The biggest "if", as always, is what the new government will do about policy issues once it has settled in. Because, there are plenty of warning signals besides an overall slowdown in economy to set off enough alarm bells to wake up a nation. The budget deficit is expected to increase. Exports are expected to be hit further -- as Korea and Thailand in particular and Malaysia and Singapore are widely expected to dump goods and undercut wherever they can -- and that's everywhere.

There is little domestic demand to pick up the slack. Industrial output should grow by less than 1 per cent in real terms this year, compared to more than 5 per cent in the last financial year. Government spending in the public sector, which drives 80 per cent of the industrial economy, is down by a fifth in the past two years.

What the Government needs to do is being argued more strongly and bluntly than ever. Raghavendra Jha, an economist with Mumbai's Indira Gandhi Institute of Developmental Research (IGIDR), a respected institution though not known for hard-talk, stresses how removing "supply-side bottlenecks" like infrastructure and privatisation "should be the first order of the day to boost the morale of industry". The high-powered World Economic Forum annual meeting at Davos, Switzerland last month was pre-occupied with the South-east Asian crisis. But it was concerned enough to put out a simple, terse statement about India: "The new government ... must take fast decisions and take immediate action to pursue, accelerate and deepen much needed economic reform particularly in the area of infrastructure which is crucial to India's real economic take-off."

India's two biggest chambers of commerce, CII and the Federation of Indian Chambers of Commerce and Industry (FICCI), have compiled and presented detailed approaches to top-level political functionaries. The FICCI paper, called the "90 Days Agenda of the New Government for Revival of Industrial Growth" has been circulated to senior bureaucrats and policy-makers and Secretary General Amit Mitra says that he has already started receiving enquiries about a whole host of proposals that FICCI has sent out.

Together, they urge politicians and policy-makers to pursue wide-ranging goals. They ask the government to raise capital expenditure in infrastructure through proceeds from sale of equity of public-sector undertakings -- instead of using these to fund administrative expenses. They advocate opening the insurance sector to the private sector, a surefire recipe for bringing in vast, long-term funds critical for projects such as power generation and road-building; a FICCI estimate suggests that doubling India's gross per capita insurance premia from about Rs 200 at present, can bring in over Rs 30,000 crore a year in funds. They urge the government to peg real interest rates to inflation within a fixed range, say 3 per cent -- to reduce cost of credit.

There are a host of other practical suggestions as well. Dereserve the small-scale sector and deregulate agriculture. Widen the tax base. And enact laws to manage currency better. This last point is finding increasing advocacy especially as winds from South-east Asia waft across. "As the world integrates, weaknesses in financial systems of countries will sooner than later be reflected in the exchange rates and cross-border flows," stresses Anil Ambani, managing director, Reliance Industries Limited. "India thus has to adopt and increasingly focus on managing a globally competitive exchange rate environment."

The decisions about where the economy will head will begin now. Within days, there will begin a cycle of frenzied meetings in ministries and the thrashing out of needs and wants as government and numerous industry associations meet to discuss demands to be included in the Union budget for 1998-99.

But there's a note of urgency being sounded this year. Especially because there's a fear that political parties, though generally agreed on the course if not the speed of economic liberalisation, shouldn't in the throes of survival politics be spooked into taking hasty decisions. And as a result spoil the brand equity, so to speak, that India is still able to build up at home and abroad. "The crisis in Thailand and the neighbouring countries showed India in a relatively good light," says Marti Subrahmanyam, Charles E. Merril professor of finance and economics at New York University. "It sent the signal to many international investors that they should not rush to countries that offer instant growth."

While that is welcome news in India's relatively staid, controlled environment, what numerous Indian and overseas analysts and business chiefs endorse is that India's only hope, now more than ever before, is to address key, bottom line issues that affect national productivity and growth. And alongside, not stop short and make flashy, ultimately pointless gestures like a blanket ban on foreign funds and businesses. "I can understand short-term reactions to developments in South-east Asia which, unfortunately, are beginning to impact on India," argues Leif Johansson, president and CEO of AB Volvo. "But any alternative to speedy liberalisation can, even in the medium term, be a grave mistake."

It would help if those aspiring to office were to listen now, rather than make the nation pay later. Indonesia may be a good example not to follow. So is Albania.

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