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REFORMS Time to Just Do it Nine years after India ushered in liberalisation, the economy continues to be dogged by an assortment of ailments. By V.Shankar Aiyar Winter in Delhi is time for grey suits and grey cells to converge and expound on a favourite subject: economic reforms. Last year, the capital saw 36 seminars in 20 days and the presence of Prime Minister Atal Bihari Vajpayee or Finance Minister Yashwant Sinha was de rigueur at most venues. Sinha though chose to give some of them a miss last year, including the hallowed CII-World Economic Forum meet. In his second innings, Sinha knows the importance of being "visible" but also realises that it is more important to be seen to act. He spent the fortnight before the Parliament session networking with MPs -- from within the NDA and the Congress -- to push through the Insurance Bill and achieve what his predecessors could not: walk the talk. It has been an auspicious beginning, though Sinha -- who has to play Draupadi to 25 parties -- has a long, perhaps lonely walk ahead. He has been convincing his recalcitrant cabinet colleagues that the tender shoots of economic recovery could well shrivel if the Government doesn't get its act together. Consider the facts: Last year, the Government on an average borrowed Rs 284 crore every day of the year. This year it will borrow Rs 287 crore a day, taking the deficit to Rs 1,04,955 crore. Last year, the Government paid Rs 77,248 crore in interest. This year it will pay Rs 88,000 crore, or 48.12 paise of every rupee it earns. This is not surprising, considering that India Inc's internal debt is Rs 9,34,429 crore (46.7 per cent of India's GDP) and external debt is $98,231 million (Rs 4,24,849 crore). Consequently, the Government can just about spend Rs 13,962.89 crore, or 4.91 per cent of total receipts and 0.69 per cent of the GDP on education, housing and healthcare. Much of this is a legacy Sinha has inherited. But the Government is living well beyond its means. Ashok Bhatia, associate director (Asia), Standard & Poor, says, "A fiscal deficit, including those of the states and PSUs, of about 10 per cent of the GDP is not sustainable, even with the higher GDP growth trend this decade." The Hobsonian choice before Sinha is to cut expenses, raise revenue, cut subsidies, downsize government, privatise psus, retire costly debt and reduce interest rates. Precisely what has been discussed for the past nine winters though precious little has come through. Bhatia says, "There is appreciation of what needs to be done. But implementation is lacking." Mahindra and Mahindra Managing Director Anand Mahindra adds, "We should move from halal to jhatka. Speed is the key." Speed though is not on the agenda. Not yet. Take disinvestment. PSUs account for the largest hole in the government's finances. Of the 240 PSUs only 134 show profits. The government earns a return of 1.6 per cent on an investment of Rs 2,23,047 crore. Clearly, the government needs to get out of business. Has that happened? Over the past five years, the Disinvestment Commission looked at 53 PSUs but most of its recommendations are still on paper. Why? "Because, the bureaucracy doesn't want it to happen and the politicians are not smart enough to get around them," says former chairman G.V. Ramakrishna with inimitable candour. Secondly, there is no clarity yet on disinvestment. Mark Mobius, president of Templeton Fund, remarks, "We have been disappointed with the privatisation process." There is confusion on both the aim of privatisation and the path to choose. Ispat International Chairman L.N. Mittal suggests the Mexican way. "They got liquidity by privatising their assets, improved performance, slashed government debt and interest costs," he says. V.R. Srinivasan, director, Imperial Finance adds, "Translate divestment into cash flows not accounting entries." Exactly -- it would appear -- what the government has indulged in thus far -- be it the cross holdings of oil PSUs or the proposed sale of NTPC and NHPC. Not surprisingly, since 1991-92 it has managed to raise just Rs 18,288 crore via disinvestment (including Rs 5,300 crore via cross holdings) or an average Rs 2,000 crore per year. It isn't as if there aren't opportunities. But that would require the use of a modern financial idiom (see box). Malaysia, for instance, has successfully raised $58 million in a part disinvestment of its airport. Can't India do the same for its international airports and upgrade them? Why does the Government need seven oil PSUs -- which translates into seven chairmen, seven managing directors and the rest of Parkinson's law? Why not sell some -- like IBP and BPCL -- and build the others to global class? "Or at least merge them, disinvest strategically and go public," advises Uday Kotak, vice-chairman, Kotak Mahindra Finance Ltd. There's more. Infosys commands a market capitalisation of over Rs 45,000 crore and is priced at $300-plus on Nasdaq. Yet despite the infotech boom the Government won't sell its stake in CMC and even withdrew it from the disinvestment list. The Government needs to take the sin out of disinvestment, divest its stake and transfer resources to the social sector. But it can't. The reason is simple: since 1991 reformers have found themselves hostage to the interests of the entrenched -- be it the 19.65 lakh PSU workers or 39.02 lakh government employees. The siege mentality rules the banking sector too. With inflation at 2.5 per cent interest rates should be much lower than the PLR of 12.5 per cent. But even the Government is borrowing at 11.75 per cent. Both RBI and the Finance Ministry have been debating how to correct this. Typically the debate is on the easier route: how to cut provident fund rates by 1 per cent. The bigger culprit -- an inefficient banking sector with transaction costs that account for 3 per cent of the interest rate -- is left untouched. To understand efficiency consider this: SBI has 8,925 branches, 2,39,649 employees, deposits of Rs 1,69,042 crore and net profit of Rs 872.55 crore. Profit per employee is Rs 36,409 while that of the private HDFC Bank is Rs 9.96 lakh. A senior RBI official blames the owners: namely, the Government. "A commercial entity is being treated as an arm of the government under Article 12 of the Constitution simply by an accident of ownership." The answer clearly lies in privatisation. Pradip Shah, chairman, IndAsia Fund, believes that "privatisation is not only feasible but is the only answer. Why do you need so many banks?" R. Sankaran, chairman, IndGlobal Finance, feels the banks could easily be converted into bancassurance outfits. "Allow the banks to be sold to the insurance firms. Who else can give the depth and reach that PSU banks have?" The money raised could be pumped back to strengthen banks. But for that we need an exit policy. ICICI CEO K.V. Kamath feels, "For reforms to work there has to be an exit policy." Mittal echoes that view: "Restructuring cannot be done without an exit policy. Without an exit policy you are back to square one after the fiscal corrections." But the "entrenched" would have none of it. So, the economy is stuck with high interest and low growth rates. "The crux of the problem," says a foreign banker "is in the perspective. The magnitude of the problem and the ratio of response are out of sync. For instance, when we need to disinvest and raise Rs 45,000 crore we are talking about driblets. Even in foreign direct investment when we should be talking about $20 billion we are discussing $2.5 billion." RBI Governor Bimal Jalan doesn't quite agree. "I do not agree that the problems are of a gargantuan nature." But Jalan does feel that the problems "are deep-seated leading to inefficiencies costing the country in terms of GDP and growth". That, perhaps, is the most polite way of saying that the economy is badly managed. The classic case of mismanagement is the power sector. Of the total installed capacity of 90,142 MW, nearly 23 per cent or over a fifth of the power generated is lost in transmission, distribution and worse, pilferage. Only three of the 17 SEBs deliver the prescribed rate of return of 3 per cent while subsidies to the domestic and agriculture sectors has risen from Rs 7,248 crore in 1991-92 to Rs 31,205 crore and losses have touched Rs 13,476 crore. It is not that reforms have not been suggested. But they have been from the wrong end of the problem. After the government opened up the power sector in 1991 for private and foreign investment, 196 MOUs were signed. Nine projects were categorised as fast track projects and only two -- Enron and GVK -- have taken off. Of the 99 guarantees issued by the government for the power sector, 98 were outstanding as on April 1999 involving an amount of Rs 10,159 crore. Obviously there has been a gap between intent and execution. And that gap has been the poor performance of the SEBs. Sanjay Bhatnagar, CEO, Enron, sees nothing wrong in subsidies. "Government is free to subsidise but it should pay the bill. Not the SEBs. As of now everybody seems to be consuming and virtually nobody is paying." The way out obviously is to privatise transmission and distribution so that the governments are prevented from doling out largesse. Deepak Parekh, chairman, IDFC, goes a step further: "Privatise distribution. The current policy leads to mortgaging of distribution revenue to private power producers. Soon there will be nothing much left to privatise." Of course, as Kamath says, "Privatisation is only part of the reforms. The Government has to address the other side of the fiscal too." Take direct taxes. India's total income or GDP is Rs 19,98,875 crore. Even at a base level of 10 per cent the total direct tax collections (corporate and personal) should be at least Rs 1,99,887 crore. Whereas even at 33 per cent the total direct tax collection in 1999 will be Rs 26,910 crore. The reason: there is no tax on the agriculture sector which accounts for 26.8 per cent of the economy. Secondly, there is little revenue garnered from the services sector which accounts for 51.2 per cent of the economy. Very simply, all those who earn are not paying their bit. Add to this lack of compliance. Conventional wisdom has it that lower taxes push up collections and there could be a case for further cuts. But Shah finds the idea very tame. "Instead focus on indirect taxes -- particularly excise -- which are regressive and affect the poor the most. We should slash excise and customs. This will make goods (and life) affordable, increasing the willingness on the part of taxpayers to pay." In fact, by keeping indirect taxes high the Government is simply perpetuating a kind of Ponzi scheme. Of the Rs 52,200 crore collected in 1997-98 as excise duty, Rs 15,779 crore came from the PSUs kept afloat by the Government's borrowings which impact taxes. The current level of oil pool deficit on account of kerosene is Rs 8,000 crore and that on LPG is Rs 4,000 crore. Half of this is the tax the Government imposes. If the Government were to bring down the taxes it could also slash subsidy levels. Adds Kamath: "Lower taxes will boost compliance and thus higher revenues." Earnings though would have to be accompanied by expenditure control. Like his predecessors, Sinha too has paid lip service to the need for downsizing the Government. In the last budget he announced the slashing of four secretary-level posts. What he didn't announce is that the size of the Central Government has gone up from 37.86 lakh to 39.45 lakh taking the salaries bill up from Rs 26,688 crore to Rs 32,722 crore. In fact, the strength of his own ministry has gone up from 2,27,678 to 2,29,360. A senior RBI economist points out the problem is "not with the numbers but what they (the employee strength) deliver. Governments, like all services, should deliver what they are instituted for." Sounds like a wish for Santa Claus but thanks to the web this could be a reality. Pramod Mittal, vice-chairman, Ispat India, believes the Government can "create wealth through technology" by using the web. "The web can connect people, create systems, improve response, make it paperless and make administration transparent, accountable and efficient. The focus should be to wire the nation and leapfrog to the level of developed nations." Andhra Pradesh Chief Minister N. Chandrababu Naidu has proved it can be politically correct too. For finally it all boils down to politics. Mukesh Ambani, vice-chairman, Reliance Industries, believes Vajpayee is uniquely poised to do the politically correct thing. "His popularity is at the highest, his stature is high. He has the opportunity to turn India into a global performer." RBI Deputy Governor Y.V. Reddy puts it in perspective. "Thus far we have only liberalised the implementation of controls. We need to replace the institutional framework that regulates growth with one that promotes growth." Rajeev Chandrashekar, chairman, BPL Telecom, adds, "There is a huge cache of investible capital available in the world. India can and should get a substantial portion of that instead of relying on driblets of fdi and disinvestment. We need to rebuild India Inc's balance sheet." After all, as Kamath puts it, "In the brave new world it is the ability to compete in a changing environment that creates winners. The pace of change will only accelerate." Here's hoping India Inc will catch up. Finally. |
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