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February 20, 1999
The Rediff Business Interview/ Dr Isher Ahluwalia
'Special concessions are not necessary to lure foreign investors'
You said we should not seek to protect the economy from external shocks. Yet after the Asian crisis, there was a lot of back thumping among Indian officials who once again harped on the role of the state in managing the economy. Is there a fear of brakes being applied to the reform process?
I think some people would like to do this but it will be misguided. What the Asian crisis has shown is that you have to be much more careful about opening up your capital account, about portfolio investment. But there is nothing in the Asian crisis that says trade liberalisation has hurt the economies of these nations or even that after the crisis, any of these economies have gone back on trade liberalisation.
The Asian economies have realised that their mistake was opening up the capital market at a time when their financial sector was not liberalised or regulated sufficiently.
In this sense, we have to give credit to our government. There was a lot of pressure a few years ago to allow capital account convertibility at a rapid pace. But our government rightly stated that given the condition of our financial sector, which is far from reformed or regulated, it would not be appropriate.
But there is nothing in the Asian crisis or in the response to the crisis to show that trade liberalisation in goods and services has harmed these countries. In fact, Korea is on the verge of positive growth once more, and it has achieved this not by seeking protection but by restructuring the financial sector and allowing their industry to become more competitive.
What, in your opinion, are the measures most needed to boost economic growth?
I think the government needs not only to cut its fiscal deficit to give a signal that it is managing its house, but it also needs to protect the quality of the cut. This means that the government has to curb its wasteful expenditure, the government has to improve the buoyancy of tax revenues, the government has to earn from the public sector.
Where the public sector cannot be revived, it must be sold off to the private sector and use the funds partly to retire the debt and thereby curb the fiscal deficit, and partly to invest in the social sector such as education, health, poverty alleviation.
Former finance minister P Chidambaram recently said that the only way to alleviate poverty is to ensure higher growth. Now while in transition you may have poverty alleviation measures, but the fact is that they are a very costly way to help the poor. It has been calculated that today, for every rupee that reaches the poor through the public distribution system, the government spends five rupees! That is wasteful expenditure.
You spoke of the measures to be taken. Yet, do you expect much from the government, given its fractious nature?
Well, the government has taken some measures. I must say that this government needs to be applauded for taking the difficult task of cutting down on subsidies. This is where you and I have to strengthen the hands of the government towards rationality.
I agree these stresses are there. Even if you have a single party, there will be difficulties. Not every member thinks alike. Every member of Parliament thinks that if there is an increase in price, how will it affect his or her chances of re-election. One understands this.
But where this and the previous governments of India have been failing is in being honest with the people of India. You have to explain to the people that if you want lower prices, that is only possible by having lower costs of producing the goods, and if you want lower costs of producing goods, there are some decisions that are hard but which you have to take.
The difficulty is in wasteful expenditure. For instance, the Fifth Pay Commission had agreed to hiking salaries but had also said that one-third of the government employees can and should be laid off. And it recommended such a measure so that the overall burden on the government is negligible.
What happened was that the government chose to give a pay increase of more than what was recommended but completely chose to ignore the question of cutting the size of the government!
These are things that opinion-makers must highlight dispassionately to strengthen the hands of all parties when in government and also to make the parties in Opposition more responsible.
With all due respect to you and fellow economists, aren't you overestimating your influence on politicians?
I have been in this field since 1979, doing full-time research on Indian economy for the last 20 years.
I can tell you that the level and quality of debate, comparing 1979 to 1999, have changed for the better.
People's mindset has changed.
Today, there is a political awareness of what needs to be done by all political parties.
What is lacking today is the political will.
And in order to go from political awareness to political will, the task is really for people like us, to educate the people and force the politician to be honest in admitting to the people that these are the choices. That if five years down the line, people want more economic growth, more employment, lower inflation, then today one must be willing to pay a price.
Foreign investment is falling, along with domestic investment. What needs to be done to lure foreign investors?
I have always believed that you don't need any special concessions to lure foreign investors. If you were to make your policies that were more investor-friendly, you will get more foreign and domestic investment.
Let's face a fact: a lot of what is called foreign investment in China is actually recycled investment. That is, money that went out of China is being reinvested in China once again. We too have our counterparts of overseas Indians, and if they have confidence in what is going on here, in the name of foreign investment you will also see those funds coming, along with the real foreign investment.
But there is no need for a special package for that. You only need to open up the economy to the forces of competition, so that there is pressure to cut costs, to improve quality and in that process, you will get investors -- domestic and foreign.
One major criticism about investing in India is that there is no surety. Take the insurance sector: one day there is talk of opening up to foreigners, another day of not doing so. Surely all this sends the wrong signals across?
That is true. That has been the story of our life in India. A number of reports, written by official committees set up by the government of India, were released in between the years 1978 and 1980. There were reports on the subsidy regime, the licensing policy, the protection regime, on infrastructure, on almost everything under the sun. All these reports had said everything that we finally started to do in 1991, the year we began liberalisation. It took over 10 years to build what we call consensus, and even now there are debates going on.
During the same period of 1978 and 1991, China doubled its GDP! I always point this out to people. Certainly in a democracy one needs some consensus, but 12 years? And even after we started reforms, we still have this habit of two steps forward and one step backwards.
I think we need to bring these statistics to the notice of the people. And it is happening, thanks to the television revolution. Earlier on, the politician could fool some of the people some of the time and because there was no cross reporting, the politician could get away.
Today, the politician just cannot fool the people all the time. People are seeing the growth of countries like Indonesia and Malaysia. Of course, these countries are going through temporary problems, but given 20 years of 12 per cent growth, no one will mind problems of one or two years because one can always bounce back.
What major initiatives will be needed in the forthcoming Budget? What can we finally expect?
I would not like to speculate on what to expect because I also feel the need to demystify the Budget. It is only one element in a process that is going on. As I said earlier, since November there are some decisions that the government has taken which are very good. In the legislative agenda, the government has shown its intent to move the insurance bill. The government has also cut prices, and doing that at a time when inflation is low. It is most welcome.
I don't think the rollback on the subsidy cut for the poor was good. If you really want to help the poor of India, let us not forget that more than 50 per cent of the poor live in the north, whereas most of the PDS (public distribution system) food grains are sold in the south and West Bengal.
Then there was the free trade agreement with Sri Lanka, and there is now talk of a similar agreement with Bangladesh. This is a very good and desirable signal.
However, there are areas where much needs to be done. For example, the telecom sector where there is a stalemate between the government and the private operators over licensing fees. It really does not matter who is at fault, they should reach a conclusion and get on with it.
Another very wrong thing that the government is doing is this whole business of cross-holding. This is just backdoor financing of the fiscal deficit with a grand name. It is getting the public sector Indian Oil Corporation (India's only Forturne-500 company) to buy government shares in Oil and Natural Gas Commission and vice versa, and both pay the government for doing so.
What happens is that the government gets Rs 5 billion that only goes down the drain! This only allows the government more soft options, because now they have this money to finance the deficit that it should have actually cut.
At one time the government calls the public sector navratnas (nine jewels), at another time it not only takes away their autonomy but also their financial ability. It has also given future finance ministers a chance to find money to pay for unproductive schemes by taking them from the rich public sector units. This is a very negative measure that fools no one.
How optimistic are you about an economic turnaround?
To answer that question, I would have to put some probability on some decisions of the government. Whether we would have an economic turnaround depends on what kind of signals the government gives now. This government has taken some very positive measures and some very negative ones. So I would have to wait and see, and not just for the Budget but for other decisions also, like the export-import policy, the decision on telecom, etc.
I sincerely hope that the government moves in the direction of more pragmatism and more reforms. In which case, the turnaround could be six months from now. But if we don't do that, then god help us!
I don't think we need another election. This government really just needs to call the bluff of its allies and get its act together.
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