The reforms experience
NIRMAL KUMAR CHANDRA
INDIA IN A GLOBALISING WORLD — Some Aspects of Macroeconomy, Agriculture and Poverty, Essays in Honour of C. H. Hanumantha Rao: R. Radhakrishna, S.K. Rao, S. Mahendra Dev and K. Subbarao — Editors; Academic Foundation, 4772-73/23 Bharat Ram Road (23, Ansari Road), Daryaganj, New Delhi-110002.
Rs. 995.
This volume, a befitting honour to C.H.Hanumantha Rao, contains 19 papers of high quality by eminent economists on the broad theme of economic reforms. The editors' introduction highlights the disturbing features of India's reforms, especially in agriculture, that have attracted public attention after the electorate rejected the previous Government's campaign slogan, `India shining'. The papers by V.M. Rao and by D.Narasimha Reddy reflect this concern.
In Rao's unconventional approach, the Indian elites supported the earlier anti-poverty schemes offering to the poor subsidised food and temporary work. But today's poor aspire for better education, health, and quality jobs, threatening elite dominance. Equally unfashionable is Rao's support for the pro-poor land reforms in West Bengal.
His belief that the rise of Laloo Prasad and Mayawati might shake the very foundations of our polity might seem far-fetched, but not after the recent turmoil over reservation. Reddy is broadly on the same wavelength, but his focus is on the small farmer facing discrimination in the market place for which the only remedy is state intervention.
Functioning of RBI
The opening essay by Y.V. Reddy (YVR) lucidly describes the changes in the functioning of the Reserve Bank of India (RBI) before and after 1991. He endorses the neoliberal thesis on `financial repression' till 1991, and wants a market-based system to replace government control over bank credit. Paradoxically, he does not want the RBI to imitate the central banks in the West; it must play the lead role in developing and supervising financial institutions and our credit policy must prioritise certain sectors like agriculture. Was the recorded suicide of 100,000 farmers in the last decade an eye-opener?
High interest rates after 1991 affected not only agriculture, but also industry. The impact was crippling for the Central and State Governments with a rising revenue deficit caused by interest payment on debts. However, `globalising' China consistently maintains low interest rates and direct credits. YVR avoids these questions.
Unlike the Finance Ministry, the RBI finds no need to promote a larger inflow of capital through the FIIs. Yet YVR finds the present dollar reserve ($150 billion) `comfortable'. Why should one not raise the comfort level by soliciting larger inflows? Probably, he is aware of the hidden cost. With the current market value of FII equity stock at $80 billion and a minimum 10 per cent rate of return, the profit outflow is likely to exceed the earnings from our dollar reserve.
Few are better qualified than C. Rangarajan to write on fiscal federalism. Unfortunately, he bypasses the central issue — convergence in per capita incomes across the states as ordained by our Constitution. With Australia and Canada as points of reference, the author ignores one basic difference. Within industrial countries there is unfettered movement of labour and capital, but in India (or China) such mobility is absent leading to much greater disparities in wages, returns to capital and per capita incomes. These gaps have widened over the past decades.
Indeed, resource-rich Assam, Jharkhand, Chhattisgarh and Orissa remain very poor, replicating the global pattern of neo-colonial exploitation.Though constrained by the brief from the Centre, the Finance Commissions could still recommend higher shares for states in central taxes, propose an equitable distribution of service taxes collected exclusively by the Centre, and so on.
Curiously, Rangarajan chooses to discuss the demand of several states that `better performance' on the fiscal front needs to be suitably rewarded. As a careful scholar, he is conscious that it emanated from the industrially more advanced states that are, by definition, `efficient'.
Our reformers promised to galvanise manufacturing industries through liberal imports and induction of FDI. N.S. Siddharthan, however, concludes from a literature survey that there is no clear evidence that FDI in India had a positive impact either on exports or the performance of local firms. He is not against FDI per se, but underlines the need for an `appropriate policy environment'.
Agriculture
For G.S. Bhalla, growth in agricultural output, especially labour productivity, is an antidote to poverty in rural India. His cross-section regressions spanning the 1990s are not convincing. In as many as six (Andhra Pradesh, Gujarat, Himachal Pradesh, Karnataka, Rajasthan and Tamil Nadu) out of 17 major states, labour productivity levels were lower than the average, but their poverty ratios declined faster. Indeed, the fruits of growth may sometimes `trickle down' as in the West during 1950-73; later, neoliberal governments took over, and the top percentiles cornered the growth dividend.
Will agricultural output fall if the controversial subsidies on fertilizers and power are slashed? A rise in fertilizer prices, Kanchan Chopra shows, will reduce the area fertilised marginally, belonging mainly to big farmers. If the subsidies saved finance new investment in irrigation for the small farmers, the overall impact would be positive.
By contrast, Y.K. Alagh attributes the recent deceleration in agriculture to an escalation in (material) input costs and the resulting profit squeeze. The link between rates of profit and output growth is tenuous in manufacturing, and a fortiori weaker in Indian agriculture since these inputs contribute a much smaller part of the output value. Moreover, one is yet to find a country where the aggregate crop output responds to price signals.
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