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Has PC missed out on BIG BANG REFORMS?

 

Has PC missed out on 

big bang reformS?

There were wide expectations on Finance Minister P Chidambaram (PC) presenting a populist budget as the current one was the last one of UPA II before the elections.

On the lines of state budgets (notably Tamil Nadu), it was expected that PC would be liberal in offering freebies and other sops eyeing on the votes these can garner. There is, therefore, a welcome surprise in the Finance Minister preferring prudence to populism demanded by an economy in distress.

The profligacy of his predecessor Pranab Mukherjee in resorting to massive step up of expenditure has landed the economy in a soup. With inflation raging, savings and investments falling steeply,  deficits ballooning and growth plummeting,  economic growth is estimated at 5 per cent, the lowest in years. The deterioration over the last couple of years has indeed been marked.

There is also the impact of the disastrous decline of growth on the global plane. India’s sovereign rating by international agencies has been falling. If further decline is not arrested, there is the danger of India being given a junk rating. Remember the IMF dictating the corrections when the economy bottomed out in 1991? Should India risk going the way of Portugal, Ireland, Greece and Spain(PIGS)?

The government’s approach is thus understandable. Since September last several corrections have been attempted. These included a drastic cut in expenditure.  The bold but unpopular measure of cutting out subsidies on LPG and diesel was initiated. There was a massive cut of Rs 91,838 crore of plan expenditure.  The budget has also attempted to raise additional tax revenue of Rs 18,000 crore.

NDTV’s Prannoy Roy referred to the opportunity missed in resorting to big bang reforms at times of severe economic crisis. Like those experienced in 1981 when India had to borrow heavily from the IMF; in 1991, when massive economic reforms were ushered; in 2001, when the NDA government launched the National Highway Development Programme. Since historically the worst phases in an economy had triggered massive reforms, Roy wondered whether the UPA II government lost an opportunity  in not attempting it now. But it should be remembered that on these past
occasions elections were not round the corner. In fact, both in the 1981 and more importantly, in 1991, the government was in the initial months of its life and could embark on reforms. With elections around and with the impact of reforms not quickly discernible, the hesitation of UPA II is understandable.

With the government not enjoying a comfortable lead in the two Houses and with political parties in Opposition not quite aligned to the need for large-scale reforms, it is difficult to risk too much.

Still, there is a lot that could be done by improving the efficiency of administration. One, take power sector. Soon after assuming power, the UPA I government announced the policy on ultra mega power projects of 4000 MW each. It is nine years since the policy was conceived.   This imaginative concept designed to create handsome capacity outside the plan target, had got stuck. The stipulation of the private power utility committing to supply power on fixed rate over a 20-year span was absurd. Excepting Tata Power, the other projects have remained non-starters. Three of these were awarded to the Anil Ambani owned power utilities, which won on  bids offering supplies  at less than Rs 2 per kWh over 20 years. With imported coal prices shooting up, with long delays in deciding on coal linkages and mining leases have contributed to poor progress. A brilliant concept of adding large capacity in 4-5 years has thus been stuck.

Two, the pricing of natural gas from the KG Basin. In 2009, the expectation of gas from KG Basin was over 150 mcmssm per day, much more than  the total production at that time. There was a prospect of this resource meeting a vast variety of needs of power utilities, fertiliser manufacturers, the transport sector and domestic consumers. The stipulation of supplies at $ 4.20 per BTU  led to a steep fall in anticipated production. Dozens of such schemes involving  massive investments (eg. POSCO Steel) have been stuck for years . The highly imaginative highway development programme has seen poor progress.

More than financial resources, the constraint relates to lack of governance. There is widespread understanding of this deficit. The UPA II government would do well to focus on this single factor, which promises to stimulate growth in quick time.

 

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