|
We have now had a decade and a
half of economic reforms. It is perhaps appropriate at this point to stand back
and take stock of what we have done as we venture further. Today I shall, therefore,
make an effort to (a) review what has been done; (b) evaluate where we are;
and (c) suggest where we need to go.
Let me give you the backdrop as
to what motivated me to choose this topic. I recently came across, The Tipping
Point: How Little Things Make a Big Difference, by Malcolm Gladwell. He
observes that many large changes sometimes happen in a hurry. Whereas there
is usually a step by step, gradual process of little changes taking place, an
epidemic suddenly acquires a tipping point and spreads suddenly. I believe that
at the present juncture we are in need of such an epidemic of change and growth;
we are perhaps at the tipping point. The macro-foundations of a healthy environment
have been laid and now we need lots of little things to make a big difference.
I. What Has Been Done
What has been the main objective
of the overall economic reform process in India, or for that matter, anywhere?
The primary objective has to be the overall acceleration of economic growth
along with rapid elimination of poverty. The means to achieve these objectives
would be the injection of competition in the economy in order to induce greater
efficiency and productivity gains; and dedicated efforts are needed to build
capacity through human resource development.
Let me begin with a broad brush
of history. Around 50 to 100 years before our independence in 1947, there was
hardly any discernible economic growth in the whole Indian sub-continent. Per
capita income was stagnant, perhaps declining over that whole long period. After
independence, annual per capita growth broke out of this long period of slumber
and was in the range of 1 to 1.5 per cent for about 30 years or so until around
1980. After 1980 it increased to about 3-4 per cent, which was a major departure
in our recorded history. Along with this change, a good deal of new thinking
also took place in terms of the strategy for future economic policy. As it happened,
there was a full blown economic crisis at the end of the 1980s: the balance
of payments came under severe pressure, and a realistic threat of sovereign
default loomed over us; fiscal deficits had increased significantly over the
1980s; and inflation began to creep up to the late teens. These unfortunate
developments focussed our minds like never before: India has a proud history
of never ever having defaulted on our international objections; our fiscal management
has historically been conservative; and inflation seldom exceeded 10 per cent.
Consequently, a whole reform process
got unleashed in 1991.
I will first give a brief run-down
of the various reforms that have taken place in the last 15 years before providing
some evidence of their effectiveness. For expository convenience I shall make
a conceptual difference between (a) macroeconomic reforms and (b) microeconomic
reforms.
Macroeconomic Reforms and Fiscal
Stabilisation
Over a period of time through the
1950s, 1960s, and 1970s the economy had become over controlled and rigid; consequently
entrepreneurship was heavily constrained. The import substituting inward looking
development strategy that could have been relevant in the 1950s and 1960s was
no longer suitable in the modern globalising world. Hence overall reform had
to be undertaken to lay down a new framework. Wide ranging macro reforms were
undertaken along with corresponding microeconomic and sectoral reforms. The
macro reforms can be divided into (a) fiscal policy, (b) monetary policy,
(c) trade policy, and (d) exchange rate management. Without any claim of exhaustiveness,
the exposition aims at setting the context.
Fiscal System
The tax system, both for direct
and indirect taxes, had become very complex in India. Maximum marginal personal
income tax rates were high, along with a number of rates for different income
ranges. The corporate tax rate was high too. Accordingly, the tax code had to
be riddled with a number of special provisions for exemption of different kinds
of income, and the corporate tax code was full of exceptions and incentives.
Because of high rates and complexity, avoidance and evasion was naturally high.
As a consequence, over the whole reform period, both the personal income tax
and corporate tax rates have gradually been brought down to 30 per cent, along
with considerable simplification.
Similarly, in the case of indirect
taxes, there were high levels of both domestic excise duties and customs tariffs,
with a myriad of rates for different commodities. Again, this necessitated a
whole range of specific provisions and exemptions for different kinds of producers
and end uses, leading to great administrative complexity. A major programme
of comprehensive and continuous reform has had to be undertaken over the last
15 years. The rates in case of customs duties have been brought down from an
average of 110 per cent in 1991 (with highs over 400 percent) to a non agricultural
peak of 12.5 per cent in 2006. There has been massive simplification of the
excise tax structure to achieve a "central" rate (CENVAT) of 16 per
cent (apart from a few exceptions like food products, textiles and some optical
fibres that attract lower tax rates). Excise, which is levied at the manufacturing
stage, is now essentially levied as a VAT (Value Added Tax) so that cascading
is avoided. In addition, the service tax has been introduced in order to tax
the whole economy more fairly and to reduce the excessive burden on one sector,
the manufacturing sector. Such tax reforms typically take a long time.
The latest most significant measure
taken is the introduction of the Fiscal Responsibility and Budget Management
Act (FRBM) in 2004, which enjoins the government to eliminate its revenue deficit
and reduce its fiscal deficit to 3 per cent of GDP by 2009. Similar acts have
been passed by most state governments (23 states so far). So fiscal responsibility
has now become part of our legislative commitments. The other most noteworthy
development at the federal level is the transformation of state level sales
taxes to the Value Added Tax (VAT), which has introduced a large measure of
rationality and uniformity in the state tax system. The state sales tax system
had also suffered from great complexity in terms of multiplicity of rates and
special provisions. A vital feature of this tax reform has been the consultative
process among all the states as mediated by the central government, which then
resulted in this consensus for massive reform.
Overall, the fiscal reform process
spanning both the central and state governments over the last 15 years has been
truly wide ranging.
Monetary Policy
Over the 1970s and 1980s, monetary
policy, as we know it, had become almost non-existent: with a system of credit
allocation, administered and different interest rates for different purposes;
automatic monetization of fiscal deficits; and financial repression through
pre-emption of banks’ resources.
Hence a number of measures had
to be taken. These include: elimination of automatic monetization, reduction
of statutory pre-emption of the lendable resource of banks, and interest rate
deregulation. As a result of these measures independence of monetary policy
and the central bank has been restored. There was a consequent movement from
direct to indirect instruments of monetary policy. These changes in the practice
of monetary policy are manifest in its effectiveness in the significant reduction
of inflation. In fact, if one bifurcates the period since independence into
two, one from the early 1950s to late 1990s, and the other since the late-1990s
to present day, then there is marked difference in the average inflation rates
between the two periods. While it was around 7-8 per cent during the first forty
five years, it has fallen to around five per cent in the recent period since
the late 1990s.
External Sector Reforms
It was the balance of payment crisis
in 1991 that was the key trigger for reforms. Consequently, actions on the external
sector have been of the greatest importance. Despite the existence of comprehensive
quantitative trade restrictions along with high levels of tariffs, the balance
of payments was under continuous pressure through the 1960s, 1970s and 1980s.
Consequently, exogenous shocks such as oil price rises, or monsoon failures,
invariably led to large crises necessitating recourse to IMF resources. With
the existence of these trade restrictions, the exchange rate was typically overvalued
over a long period of time. Hence, among the first reform moves was an ex ante
real devaluation of the exchange rate in 1991 and a move of the exchange rate
regime from that of a crawling peg towards a market determined one, though somewhat
managed.
The trade regime has undergone
massive change with the removal of quantitative restrictions along with rationalisation
of the tariff structure. There has been a massive reduction in the number of
tariff rates and the peak rate of tariff has been reduced from around 400 per
cent to 12.5 per cent for non-agriculture products. Tariff reform for agriculture
products has been constrained by the intransigence of developed countries in
reducing their farm subsidies. Internationally, India has always participated
actively in WTO negotiations. More recently, reflecting the hiccup in the achievement
of consensus for further global trade reforms, India has also began to participate
in a number of regional and bilateral trade agreements that are in the
making.
With the change in the exchange
rate regime and accomplishment of trade reforms the current account is now open
along with limited capital account convertibility. The exchange rate regime
focuses on management of volatility without a fixed rate target and the underlying
demand and supply conditions determine the exchange rate movements in an orderly
way.
Micro Economic Reforms
Let me now turn to the micro economic
reforms. Industrial deregulation, infrastructure reforms, financial sector strengthening,
capital market deepening and agriculture are the major areas where such reforms
have taken place.
Industrial Policy
Massive deregulation of the industrial
sector, in fact, constituted the first major package of reforms in July 1991.
The obsolete system of capacity licensing of industries was discontinued; the
existing legislative restrictions on the expansion of large companies were removed;
phased manufacturing programmes were terminated; and the reservation of many
basic industries for investment only by the public sector was removed. At the
same time restrictions that existed on the import of foreign technology were
withdrawn, and a new regime welcoming foreign direct investment, hitherto discouraged
with limits on foreign ownership, was introduced. With this massive reform introduced
in one stroke in 1991, the stage was set for a policy framework that encouraged
new entry, introduced new competition, both domestic and foreign, which thereby
induced the attainment of much greater efficiency in industry over a period
of time. One area of industrial reform that has been sluggish has been the removal
of restrictions that exist on investment in most labour using industries – known
as small scale industry reservations. In 1991 as many as 836 industries were
reserved for investment by only small firms, defined by the level of investment.
The number of these industries has now come down to 326.
Infrastructure
A number of measures have been
initiated in the development of infrastructure since 1996. Many of these reforms
emanated from the recommendations of the India Infrastructure Report
of the mid 1990s. We recognized that infrastructure investment had to be raised
and suggested introduction of the private sector in infrastructure which had
been restricted earlier. This was part of a world wide move during the 1990s.
This has also necessitated other wide ranging reforms including new legislations
and formation of regulatory authorities.
With deregulation, introduction
of the private sector and formation of the Telecom Regulatory Authority of India
(TRAI), telecom is indeed a success story. The major reforms in roadways were:
imposition of a fuel cess to finance highway construction; the commissioning
of the National Highway Development Project and PMGSY (Prime Minister's Gram
Sadak Yojana or the Rural Roads Programme). In case of ports private operators
have been introduced and then the Tariff Authority of Major Ports (TAMP) formed;
in civil aviation new private airlines, new private airports and the beginning
of an open skies policy are in evidence. In all these cases the response has
been positive.
In other infrastructure sectors,
the reform process experience has been mixed. In the power sector, where some
of the early efforts for reform were made in the early 1990s, problems continue
to constrain its expansion. A comprehensive modern electricity act has been
enacted, which has enabling features for encouraging private sector entry, enhanced
competition, and rational regulation. However, despite the formation of a central
regulatory authority and others at the state level, implementation of the tariff
reform has not been found to be easy. State Electricity Boards continue to suffer
from losses, arising both from inadequate tariff and from transmission and distribution
losses (comprising important part of theft). Consequently, private sector investors
in power generation face insecurity of payment and hence expansion of private
investment in this sector has been constrained. Although the Act allows for
private participation in distribution, practically it has not been found easy
to privatize distribution systems. Thus, power reforms have some way to go,
although the legislative and institutional pre-requisites are now in place.
Urban infrastructure is another
area where reform has been inadequate and thinking has just begun. In transportation,
considerable reforms have taken place in air and road transportation but railways
have some way to go. Although there has been noted improvement in financial
performance of railways in the last couple of years, there is need for much
greater structural reforms for this vital transportation system to be put in
a sound sustained growth path.
Financial Sector
Financial sector reform is another
area of India's success story. A major element of the financial sector reform
was the introduction of competition enhancing measures. Introduction of operational
autonomy and partial disinvestment of public ownership in public sector banks,
entry of new private and foreign banks and permission for FDI and portfolio
investment in banking are some the major reform measures in this area. Listing
of almost all public sector banks is another major reform in this regard. Besides,
prudential regulations have been strengthened in line with Basel I standards
and are now in process of being updated to Basel II standards. An effort has
been put in for phased implementation of international best practices such as,
CRAR, provisioning and income recognition norms, exposure limits and measures
to strengthen risk management.
The introduction of partial private
sector ownership in public sector banks and their consequent listing has been
extremely important for market orientation of these banks and transparency in
their accounts and operations. This gradual process of banking sector reforms
has contributed significantly to the all round improvement in the financial
health of the banking system.
Among other segments of the financial
sector, new private insurance companies have been introduced with limited foreign
ownership. Subsequent to insurance nationalization in the 1950s and 1960s, all
insurance was in the public sector, with just one life insurance company and
four general insurance companies. The introduction of new competition has led
to the introduction of new products and new practices. A new regulator, the
Insurance Regulation and Development Authority (IRDA) has been formed to govern
the insurance industry.
The capital market has been revived
with both policy reforms and financial infrastructure development. The Securities
and Exchange Board of India was formed as the capital market regulator; a new
modern technology oriented stock exchange was formed (the National Stock Exchange,
NSE); private sector mutual funds allowed and encouraged; along with the abolition
of the Controller of Capital Issues (CCI) who controlled both issuance of securities
and administered their price. A particular development has been the building
of world class payment and settlement architecture in the stock market and government
securities market. The one area that still needs considerable attention and
development is the corporate bond market.
Agriculture
Agriculture is the key significant
area that has not been subject to comprehensive reforms. It is not widely understood,
though, that the reduction of industrial tariffs improved the domestic terms
of trade significantly for agriculture. In terms of trade reforms in agriculture,
these have been constrained by the lack of progress in the WTO and the intransigence
of developed countries in the reduction of their farm subsidies. There have,
however, been a number of significant reforms: removal of restraints on inter
state movement of foodgrains; the restructuring of the public distribution system
(PDS); relaxation of restrictions under the Essential Commodities Act; introduction
of forward trading in most agricultural commodities; and removal of some marketing
restrictions on crop produce. There is no doubt, however, that agricultural
development needs much more focused attention in order to revive the somewhat
stagnating agricultural economy.
Having given a bird's eye view
of the reforms measures let me now turn to the outcome of this whole wide ranging
reform process.
II. Where are We?
There is a need to remember where
India was at the time of its independence. Power capacity was just 1.1 per cent
of what it is now. The country was literally in darkness! With high mortality
rates, the average Indian died at age 32. More than half of the country was
under the poverty line. The income of an average household is now nearly Rs.130,000.
Poverty was down to 23-26 per cent in 1999-2000. Per capita growth has gone
up from about 1.5 per cent per year in the first 30 years after independence
to about 6.4 per cent per year now. This makes a palpable difference in peoples'
standard of living (Tables 1, 2 and 3).
Table 1: Select Indicators of India's
Progress
|
Year
|
Per Capita
Income
(at 1993-94
prices) (Rs)
|
Poverty
(Per cent)
|
Literacy
(Per cent)
|
Life Expectancy
(Years)
|
Power
Capacity
(MW)
|
|
1951
|
3,687
|
45
|
18
|
32
|
1,362
|
|
1961
|
4,429
|
45
|
28
|
41
|
4,653
|
|
1971
|
5,002
|
52
|
34
|
46
|
14,709
|
|
1981
|
5,352
|
43
|
44
|
50
|
30,214
|
|
1991
|
7,321
|
35
|
52
|
59
|
64,000
|
|
2001
|
10,308
|
26
|
65
|
65
|
102,000
|
|
2005
|
12,414
|
19.3*
|
..
|
..
|
118,419
|
|
* Projection for 2007
|
Table 2: Indian Growth Experience
|
Sector
|
Agriculture
|
Industry
|
Services
|
GDP
|
Per
Capita
National
Income
|
|
1951-52 to 1960-61
|
3.1
|
6.1
|
4.6
|
3.9
|
1.9
|
|
1961-62 to 1970-71
|
2.5
|
5.4
|
4.9
|
3.7
|
1.3
|
|
1971-72 to 1980-81
|
1.8
|
4.4
|
4.2
|
3.2
|
0.8
|
|
1981-82 to 1990-91
|
3.1
|
7.6
|
6.7
|
5.6
|
3.2
|
|
Crisis Year: 1991-92
|
-1.5
|
-1.2
|
4.5
|
1.3
|
-1.5
|
|
1992-93 to 2001-02*
|
3.4
|
6.1
|
7.7
|
6.1
|
4.1
|
|
2002-03 to 2005-06*
|
1.9
|
8.3
|
8.7
|
7.0
|
5.6
|
* Data up to 1999-2000 are at the
base year 1993-94 and data from 2000-01onwards are at the base year 1999-2000
Source: Central Statistical Organisation
Table 3: Percentage of People below
Poverty Line
|
|
1987-88
|
1993-94
|
1999-2000
|
Projection
for 2007
|
|
Rural
|
39.1
|
37.3
|
27.1
|
21.1
|
|
Urban
|
38.2
|
32.4
|
23.6
|
15.1
|
Source: Economic Survey 2002-03
Having outlined the major elements
of India's achievement since independence let me briefly review the broad trends
in various macro-policy variables.
The step-up in the growth rate
of the economy has been facilitated by increase in domestic investment to over
30 per cent of GDP, financed predominantly by domestic savings. Domestic savings
increased to over 29 per cent of GDP by 2004-05 after some stagnation in the
second half of the 1990s. The improvement in overall savings in recent years
has particularly benefited from the turnaround in public sector savings. After
turning negative between 1998-99 and 2002-03 owing to sharp deterioration in
the savings of Government administration, public sector savings have turned
positive again from 2003-04 onwards, mainly reflecting the ongoing fiscal consolidation.
In 2004-05, the public sector savings rate was 2.2 per cent, but it was still
less than a half of the peak of almost five per cent touched in 1976-77. Improvement
in corporate profitability since 2002-03 has also contributed to increase in
domestic savings in the recent years. Household savings remain the predominant
component of domestic savings, contributing almost three-fourths of overall
domestic savings in 2004-05. For the Indian economy to achieve higher growth
on a sustained basis, further improvement in overall savings is necessary and,
in this context, public sector savings will have to play a significant role
(Table 4).
Table 4: Aggregate and Public Sector
Savings and Investment
|
Year
|
Aggregate
|
|
Public Sector
|
|
Savings
|
Investment
|
Savings
|
Investment
|
|
1980-81
|
18.9
|
20.3
|
|
3.4
|
8.4
|
|
1981-82
|
18.6
|
20.1
|
|
4.5
|
10.1
|
|
1982-83
|
18.3
|
19.6
|
|
4.3
|
10.7
|
|
1983-84
|
17.6
|
18.7
|
|
3.3
|
9.7
|
|
1984-85
|
18.8
|
20.1
|
|
2.8
|
10.4
|
|
1985-86
|
19.5
|
21.7
|
|
3.2
|
10.8
|
|
1986-87
|
18.9
|
21.0
|
|
2.7
|
11.2
|
|
1987-88
|
20.6
|
22.5
|
|
2.2
|
9.5
|
|
1988-89
|
20.9
|
23.8
|
|
2.1
|
9.5
|
|
1989-90
|
22.0
|
24.5
|
|
1.7
|
9.5
|
|
1990-91
|
23.1
|
26.3
|
|
1.1
|
9.3
|
|
1991-92
|
22.0
|
22.6
|
|
2.0
|
8.8
|
|
1992-93
|
21.8
|
23.6
|
|
1.6
|
8.6
|
|
1993-94
|
22.5
|
23.1
|
|
0.6
|
8.2
|
|
1994-95
|
24.8
|
26.0
|
|
1.7
|
8.7
|
|
1995-96
|
25.1
|
26.9
|
|
2.0
|
7.7
|
|
1996-97
|
23.2
|
24.5
|
|
1.7
|
7.0
|
|
1997-98
|
23.1
|
24.6
|
|
1.3
|
6.6
|
|
1998-99
|
21.5
|
22.6
|
|
-1.0
|
6.6
|
|
1999-00
|
24.9
|
26.0
|
|
-0.9
|
7.5
|
|
2000-01
|
23.5
|
24.2
|
|
-1.8
|
6.9
|
|
2001-02
|
23.6
|
23.0
|
|
-2.0
|
6.9
|
|
2002-03
|
26.5
|
25.3
|
|
-0.7
|
6.2
|
|
2003-04
|
28.9
|
27.2
|
|
1.0
|
6.5
|
|
2004-05
|
29.1
|
30.1
|
|
2.2
|
7.2
|
Source: National Accounts Statistics,
Central Statistical Organisation
Fiscal performance has still some
way to go. The gross fiscal deficit has come down from 7 per cent in 1993-94
to 4.1 per cent in 2005-06. However, this needs to go to 3 per cent by 2009.
Tax Revenue has just recovered to 10 per cent of GDP, about the 1991-92
level, and needs much greater growth (Table 5). Inflation is down from the 45
year average of 7 - 8 per cent to 4.5 - 5.0 per cent. So we have achieved some
major macro and monetary improvements. However, growth needs investment and
savings. Although the growth process stuttered somewhat in the late 1990s and
early part of this decade, it has clearly recovered now and we seem to be on
a sustainable path of annual GDP growth in excess of 8 per cent. After the award
of the Pay Commission in 1997, public finances had come under strain and hence
public savings had become negative. This was also accompanied by a business
cycle slowdown and low profitability in the private corporate sector and low
corporate savings. Both recoveries have now taken place: public sector savings
are now again positive; and corporate profitability is also very healthy. With
continuing growth in household savings, gross domestic savings are now 30 per
cent plus and hence sustained investment rates in excess of 32 per cent are
feasible. The sustenance of a higher growth now needs improvement in public
investment and delivery of public services.
Table 5: Select Fiscal Indicators
of the Central Government
|
|
Gross
Fiscal
Deficit
|
Revenue
Deficit
|
Direct
Taxes
|
Indirect
Taxes
|
Gross
Tax
|
Interest
payments
|
Subsidies
|
|
1991-92
|
5.6
|
2.5
|
2.3
|
8.0
|
10.3
|
4.1
|
1.9
|
|
1992-93
|
5.4
|
2.5
|
2.4
|
7.5
|
10.0
|
4.2
|
1.4
|
|
1993-94
|
7.0
|
3.8
|
2.4
|
6.5
|
8.8
|
4.3
|
1.4
|
|
1994-95
|
5.7
|
3.1
|
2.7
|
6.5
|
9.1
|
4.4
|
1.2
|
|
1995-96
|
5.1
|
2.5
|
2.8
|
6.5
|
9.4
|
4.2
|
1.1
|
|
1996-97
|
4.9
|
2.4
|
2.8
|
6.6
|
9.4
|
4.3
|
1.1
|
|
1997-98
|
5.8
|
3.1
|
3.2
|
6.0
|
9.1
|
4.3
|
1.2
|
|
1998-99
|
6.5
|
3.8
|
2.7
|
5.6
|
8.3
|
4.5
|
1.4
|
|
1999-00
|
5.3
|
3.5
|
3.0
|
5.8
|
8.8
|
4.6
|
1.3
|
|
2000-01
|
5.6
|
4.0
|
3.2
|
5.7
|
8.9
|
4.7
|
1.3
|
|
2001-02
|
6.2
|
4.4
|
3.0
|
5.2
|
8.2
|
4.7
|
1.4
|
|
2002-03
|
5.9
|
4.4
|
3.4
|
5.4
|
8.8
|
4.8
|
1.8
|
|
2003-04
|
4.5
|
3.6
|
3.8
|
5.4
|
9.2
|
4.5
|
1.6
|
|
2004-05
|
4.0
|
2.5
|
4.3
|
5.5
|
9.8
|
4.1
|
1.4
|
|
2005-06
|
4.1
|
2.7
|
4.7
|
5.7
|
10.4
|
3.7
|
1.4
|
|
2006-07 (BE)
|
3.8
|
2.1
|
5.3
|
5.9
|
11.2
|
3.5
|
1.2
|
BE: Budget Estimate
Financial sector reforms in general
and banking reforms in particular have been a key ingredient of the Indian reforms
process. As a result of these reforms, statutory pre-emptions of banks (in the
form of high cash reserve and statutory liquidity ratio) got reduced to a great
extent - so was the extent of financial repression. Interestingly the asset
quality of the Indian banks has improved to a great extent with a distinct improvement
in capital-to-risk adjusted assets ratio (CRAR) of banks which is much above
the stipulated level (9 per cent), and drastic reduction in NPA levels, notwithstanding
the transition to 90-day delinquency norm in 2004 (Table 6). The initial recapitalization
by government in the public sector banks has been rather meagre (about 1 per
cent of GDP) which was supported by equity issuance by the public sector banks.
With public listing the public sector banks in India are now more subject to
market discipline. Furthermore, there has been a distinct improvement in post-reform
productivity as reflected in various indicators such as, business per employee,
profit per employee and branch productivity. These productivity gains can be
attributed to both technological improvement as well as peer pressure or catching
up effect.
Table 6: Indicators of Indian Banking
Reforms
|
|
Quality of
Assets
|
|
Extent of Competition
(Percentage share in Total Bank Assets)
|
|
Gross
NPL
/ Assets
|
Net
NPL
/ Assets
|
|
Foreign
Banks
|
Private
Sector
Banks
|
Public
Sector
Banks
|
|
1996-97
|
7.0
|
3.3
|
|
7.9
|
7.7
|
84.4
|
|
2000-01
|
4.9
|
2.5
|
|
7.9
|
12.6
|
79.5
|
|
2002-03
|
4.0
|
1.8
|
|
6.9
|
17.5
|
75.7
|
|
2003-04
|
3.3
|
1.2
|
|
6.9
|
18.6
|
74.5
|
|
2004-05
|
2.5
|
0.9
|
|
6.5
|
18.2
|
75.3
|
|
2005-06
|
1.9
|
0.7
|
|
7.2
|
20.4
|
72.3
|
Source: Reserve Bank of India
Let me briefly touch on the external
sector now. The measures taken in respect of the external sector have clearly
been very successful. Merchandise exports have increased from 6 to 13 per cent
of GDP between 1990-91 and 2005-06; imports have also increased from 10 to 24
per cent of GDP over the same period; foreign exchange reserves increased from
$ 1.5 billion to $ 165 billion.
Industrial growth was very high
during the 1992-97 period in the immediate exuberance of industrial policy reforms.
However, there was a significant slowdown during 1997-2002. As tariffs were
reduced, import controls were lifted, and domestic competitive threats emerged
at the same time, the initial protective effects of the ex ante real
devaluation of 1991 wore off and the Indian corporate sector, particularly in
manufacturing, found itself in difficulty. The Indian corporate sector was therefore
in the throes of significant technical restructuring, business process restructuring
and financial restructuring, all at the same time. It can be said in retrospect
that, though this process resulted in an industrial slowdown then, it has contributed
to the industrial competitive resurgence that is now observed. There is a revival
of manufacturing. A competitive company can be found in almost every sector
industrial sector now. As indicators of this competitiveness, exports are growing
more than 20 per cent; and the balance of payments with reference to China is
almost even (Table 7).
Table 7: Some Indicators of India's
Openness
|
|
Export of
Goods
|
Import of
Goods
|
Exports of
Services
|
Import of
Services
|
Receipts of
Transfers
& Incomes
|
Payments of
Transfers
& Incomes
|
Current
Receipts
|
Current
Payments
|
Current
Account
Balance
|
|
1990-91
|
5.8
|
8.8
|
1.4
|
1.1
|
0.9
|
1.3
|
8.2
|
11.2
|
-3.1
|
|
1991-92
|
6.9
|
7.9
|
1.9
|
1.4
|
1.7
|
1.5
|
10.5
|
10.8
|
-0.3
|
|
1992-93
|
7.3
|
9.6
|
1.8
|
1.5
|
1.8
|
1.5
|
10.9
|
12.6
|
-1.7
|
|
1993-94
|
8.3
|
9.8
|
1.9
|
1.7
|
2.2
|
1.3
|
12.4
|
12.8
|
-0.4
|
|
1994-95
|
8.3
|
11.1
|
1.9
|
1.7
|
2.9
|
1.3
|
13.1
|
14.2
|
-1.0
|
|
1995-96
|
9.1
|
12.3
|
2.1
|
2.1
|
2.9
|
1.3
|
14.1
|
15.8
|
-1.7
|
|
1996-97
|
8.9
|
12.7
|
1.9
|
1.8
|
3.6
|
1.2
|
14.4
|
15.6
|
-1.2
|
|
1997-98
|
8.7
|
12.5
|
2.3
|
2.0
|
3.4
|
1.3
|
14.4
|
15.8
|
-1.4
|
|
1998-99
|
8.3
|
11.5
|
3.2
|
2.7
|
3.0
|
1.3
|
14.5
|
15.5
|
-1.0
|
|
1999-00
|
8.3
|
12.3
|
3.5
|
2.6
|
3.2
|
1.2
|
15.0
|
16.1
|
-1.0
|
|
2000-01
|
9.9
|
12.6
|
3.5
|
3.2
|
3.5
|
1.7
|
16.9
|
17.4
|
-0.6
|
|
2001-02
|
9.4
|
11.8
|
3.6
|
2.9
|
4.1
|
1.7
|
17.0
|
16.3
|
0.7
|
|
2002-03
|
10.6
|
12.7
|
4.1
|
3.4
|
4.2
|
1.5
|
18.9
|
17.6
|
1.3
|
|
2003-04
|
11.0
|
13.3
|
4.5
|
2.8
|
4.4
|
1.5
|
19.9
|
17.6
|
2.3
|
|
2004-05
|
12.2
|
17.1
|
6.2
|
4.0
|
3.8
|
1.5
|
22.2
|
22.6
|
-0.4
|
|
2005-06
|
13.1
|
19.6
|
7.6
|
4.8
|
3.9
|
1.5
|
24.6
|
26.0
|
-1.3
|
Source: Reserve Bank of India
The performance of the Indian corporate
sector has been highly encouraging in the last three years. The previous occasion,
when such a healthy performance was demonstrated by the corporate
sector was in the early 1990s,
i.e., during the initial period of exuberance immediately after the economic
reforms programme was initiated in India. But during the latter part of the
1990s, around 1997, the momentum in the corporate sector slowed down in sync
with the general economic slowdown. The recovery since then is remarkable in
all important parameters: sales, gross profit, profit after tax, all have recorded
robust growth rates during 2002-03, 2003-04 and 2004-05 implying that economic
activity in the corporate sector has taken a full circle after three years of
dull performance during 1999-2000, 2000-01 and 2001-02 (Table 8).
The current exuberant run of corporate
sector performance has continued well into its fourth year as evidenced by the
corporate sector results for the first quarter of 2006-07. The strong sales
performance has resulted in an improved bottom-line for the corporate sector
as a whole. Powered by a strong top-line performance, gross profits of the Indian
corporate sector grew at a sturdy rate of 34 per cent in the quarter ending
in June 2006 on top of a 20 per cent growth recorded in the full fiscal year
of 2005-06. The interest costs have been plummeting in the recent years due
to an overall softening of interest rates and lower debt equity ratios, which
is an outcome of conscious policy-driven measures.
Table 8: Select Indicators of Corporate
Performance
|
|
Sales
Growth
(Year-on-Year)
|
PAT
Growth
(Year-on-Year)
|
Working
Capital
/ Sales
|
Debt
/ Sales
|
|
1995-95
|
29.9
|
55.4
|
52.2
|
50.8
|
|
1995-96
|
19.4
|
22.7
|
53.2
|
47.7
|
|
1996-97
|
19.3
|
-0.5
|
54.8
|
47.8
|
|
1997-98
|
6.1
|
13.5
|
51.9
|
49.6
|
|
1998-99
|
13.8
|
-2.8
|
50.0
|
43.8
|
|
1999-2000
|
21.6
|
9.2
|
47.6
|
37.8
|
|
2000-01
|
22.9
|
23.6
|
42.2
|
31.8
|
|
2001-02
|
3.7
|
0.2
|
41.1
|
31.3
|
|
2002-03
|
16.2
|
51.8
|
43.2
|
27.1
|
|
2003-04
|
13.0
|
30.7
|
39.5
|
25.0
|
|
2004-05
|
18.5
|
28.4
|
24.7
|
52.6
|
Source: Prowess, Centre for Monitoring
Indian Economy.
There is in fact a new confidence
in the air. Let me give some random illustrations - TISCO is the lowest cost
steel producer, Hindalco / Sterlite / NALCO are competitive aluminum producer,
Reliance is a major petrochemical producer. We now have world class producers
in most sectors and there are many more success stories. Moser Baer exports
more than Rs.1000 crore; Hero Honda with 1.7 million motor cycles is the largest
producer of motor cycles; one now gets a wide range of automobiles in India
such as Maruti, Tata, Hyundai, Toyota, GM, Ford; in Pharma there are Ranbaxy
and Dr Reddy’s among others; Bharat Forge exports castings and forgings to all
main auto producers; Sundaram Clayton has been adjudged as Best GM supplier.
Let me sum up the broad contours
of success of the overall economic reform programme. In general, the reform
programme has achieved remarkable success. Annual GDP growth has averaged 6
to 6.5 per cent during the whole 15 year period since reforms began, and is
now ascending to a higher trajectory of 8 per cent plus sustained growth. The
external sector is comfortable: gone are the days of perpetual "shortage"
of foreign exchange. In contrast, some observers view India’s foreign exchange
as reserves as a problem of plenty. Industrial growth has been restored and
the manufacturing sector has found a new level of competitiveness, quality and
efficiency. There is a transformation in the external impression of the Indian
economy: it is now viewed with a sense of some awe and confidence in its potential
of sustainable high growth. Finally, measured poverty has been reduced significantly.
But we still have miles to go.
The poverty ratio of 23-26 per cent is still too high, about a quarter billion
people living in poverty are too many. Employment growth is inadequate and we
have an expanding young labour force, which will demand quality jobs. Public
service delivery continues to be poor, with little sign of improvement.
Let me now turn to a menu of things
that we need to do.
III. Where Do We Go?
We have now had 15 years of
economic reforms spanning five governments. What have these reforms achieved?
We have ascended a higher growth path; poverty has been reduced; the external
sector is more than comfortable; industrial growth has been restored; and all
this has been achieved with financial stability in the country. As a consequence
of all these momentous changes there is a new respect for India in the world
and, even more important, Indians in all walks of life have found a new level
of self confidence.
But we still have miles to
go. We need to move to the next level of sustained growth so that per capita
income growth can exceed seven per cent per annum (or over 8.5 per cent per
GDP growth per annum on a sustained basis) and thereby see at least a doubling
every decade. Although poverty has been reduced considerably to less than 25
per cent, this level is still too high with 250 million living under the defined
poverty line, which itself is at a very low level.
The main organizing principle
of most reforms carried out so far has been that of freeing the private sector
from the myriad government controls that had existed for a long time. Whereas
this process itself still has some distance to go, the consequence of this widespread
deregulation and introduction of competition in most segments of the economic
sphere has been the very visible unleashing of entrepreneurial energies at all
levels and in most parts of the country. We have been reasonably successful
in what we set out to do so far, with the benefits of increased competition
and efficiency manifesting themselves in the higher recorded growth, particularly
in the present decade.
The issue that arises now is
whether we have reached the limit of private sector led acceleration in investment
and output growth? Will this now be increasingly constrained by the lack of
public investment, both physical and social? An underlying theme encompassing
most constraints now is the lack of adequate delivery of public services in
both quality and quantity. The public service system is simply not functioning.
Further acceleration in economic
growth and reduction of poverty will need greater investment and employment
growth along with enhancement of productivity. For such acceleration to take
place we will need a significant enhancement of growth in capacity building
and in the availability of public services that the private sector cannot provide.
I, therefore, believe that just
as the first generation of reforms empowered the private sector to perform as
it can to the limits of its abilities, the second generation of economic reforms
must focus on a similar empowerment of the public sector to deliver public goods
and services for the benefit of all segments of the private sector, corporate
entities and the public alike. Lest this proposition be misunderstood, it should
be made clear that I am not advocating greater empowerment of the public sector
to increase its control over the economy as was the case in the past. The "public
sector" needs to be seen in its widest definition to encompass all levels
of governments from the local, state to national, and their entities, which
deliver public goods and services.
I would like to take up four areas,
by way of illustration, where we need to give focused attention and which I
believe can mainly be done by the public sector, even if some of it is to be
delivered through public private partnership.
The four areas that I propose to
address are: agricultural development, urban development, human resource development,
management of public services.
What is commo0n among these sectors
is the lack of competence in public systems that govern these areas. There are
other areas of broader governance that could also be taken up, particularly
the maintenance of law and order, but that would take me too far a field from
my area of competence related to the economy.
Agriculture
One of the most disturbing
features of the recent growth experience has been that of the deceleration in
agriculture growth (Table 9).
Table 9: Growth in Agricultural
Production and Value Added
|
Period
|
GDP in
Agriculture
|
GDP in
Agriculture and
Allied Activities
|
Index of
Agriculture
Production
|
|
1950s
|
3.0
|
2.7
|
3.7
|
|
1950s
|
2.5
|
2.5
|
2.9
|
|
1970s
|
1.4
|
1.3
|
1.4
|
|
1980s
|
4.7
|
4.4
|
5.2
|
|
1990s
|
3.1
|
3.0
|
2.3
|
|
2000s
|
2.0 @
|
2.3 $
|
-1.6 #
|
|
@:For 2000-01 to 2004-05 as per the new series
(Base: 1999-2000=100).
$: For 2000-01 to 2005-06.
#: Index of Agriculture Production (Base: Triennium Ending 1981-82=100)
covers the period
2000-01 to 2004-05.
Source: 1) National Accounts Statistics.
2) Ministry of Agriculture, Government of India.
|
With about 60 per cent of the population
still largely dependent on agriculture, this deceleration has clearly had a
significant impact on slower reduction in poverty levels than otherwise would
have been the case. Moreover, for aggregate annual GDP growth to exceed 8.5
per cent on a sustainable basis it will be difficult if agricultural growth
itself does not exceed 4 per cent annual growth. The fast growing economies
of East and South-East Asia all exhibited elevated levels of agriculture growth
along with industrial and service sector growth during their fast growth periods.
Higher agriculture growth will also lead to faster increases in rural household
incomes giving rise to greater demand for goods and services in rural and urban
areas alike, which would be employment promoting.
In order to understand where
the potential for higher agriculture growth may lie, it is useful to briefly
examine the pattern of growth in both the demand for and supply of agricultural
commodities.
Let us take the supply side first.
After the prolonged drought of the mid 1960s, and the severe difficulties experienced
in food security during that period, the government launched a crash emergency
programme to accelerate the production of basic foodgrain cereals. This was
fortunately accompanied by the discovery of high yield rice and wheat varieties
internationally, which made the green revolution possible. Thus, growth in rice
and wheat production took place in a sustained fashion through both significant
productivity gains and through expansion in the area devoted to cereal production.
The successful evolution of the Green Revolution gave the country both agriculture
growth and food security over a period of more than two and a half decades.
In recent years, however, production growth in cereals has stagnated significantly,
and further productivity gains are increasingly difficult to achieve.
Equally significant change can
be observed on the demand side. As may be expected, with increasing incomes,
there has been a progressive diversification of the Indian diet in both rural
and urban areas involving a shift away from cereals to non-cereals. For the
poorest, of course, the initial increase in incomes leads to enhanced demand
for food and a shift from lower quality cereals to higher quality cereals like
wheat and rice. As incomes increase further, greater growth takes place in the
demand for non-cereal foods such as milk, fruits and vegetables, and for fish,
poultry and meat for those who are not vegetarians. Consequently, it needs to
be understood that, whereas there may be technological limitations to the continued
growth of cereal production from the supply side, there are also limitations
to the continued growth of cereals from the demand side. Admittedly, the shift
to demand for certain kinds of meat will lead to acceleration in the demand
for certain kinds of feed stocks for animal production. Nonetheless, the key
point for policy is that the acceleration in agriculture production cannot come
from that of cereals, keeping both demand and supply constraints in mind. That
being said it still needs to be emphasized that the serious stagnation in cereals
production that has taken place in the last ten years or so needs to be addressed
with urgency.
What then needs to be done? We
can learn from the approach taken more than thirty years ago, which still dominates
our policy thinking. The success of the green revolution was achieved by the
adoption of a coordinated policy package that addressed the needs of production
on a national scale. Simultaneous provision was made for the supply of needed
technology inputs, infrastructure, input supplies and the delivery of credit
in a timely fashion. Technology inputs were provided by the setting up of a
chain of agricultural universities across the country, which, moreover, were
also connected with the international agricultural research system and foreign
counterpart agricultural universities, particularly the land grant colleges
and universities of the United States. For the transfer of technology from the
laboratory to the farm, agricultural extension systems were organized, first
under the Intensive Agriculture Districts Programme (IADP) and later the Intensive
Agriculture Area Programme (IAAP). For a considerable period of time both the
research and extension systems proved to be quite effective, but deteriorated
later. Infrastructure provision was essentially needed for the expansion of
irrigation from ground water sources, which required the greater availability
of electric power to energize pump sets. Consequently a large rural electrification
programme was initiated along with the provision of power for agriculture at
subsidized rates. The main new inputs needed were seeds, fertilizers, pump-sets,
and tractors. Apart from the arrangement of supply of these inputs, corresponding
arrangements were made for appropriate credit delivery to farmers to enable
them to buy these inputs. The nationalization of banks, the creation of regional
rural banks, and the creation of National Bank for Agriculture and Rural Development
(NABARD) to govern the rural cooperative banks were all directed towards this
massive change in the delivery of credit to fuel the green revolution. Most
of these activities were done on a national basis with appropriate coordination
with state governments and other public sector agencies. Given the highest priority
that was attached to this programme, it delivered.
Need for a Second Green Revolution
The need now is for a corresponding
second agricultural revolution, but one that will have to be much more heterogeneous.
With the increasing diversification of the Indian diet, there is great potential
for acceleration of growth in the production of all non cereal foods,
though in varying degrees. There is need for a new agricultural revolution in
all areas such as: dairying, horticulture (covering both fruits and vegetables),
aquaculture and pisci-culture, poultry, meat, and even wineries. There is also
similar potential for acceleration in growth in non-food agriculture. The potential
in all these areas is massive for income and employment generation on a well
distributed basis; for generation of a host of new activities; and for widespread
innovation.
How can this be achieved? A key
common feature behind the success of the national programme related to both
the green revolution and the white revolution (milk production) was the relatively
homogeneous nature of cereal production and of milk. It was thus possible to
design national programmes that were broadly applicable country wide with relatively
easy regional variations. The difficulty in designing programmes for the new
agricultural activities is that these products are very heterogeneous and which,
moreover, exhibit great regional differences.
Even for each activity, say poultry
production, it will be difficult to design the kind of national programmes that
helped the green and white revolutions. The need is now for decentralized packages
for the many different activities that will have to be regionally disaggregated.
The broad approach can be similar. Each package will need to make simultaneous
provision for technology inputs, infrastructure, supply of inputs and associated
credit delivery. Whereas the packages will need to be diverse and decentralized,
it is unlikely that they will be developed without the initiation of a nationwide
coordinated programme on a mission basis. Such a programme could form expert
teams for each activity and location. It will be essential to bring together
high level expertise, both domestic and international, along with local practitioners.
Each team would prepare a package for their respective activities and locations.
There is now much more expertise available across the country relative to the
situation 35 years ago.
Along with such a disaggregated
but coordinated programmes, there is need for a major new initiative for the
rejuvenation of agricultural research that is also regionally distributed. A
crash programme is required for the urgent renovation of agricultural universities,
which will need to be supported internationally as well. A beginning has already
been made by the Prime Minister’s initiative to renew association with the US
research system. These universities need to be made respectable again. They
will also need to specialize in the activities specific to their locations.
The transfer of technology from these rejuvenated universities and from other
sources will also have to be specific to each activity and new forms of extension
activity will need to be explored to achieve the maximum effectiveness. There
is increasing expertise in the private sector and in the cooperative sector
so new forms of public private partnerships will have to be explored, just as
the National Dairy Development Board innovated in respect of milk.
The banking system will also have
to explore ways and means of achieving efficient credit delivery to these new
agricultural activities along with all their associated activities. As the system
develops, the supply chain from farm to market will need to be financed: warehouses,
cold storages, rural transportation, refrigerated trucks, along with all the
service intermediaries. The efficient delivery of credit in a dispersed manner
in rural areas will need to give special attention to the minimization of transaction
costs through reduction in layering of intermediaries, much greater use of information
technology in information collection, risk assessment and risk monitoring. Clearly,
a great degree of innovation is called for now with out of the box thinking,
away from the past paradigm of directed credit.
Finally, agricultural diversification
and growth is not possible without the provision of rural infrastructure: roads,
storage facilities, transportation, telecommunication and power. All of these
activities have very high economic returns but, those that have public good
characteristics have low financial returns. They are therefore difficult to
finance. User charges will have to be used where feasible, but other financing
means will need to explored. States like Punjab, Haryana, Tamil Nadu and Goa
built rural roads early and financed them through the imposition of local cesses
like the Mandi cess. Hence there is clear need for the search for new
financing mechanisms. Investment in and the financing of rural infrastructure
is therefore a key challenge. The government has clearly recognized this through
the initiation of Bharat Nirman and PURA.
I have digressed at some length
on the need for accelerating agricultural growth and how it could possibly be
done because of its obvious importance and its relative neglect over the past
15 years. The key point that I would like to emphasize here is that without
the organizing and coordinating initiative of the government and its agencies
at various levels, such a programme cannot be implemented. It is in this context
that I have talked about the empowerment of the public sector in all its aspects,
but particularly related to competence.
Urbanisation and Urban Development
Let me now move to issues related
to urbanization and urban development. It may be ironic but, just as agricultural
growth has stagnated in recent years, the astonishing fact is that urban population
growth also slowed down in India during the 1980s and 1990s (Table 9). The normal
expectation is, and the historical experience is that urban growth normally
accelerates with economic growth. So the slowing of Indian urbanization is unexpected,
perhaps anomalous, and worrisome. At the same time, the magnitude of India’s
urban population is large, about 300 million people, similar in magnitude to
the total population of the United States. Even with low growth it will probably
double by 2030 or so. According to most projections done in the 1980s the urban
population in 2001 was expected to be about 30 to 35 million higher than the
estimated 285 million. Contrary to popular impression, there has been a significant
slowdown in net rural urban migration: people are not flowing into cities and
there is no "urban explosion". During the whole decade of 1981 to
1991, total net rural-urban migration was only 12.7 million people and 14.4
million in the following decade of 1991-2001. In both decades, net rural urban
migration accounted for only 21 per cent of total urban population growth.
Why is this worrisome and why has
this strange occurrence taken place in India?
In the light of low growth
in agricultural production and productivity, had there been a greater rural/urban
transformation, outward migration from rural to urban areas would have relieved
some of the economic pressure in rural areas. Ironically, this in itself is
also related to the inadequate increase in rural productivity. Had there been
greater increases in rural productivity, rural incomes would have increased
faster, leading to higher growth in the demand for non-food goods, leading to
higher industrialization and urbanization. With higher productivity, more food
could also have been produced by fewer people and hence more people would have
been released off the land. The second issue relates to the atypically low growth
in manufacturing employment: during the decades of the 1980s and 1990s, output
growth in industry far exceeded that in employment. This experience is also
quite different from that of the East and South-East Asian countries. Thus,
there have been neither demand pressures for labour in urban areas, nor supply
of excess labour from rural areas. Both are related to failures in both public
policy and public administration and public management. Just as we have not
responded to the changing contours of agriculture, the low absorption of labour
in urban areas is related to inappropriate industrial and urban policies.
|
Table 9: Urban Population
in India, 1901-2001
|
|
Census
Year
|
Number of
UAs/ Towns
|
Total
Population
(in millions)
|
Rural
Population
(in millions)
|
Urban
Population
(in millions)
|
Average Annual
Growth in
Urban Population
|
Urban Population
as percentage
of total Population
|
|
1901
|
1,830
|
238
|
213
|
26
|
..
|
10.8
|
|
1911
|
1,815
|
252
|
226
|
26
|
0.00
|
10.3
|
|
1921
|
1,944
|
251
|
223
|
28
|
0.77
|
11.2
|
|
1931
|
2,066
|
279
|
246
|
34
|
2.14
|
12.0
|
|
1941
|
2,253
|
319
|
275
|
44
|
2.94
|
13.9
|
|
1951
|
2,822
|
361
|
299
|
62
|
4.09
|
17.3
|
|
1961
|
2,334
|
439
|
360
|
79
|
2.74
|
18.0
|
|
1971
|
2,567
|
548
|
439
|
109
|
3.80
|
19.9
|
|
1981
|
3,347
|
683
|
524
|
160
|
4.68
|
23.3
|
|
1991
|
3,769
|
846
|
629
|
218
|
3.63
|
25.7
|
|
2001
|
4,378
|
1,027
|
742
|
285
|
3.07
|
27.8
|
|
Note:
1. Urban Agglomerations, which constitute a number of towns and their
outgrowths, have been treated as one unit.
2. The total population and urban population of India for the year 2001
includes estimated population of those areas of Gujarat and Himachal Pradesh
where the census could not be conducted due to natural calamities.
3. The total population and urban population of India for the year 1991
includes interpolated population of Jammu & Kashmir where the census
could not be conducted.
4. The total population and urban population of India for the year 1981
includes interpolated population of Assam where the census could not be
conducted
Source: Census of India, 2001
|
The persistence of industrial
policies, such as restrictions in many labour using manufacturing sectors being
reserved for small scale industries, and rigidities in labour legislations,
have contributed to the bias against labour using industrialization. Such policies
were further compounded by inappropriate industrial location policies that have
restricted location of industries in cities and urban areas since the 1970s.
Such restrictions have led to the loss of agglomeration economies, thereby raising
the cost of industrialization and hence inhibiting expansion. Moreover, the
role of cities as incubators for manufacturing entrepreneurship was not also
allowed to flourish; and finally it is labour using industries that need to
be located in cities and urban areas. The necessity to locate in distant locations,
where labour is not easily available, also inhibited labour using industrialization,
and hence urbanization.
Another set of reasons why
urban growth slowed in the 1980s and 1990s is connected with the extant rigidities
in urban land policy. The existence of rent control laws since the 1940s, urban
land ceiling laws since the 1970s, inappropriate zoning and building bye-laws,
have all contributed to the inflexibility in transformation of land use in urban
areas, thereby slowing urban growth. These rigidities also implied excessive
government control of urban land development, which was handicapped further
by lack of resources and expertise. Thus land assembly and land development
in Indian cities has been handicapped generally and has also led to excessive
increase in urban land prices, making shelter unaffordable for a large proportion
of the people.
These policy rigidities have
been further compounded by inadequate urban infrastructure investment and severe
problems in urban governance: urban local bodies have not been effective; they
suffer both from lack of expertise and of financial resources. Local taxes are
typically not buoyant and poorly administered, and user charges are low and
ineffective.
The consequence is that most
urban environments are inhospitable, particularly to the less well off. This
is indicated by the fact that about half of urban households do not have access
to drinking water within their house; and about a quarter of urban households
do not have access to any latrine, private or public. These messages have obviously
gone back to the village and it is no wonder that urban growth has slowed down.
What is to be done? This is
another case where the public sector has to be empowered to make appropriate
knowledge based policy that is city and people friendly; and also to build capacity
to manage cities in a progressive framework. Overall industrial policy and industrial
location policy both have to be rid of their anti-labour using bias; and industrial
location policy has to provide for the conscious development of urban industrial
parks. Many Asian cities, for example, including a high income city state like
Singapore, have a profusion of flatted multi-storied factories that house a
host of non-polluting labour using manufacturing facilities. There has to be
a recognition of the virtue of industrial clusters and facilitation of associated
facilities such as industrial training institutions, educational and health
facilities. Many such activities can be supplied by the private sector but it
is enlightened public management that can bring them about.
We now have 35 million plus
cities and about 400 cities with more than 100,000 population. Thus, the management
problem of these cities are immense in terms of financial management, in the
provision of public services, and overall city management. The budgets of the
largest cities are larger than those of some states. Yet there are almost no
programmes for the training of city managers, there is little expertise available,
and the prestige of municipal employees is low. Once again there is a massive
failure to provide for public management of cities in India in all its various
manifestations.
Hence strengthening of city
management is a key requirement for the healthy growth of Indian cities. This
needs a massive programme for financial strengthening of local bodies including
revamping of their local tax systems so that they become buoyant. Ways and means
will also have to be found for credit enhancement of urban local bodies so that
they become credit worthy and can then raise the resources necessary for urban
infrastructure investment. Overall, cities are huge public management systems
that have been largely neglected.
With the opening of the Indian
economy, Indian industry and enterprise of all kinds have to be competitive
with the best in the world. They will be handicapped if the cities that they
inhabit are themselves not as efficient as their counterparts elsewhere. Hence,
the acceleration in growth of Indian enterprise will be constrained without
adequate empowerment of the public sector in terms of management of Indian cities.
This is a job that the private sector clearly cannot do.
Human Resource Development
Let me now turn to human resource
development. It is ironic that we have achieved great international recognition
because of our achievements in information technology, which is often termed
as the knowledge economy. We often believe that our comparative advantage is
in knowledge intensive sectors. In fact, given the basic indicators of health
and education, it is difficult to sustain the notion that we are a knowledge
intensive country, notwithstanding the fact that we do have islands of excellence
in various areas (Table 10).
Table 10: Select Parameters in Human
Development Indices
|
|
GDP per capita
(PPP US$) 2003
|
Life Expectancy
at Birth (years) 2003
|
Adult Literacy
Rate (Percentage)
(Age 15 and above) 2003
|
Infant Mortality
(Per 1000 births) 2003
|
Crude Birth Rate (per 1000
people) 2003
|
Access to Clean
Water (per cent of
Population) 2002
|
Improved
Sanitation
(per cent of
Population) 2002
|
|
1. United States
|
37,562
|
77.4
|
..
|
7
|
14.1
|
100
|
100
|
|
2. United Kingdom
|
27,147
|
78.4
|
..
|
5
|
11.6
|
..
|
..
|
|
3. Hong Kong,
China (SAR)
|
27,179
|
81.6
|
93.5
|
..
|
6.9
|
..
|
..
|
|
4. Singapore
|
24,481
|
78.7
|
92.5
|
3
|
10.3
|
..
|
..
|
|
5. Korea, Rep.of
|
17,971
|
77.0
|
97.9
|
5
|
10.2
|
..
|
92
|
|
6. Malaysia
|
9,512
|
73.2
|
88.7
|
7
|
22.4
|
..
|
95
|
|
7. China
|
5,003
|
71.6
|
90.9
|
30
|
12.4
|
44
|
77
|
|
8. India
|
2,892
|
63.3
|
61.0
|
63
|
24.8
|
30
|
86
|
|
9. Bangladesh
|
1,770
|
62.8
|
41.1
|
46
|
27.1
|
48
|
75
|
|
10. Pakistan
|
2,097
|
63.0
|
48.7
|
81
|
26.5
|
54
|
90
|
|
11. Sri Lanka
|
3,778
|
74.0
|
90.4
|
13
|
18.8
|
91
|
78
|
|
Sources: (1) Human Development
Report, 2005
(2) World Development Indictors, World Bank
|
Basic literacy levels in India
have been improving continuously, and most noticeably in the 1990s from 52 per
cent in 1991 to 65 per cent in 2001. But these levels are much lower than most
comparator countries. If productivity in agriculture is to improve, the basic
education levels of the rural labour force, both male and female will need to
improve considerably. Similarly, if labour using Indian industry is to compete
in the world, its labour force also will have to be better educated and technically
trained. The future will essentially need a skilled labour force.
Primary and Secondary Education
That there is increasing appreciation
of the education deficit in India is shown by the new programmes launched by
the government for providing a new thrust to primary education: the Sarva
Shiksha Abhiyan (Education for All Programme). There are also a host of
non governmental and other philanthropic organizations now concentrating on
the rapid expansion of primary education in India. However, it is now well known
that there has been noted deterioration in the public education systems in most
parts of India. The performance of public primary schools has been widely brought
into question. There is also increasing evidence of a shift from public to private
schools, even by the poor, and often their quality is no better. What is encouraging
is that with even poor parents spending a lot of money on primary education,
which should really be provided for by the state, there is a clear demand for
it and recognition of its utility for upward mobility. The expansion of government
programmes will certainly expand the quantity of education being offered.
What needs equal attention,
however, is the quality of education, which would emerge if there is greater
local accountability of the school system and greater local involvement in general.
Teachers themselves need to be incentivised and better trained; and teaching
materials have to be provided and improved. Clearly, these problems are the
most pronounced in the poorest parts of the country that are also underserved
in terms of basic infrastructure like power, rural roads and communications.
A great deal of innovation and experimentation is going on but much remains
to be done. Whereas there should be no doubt that the state retains primary
responsibility for ensuring primary education to all, there can be many different
ways of delivering it, including the involvement of non government schools of
different descriptions.
As some success is achieved
in the expansion of primary education and reduction in drop out rates after
primary schooling, the next thrust will be the burgeoning demand for secondary
education. As we progress, incomes increase and production processes need greater
and greater skills to be competitive, primary education will no longer be adequate
for performing lower skill tasks. Whereas there is considerable thinking going
on with respect to primary education, we haven’t even begun to think about the
resources and strategy needed for the large consequent expansion of secondary
schools. We will need to expand the supply of secondary school teachers very
significantly, invest large resources in school buildings and in the preparation
and distribution of education materials. It is difficult to locate secondary
schools in each village: issues will also arise on how to make these schools
accessible to children in widely dispersed rural habitations. Once again, great
innovation is needed in thinking about how all this is to be done, and how the
large resources needed will be generated and invested efficiently and responsibly.
Vocational Training
What will these schools teach?
Every educational system has had to deal with the tension between the need for
basic secondary education and vocational training, and the difficulties involved
in guiding children appropriately to the different streams. Here again, there
has been little organized thinking in India. Technical training has essentially
been provided by Industrial Training Institutes (ITIs) but they are not many,
and often do not turn out students with the relevant skills. It is interesting
that in India there are 175 defined trades that can be subject to organised
training; in Germany there are 2500 such defined trades and occupations, each
with its organized training syllabi, training certification, and availability
of training institutions. The famed German vocational training system involves
a very complex web of interaction between the federal government, state governments,
local chambers of commerce, and firms that fund and take on the trainees. Whereas
it would not be appropriate to suggest that India adopt the German model, which
is itself undergoing change and modernization, I only mention it to suggest
that it is possible to evolve an organized approach that makes vocational training
respectable, demand oriented and with great local involvement and accountability.
A beginning has been made in seeking the upgradation of 500 ITIs with industry
participation, but much more needs to be done to ensure regular skill upgradation
in all vocations.
The effort will have to involve
extensive industry participation at the local level so that the training imparted
is seen as relevant by prospective employers. As with the new requirements for
agricultural extension systems, the systems for vocational training will need
to have great heterogeneity in both the kind of training to be imparted but
also how the training to be organised, accordingly to the different needs in
the widely disparate regions of India. We also need to recognise that service
occupations need organised training as well. One can illustrate this by the
longtime recognition of training needs in the hotel industry and how the private
sector itself has set up a large number of excellent training institutions.
Similar has been the case in information technology where many private sector
training institutions emerged as demand started rising. Hence this is clearly
an area that is most well suited for public private partnerships. Once again,
however, the organisation of public private partnerships also involves a great
deal of organizational capacity in the public sector, which designs delivery
systems in - a way that they spawn efficiency, productivity and innovation.
Higher Education
Let me now move to issues related
to higher education. There has clearly been a huge increase in quantity since
independence and in the proliferation of private sector technical institutions
in recent years, particularly in the Western and Southern regions of the country.
However, the success of a few elite institutions such as the Indian Institute
of Science, Indian Institutes of Technology (IITs), Indian Institutes of Management
(IIMs), the National Institute of Design, the more recent National Law Schools,
have masked the general lack of quality in Indian higher education. Even among
the elite institutions, only three were included in the top 500 higher education
institutions in the world as ranked on objective criteria by a group of Chinese
researchers. Because of the good quality of Indian secondary schooling on a
relatively wider scale, competitive processes lead to the emergence of a large
number of very bright Indian students who can then excel despite the poor quality
of instruction and environment in higher educational institutions.
Meanwhile, there has been an
explosion of colleges and universities in East and South East Asia, in China,
South Korea, Singapore, Hong Kong, and Thailand in both quality and quantity.
We must recognise urgently that there is great need to both improve the quality
of our colleges and universities in terms of facilities, laboratories, libraries,
and most importantly, faculty - along with significant expansion of quantity.
What should be clear is that the current system will not do. Although a whole
host of private technical institutions have mushroomed in recent years, most
of the higher education system remains government controlled and run. This was
originally modeled on the British public university system but which has, over
the years, become ossified in such a fashion that creativity and quality are
at a premium.
There is a severe shortage
of resources: tuition fees are extremely low and the government is strapped
for resources. Moreover, there are legitimate competing claims for scarce resources
for primary and secondary education, not to mention vocational education.
Here also we need to search
for new systems of governance that can allow for diversity in delivery. While
providing appropriate incentives for the achievement of excellence with the
great increase in compensation levels in the private corporate sector, and the
lack of even basic facilities in colleges and universities, attracting brighter
students to take up teaching careers has become even more difficult than it
was hitherto.
There is, to my mind, some needless
debate on private versus public education. No good higher educational institutions
in the world are profit oriented. Even in the U.S., where there is perhaps the
greatest prevalence of 'private' colleges and universities, the proportion of
students in state run institutions form the majority. Even those institutions
that are labeled as private are essentially autonomous non-profit institutions.
They are private in the sense that their management is autonomous of government
controls, but most receive significant government grants in different ways.
What is interesting about these institutions is their system of governance that
attempts to ensure quality, excellence and competitiveness.
Once again, I would not advocate
the transplantation of any foreign system into India, since each system is rooted
in its own peculiar history. What I would argue for is the generation of a new
excitement for higher education in the country and for a search for new resources
and new forms of governance that ensure quality and aim at achieving excellence.
Overall, there is no way that
we can sustain growth of the kind that we envisage, 8 per cent plus annual growth,
unless the whole education system, primary, secondary, vocational and higher
is revamped. The State must bear the responsibility for ensuring that this happens,
but must organise it in such a way that the best entrepreneurial energies that
are now manifesting in the country are also harnessed towards the cause of education.
Health
Before I close on the subject
of human resources, I should mention the issue of health. This is in itself
a vast and complex subject which I am not competent to even touch. The key point
that has to be made, however, is that economic efficiency can only be achieved
at different levels if people are healthy. Whereas, a good deal of success has
been achieved in almost eliminating a number of infectious diseases of the past,
morbidity in India remains high. There are significant issues related to the
delivery of public health, particularly the availability of clean water and
sanitation but there are equally important issues to do with the delivery of
curative health. Here once again, there is widespread evidence of the deterioration
of public medical systems which are being replaced by private providers. Given
the availability of new techniques, new drugs, and diagnostics, the less well
off are increasingly finding it difficult to access these services at any semblance
of affordable cost, and health insurance is in its infancy.
If our young and expanding
population is to look forward to a healthy and rewarding life, this is another
vital area crying out for innovative, affordable systems of public private partnerships
that are reliable and trustworthy. Once again the public sector has to gain
competence for organising such a system.
Public Sector Management
The common theme that runs through
the three areas that I have chosen to illustrate the need for the next generation
of reforms is that of competent and innovative public management: I have not
spent any time on the physical areas infrastructure since they have been discussed
otherwise much more often. All the areas of physical infrastructure involve
the management of large systems: airports, ports, railways, telecommunications
and the like. All of them also have in common the possibility of at least part
delivery of the private sector. As discussed, cities, education systems, health
systems, hospitals, are also all large public service systems that are in dire
need of efficient and innovative management. The key issue is that of efficient
delivery of public services, and in India particularly, at affordable prices.
In most of these areas a large
public sector presence is unavoidable. Urban water supply systems, sewerage
systems, public lighting and public transportation are typically organised by
some form of governmental authority, and even if there is some element of private
delivery. Being essential services, there has to be some form of public regulation.
In the railways also, whereas some private delivery is possible, international
experience suggests that basic infrastructure ownership has to be with the government,
along with regulation and allocation. Similar is the case with ports and airports:
typically ownership is usually with the government or public authority, while
delivery can often be prioritised.
All such public management systems
are typically very large and complex. Hence they need excellence in public management.
One would imagine that the biggest management challenges would lie in the management
of these large complex systems which, in principle, should attract the brightest
managers. The irony, however, is that there is little generation of expertise
for such management functioning and there are few prestigious schools of management
that consciously impart training for managing these systems. All these systems
need complex financial management of huge budgets; all of them involve sensitive
customer delivery; and all involve complex logistics. In other words, all such
systems have all the elements that should attract the brightest people who like
to deal with challenges. It is ironic that there is a proliferation of management
schools imparting complex training for small challenges, but none for these
complex tasks.
What do we need to do? We need
to make public service prestigious again: not for the exercise of power and
authority, but for tackling challenges for efficient public service delivery.
Most public service delivery operations, including those run by the civil service,
need the injection of outside expertise at different levels. Each of our public
authorities discourages lateral entry and therefore tends to become inward looking
and suspicious of new ideas. Lateral entry of outside experts would do much
to inject new energy and even public entrepreneurships.
A theme running across the
different sectors that have been discussed is the exploration and development
of new forms of public private partnerships. It must be understood that these
are not easy to foster. They usually involve the tension between of two different
organising principles: one non-profit and the other profit seeking. The challenge
is to design appropriate incentive systems so that the ultimate objective gets
aligned. Different sectors will need different forms of partnerships. In education,
for example, the partners could well be non-profit non-governmental organizations.
In ports and airports, the partners could clearly be profit seeking private
companies.
Overall there has to be a search
for innovative forms of public service delivery. This would also involve realignment
of compensation levels. If individuals of high levels of competence are sought
to do the most complex tasks they will need to be compensated adequately.
We thus need a nationally generated
focused programme to improve public administration and management at all levels
of government and public authorities so that the delivery of public services
becomes efficient. This cannot be done by the private sector and if it is not
done the private sector will itself suffer from the emerging inadequacies of
health, education, rural and urban infrastructure, and all other physical infrastructure.
Concluding Remarks
The economic reforms process
carried out in India over the last 15 years has brought forth a burst of new
entrepreneurial energies across the board in almost all sectors. As a consequence,
the country is now recording substantial economic growth in excess of 8 per
cent. This growth could possibly be constrained by the lack of both quality
and quantity of public services supplied by the Government and its various authorities.
Hence there has to be all-round improvement in investment in and delivery of
public services.
The new focus of economic reforms
has to be the empowerment of the public sector to do what it is supposed to
do: public services.
Lecture by Dr Rakesh Mohan, Deputy
Governor, Reserve Bank of India at a Public Seminar organized by Institute of
South Asia Studies in Singapore on November 10, 2006. Views expressed are personal
|