Asia region seminar on policy challenges in India

Ti ii WomI) BAx\K Interinal Discussion Paper AsIA REGIONAL SERIES Report No. DP 188 Asia Region Seminar on Policy Challenges in India October 1990 T he vitws rre ntted here art, theNt ot the author. and the should nt be imterpreted as reflecting tho of the World Bank ASIA RI(ION DISCUSSION PAP)iR Sli FlliS T[t Author 1)atc )I iginaot I1)' I the I ab' r I orce Partit ipatin of Women in the Republic of Korea Eolution and Polhe Issues C Grxgnert May 1988 1- Ibal II)PIS The Role of tchange Rate Polik sin I-our Last Asian Countries Sang Woo Nam May 1988 ) Leisper (91388) ID128 The Sinall Scale Enterprise Credit Program (S S u P ) Under the Second and Third Calcutta Urban Dev elopiment Projcets I Kahnert March 1988 1- Kahnert (81411) (CUDI 1 and CUDII 1Il) An Assessment IDP35 Improving Tax Policy Adiice. Lessons and UnresolNed Issues from Asia Experience IH Fkisig June 1989 IH Flcisig (81413) IDP36 Direct Taxes and Fiscal Poliey Issues An Illustration for East Asia A Virmani June 1989 II-leisil (81413) IDP37 Commodity Taxation in Selected Countries in Soth East an. East Asia Z Shalii June 1989 I, Flcisig (81413) IDP38 Tax Analysis in Developing Country Settings R Musgrave June 1989 11. Fleisig (81413) IDP39 Indonesia- External Shocks, Policy Response and Adjustment Performanc S Ahmxi June 1989 Sadiq Ahmed (82467) IDP42 An Analysis of the Nature of W.T. Dickens July 1989 R. Zagha (80433) Unemployment in Sri Lanka and K. Lang IDP44 Assisting Poor Rural Areas Through Groundwater Irrigation F Kahnert August 1989 C. Chamberlin (81409) IDP51 Educational Development in Asia A Comparative Study Focussing on Cost Je-Peng Tan October 1989 J"c -Peng Tan (81408) and Financing Issues Alain Mingat IDP52 Chinese Reforms, Inflation and the Allocation of Investment in a Socialist Economy Oktay Yenal October 1989 Oktay Yenal (81415) IDP63 Public Policy to Prof.,ole Induslrialization: The Experience of the East Asian NICs and Lessons for Thailand D. Dollar May 1990 D Dollar (80518) IDP65 A Study of the Poor in Sri Lanka C Rouse June 1990 Y. Huang (80434) IDP68 Health Sector Financing in Asia C Griffin August 1990 Jcc Peng Tan (81408) Note I stra O es na1% be bau 1Tuin th; Asia 1Iil rmnittlin ic k in PREFACE This volume contains the proceedings of a Seminar organized by the Asia Region on October 5, 1990. It was prompted by the fortuitous presence in Washington of several eminent Indian economists and their willingness to convene for a frank discussion of India's economic policy choices. The well- known Indian economist, Dr. Abid Hussain, was serving in Washington as the Ambassador of India. Professor Bagicha Minhas had joined the World Bank as a Visiting Research Fellow, while Dr. Raja Chelliah was resident (as a Visiting Scholar) in the International Monetary Fund. All three had been prominent members of the Indian Planning Commission. Mr. Jagdish Sharan Baijal, who had been a Secretary of the Planning Commission in addition to his service in policy-making positions, was serving as the Executive Director in the World Bank representing India, Bangladesh, Bhutan and Sri Lanka. And Mr. Gopi Arora, the former Secretary of Finance, was the Executive Director in the Fund. Professor T.N. Srinivasan of Yale University, a prominent economist, was visiting Washington to help in the preparation of the World Development Report. This, then, was a unique opportunity to hear their views, reflections and advice on policy issues of considerable urgency in India today. We are grateful to all of them for accepting our invitation and for consenting to the publication of their informal remarks. Oktay Yenal Chief Economist Asia Region Asia Region Seminar on POLICY CHALLENGES IN INDIA October 5, 1990 TABLE OF CONTENTS Page No. I. INTRODUCTORY REMARKS - A. Karaos1anoglu . . . . . . . . . . . 1 II. INDUSTRIAL AND TRADE POLICIES - T.N. Srinivasan . . . . . . . 3 III. ISSUES IN FISCAL POLICY AND FISCAL FEDERALISM - R. Chelliah 9 IV. AGRICULTURE AND POVERTY ALLEVIATION - B. Minhas . . . . . . . 15 V. PERFORMANCE AND PROSPECTS OF THE INDIAN ECONOMY - A. Hussain 23 VI. COMMENTS AND QUERIES - 0. Yenal, S. Bhalla, J.S. Baijal, T.N. Srinivasan, G. Arora, S. Acharya . . . . . . . . . . . . . 28 VII. SUMMING UP - A. Karaosmanoglu . . . . . . . . . . . . . . . 34 I. INTRODUCFORY REMARKS Attila laraosmanoglu Vice-President, Asia Region Good morning to you all and welcome to this Asia Region Seminar on Policy Challenges in India. Let me extend our special appreciation to His Excellency, the Indian Ambassador to the United States, Mr. H.E. Abid Hussain, for finding time from his schedule to attend. Looking around this table at the guests who have joined us here today leaves me reassured that the topic at hand will receive the attention of some of the most able minds in international development. The current circumstances in India and globally are of such complexity and volatility that no less than this distinguished group could do the subject justice. The challenges facing India today - and here I need to be careful to avoid hyperbole and pay due regard to the many momentous junctures in India's economic history - today's challenges touch the very foundations of India's development philosophy and strategy. Let me explore this notion for just a few minutes, then I will sit down and listen to those who understand these issues better than me. Three contextual points immediately come to mind. First, the problems that India faces today in its key macro balances are not the product of a sudden lurch in policy or of massive external shocks. These problems are the harvest from a decade of fiscal and monetary management that have gradually, almost imperceptibly, left this economy vulnerable to relatively modest shocks. The Gulf crisis has served to unmask, if you will, the size and seriousness of India's macro problems. My second point is that these macro imbalances coexist with some very favorable developments in the economy, which reflect the growing dynamism and openness achieved in recent years and which draw from the rich physical but especially human capacity built up with dedication and much sacrifice, over the past three decades. So we see unprecedented industrial growth performance in the second half of the decade and a breakout from the years of stagnant exports to high annual increases in volume terms. My third point concerns the political environment. Indian governments have always served under pressures and demands from a vast tapestry of interests and groups. This is to be expected in a vibrant democracy, but more recently those pressures and conflicts seem to have intensified as a new government struggles to achieve a sustainable coalition. There is a new fluidity in Indian politics, at least from this distant vantage point, and this has important implications for economic policy formulation and implementation. Again, let me not stray into hyperbole, but the convergence of these trends and recent developments has sharpened choices and hardened up the dilemmas facing India's policy makers. There are no easy answers that I am aware of. But the choices do seem to fall into one of two general directions, one more cautious and responsive to short-term concerns, and the other, a bolder approach, ushering India forward into a modern, open, competitive industrial state equipped with a literate, healthy and well-nourished population. It is on that second path that I. INTRODUCTORY REMARKS Attila Karaosmanoglu Vice-President, Asia Region Good morning to you all and welcome to this Asia Region Seminar on Policy Challenges in India. Let me extend our special appreciation to His Excellency, ih, Indian Ambassador to the United States, Mr. H.E. Abid Hussain, for finding time from his schedule to attend. Looking around this table at the guests who have joined us here today leaves me reassured that the topic at hand will receive the attention of some of the most able minds in international development. The current circumstances in India and globally are of such complexity and volatility that no less than this distinguished group could do the subject justice. The challenges facing India today - and here I need to be careful to avoid hyperbole and pay due regard to the many momentous junctures in India's economic history - today's challenges touch the very foundations of India's development philosophy and strategy. Let me explore this notion for just a few minutes, then I will sit down and listen to those who understand these issues better than me. Three contextual points immediately come to mind. First, the problems that India faces today in its key macro balances are not the product of a sudden lurch in policy or of massive external shocks. These problems are the harvest from a decade of fiscal and monetary management that have gradually, almost imperceptibly, left this economy vulnerable to relatively modest shocks. The Gulf crisis has served to unmask, if you will, the size and seriousness of India's macro problems. My second point is that these macro imbalances coexist with some very favorable developments in the economy, which reflect the growing dynamism and openness achieved in recent years and which draw from the rich physical but especially human capacity built up with dedication and much sacrifice, over the past three decades. So we see unprecedented industrial growth performance in the second half of the decade and a breakout from the years of stagnant exports to high annual increases in volume terms. My third point concerns the political environment. Indian governments have always served under pressures and demands from a vast tapestry of interests and groups. This is to be expected in a vibrant democracy, but rare recently those pressures and conflicts seem to have intensified as a new government struggles to achieve a sustainable coalition. There is a new fluidity in Indian politics, at least from this distant vantage point, and this has important I plications for economic policy formulation and implementation. Again, let me not stray into hyperbole, but the convergence of these trends and recent developments has sharpened choices and hardened up the dilemmas facing India's policy makers. There are no easy answers that I am aware of. But the choices do seem to fall into one of two general directions, one more cautious and responsive to short-term concerns, and the other, a bolder approach, ushering India forward into a modern, open, competitive industrial state equipped with a literate, healthy and well-nourished population. It is on that second path that II. INDUSTRIAL AND TRADE POLICIES T. N. arinivasan There are six broad goals and aspects of India's industrial policy framework. The first is the division of responsibility for the development of specific industries between the public and private sectors. This is defined in the two industrial policy resolutions that the Government of India announced in 1948 and 1956. I quote from the 1956 resolution: GIn the first category there will be industries the future development of which will be the exclusive responsibility of the state. The second category will consist of industries, which will be progressively State-owned and in which the State will therefore generally take the initiative in establishing new undertakings, but in which private enterprise will also be expected to supplement the effort of the State. The third category will include all the remaining industries, and their future development will, in general, be left to the initiative and enterprise of the private sector." The first category included all defense-related industries, atomic energy, iron and steel, heavy machinery, coal, railway and air transport, telecommunications, and generation and distribution of electricity. Thus vital infrastructural industries on which the development of the entire economy depended were made the exclusive monopoly of the state. This was to have rather disastrous consequences later on. The second aspect of India's industrial policy is the Gandhian legacy of cottage and village industries which were to be encouraged through public policy. In practice what this meant was not only subsidization of small-scale industry but also discouragement of capacity creation in and competition from large-scale industry whether or not the product of the small-scale sector was competitive in terms of cost or quality. The mill sector of India's textile industry and its exports were destroyed in part by this policy. The third aspect is self-reliance which was interpreted as self-sufficiency--imports were to be progressively replaced by domestic production in as many industries as possible. The notorious *indigenous clearance anglea of the import licensing system under which an application for import of a commodity was rejected if there was domestic production of a substitute, almost in total disregard of its cost, quality, time of delivery, is a prime example of this policy. The fourth aspect is that of regional balance in industrial development. In practice this meant division of capacity created in an industry into several units of inefficient scale located in different states, thus raising the cost of production. The fifth is that concentration of ownership in the hands of a few producers in any industry and in the hands of large industrial houses across industries were to be discouraged. The sixth and last but not the least is that industrial as well as non-industrial development in the private as well as public sectors were to be strictly governed by the targets laid down in the five year plans. An elaborate regulatory system was developed to implement the objectives of the policy framework. First of all, there was the industrial licensing system under which investment in capacity creation in any industry by a firm in the private or public sectors needed an industrial license unless the cost of investment was below a bound. While this bound has been increased over time, it still is not high enough to exclude many investment proposals from the purview of licensing. The second was the exchange control system under which imports were licensed under various categories: actual user licenses (for raw material imports), capital goods licenses, import replenishment licenses (for exporters) etc. The third was licensing of technology imports and of foreign direct investment as well as foreign collaboration proposals. The fourth was the control on investment financing primarily on the sale of equities and debentures on the domestic capital market by firms and on foreign equity participation in joint ventures. The fifth was a set of price and distribution controls on some commodities including items of mass consumption as well as intermediate goods. The sixth was the control on concentration under the Monopolies and Restrictive Trade Practices (MRTP) Act. In summary, the regulations covered the whole spectrum: the scale, technology, and location of any investment project other than relatively small ones were regulated; permission was needed to expand, relocate, change the output or input mixes of operating plants; critical inputs, particularly imported ones, were allocated; access to domestic equity markets and debt finance were controlled; some vital consumption goods (for example, fertilizer, irrigation water, fuel and water, etc.) were subject to complete or partial (for example, dual markets) price controls; almost automatic and made-to measure protection from import competition was granted to domestic producers in many *priority" industries, including in particular the equipment producers. The crucial aspect of all these regulations is that they were essentially discretionary rather than rule-based and automatic. Although some principles and priorities were to govern the exercise of these regulatory powers, these were largely non-operational for two reasons. First it was impossible, even in theory, to devise a set of principles or rules for all the myriad categories for regulations that were mutually consistent and in consonance with the multiple goals of the industrial policy framework, which in themselves were not entirely consistent. Second, the problem of translating whatever rules there were into operational decisions was a problem of Orwellian dimensions. The allocative mechanism was largely in the form of quantitative restrictions unrelated to market realities. A chaotic incentive structure and the unleashing of rapacious rent-seeking and political corruption were the inevitable outcomes. Indeed I would go so far as to argue that the discretiona-y regulatory system instituted in the name of planning for national development has instead become a cancer in the body politic. Another dimension of the exercise of regulatory power was that it was anticipatory in nature--that is, the regulations were meant to prevent any prospective deviation from the objectives of policy by firms or other regulated entities from ever occurring rather than to punish or cure any deviant behavior that actually occurred. While preventive rather than curative medicine is often preferable in health care systems, clearly it is not appropriate in industrial regulations. But in India we have had curative health care and preventive industrial regulations! The regulatory system certainly did not promote efficiency through competition. Since my time is short, I will not comment in detail on all regulations but selectively on some. Take the MRTP regulation for instance. First of all it is meant to prevent ex ante any restrictive trade practices rather than punish such practices when found. Second, in all the years it has been enforced, industrial concentration has not been reduced perceptibly. On the - 5 - contrary, in a few instances it has increased it. Third and most important, if promoting competition was the objective, a far more effective instrument would have been to liberalize import competition. In sum, the only effect of MRTP has been to delay implementation of investment projects. It should be phased out in favor of import competition as a means of avoiding restrictive trade practices and monopolistic behavior. There are a few price and distribution controls, particularly with respect to a limited and well-defined set of subsidies relating to food and other essential needs of vulnerable groups in the population that one might conceivably argue should possibly continue. That is at least an arguable proposition. However, until not so long ago, even the price of passenger cars that only the very rich could afford was controlledl It is clear that most of the existing price controls have no rhyme, reason or logic and they ought to be dispensed with. Perhaps the most restrictive element in the overall industrial policy structure is the huge apparatus now controlling foreign trade. Straight away, I would argue that we should use economy-wide instruments such as the real exchange rate, rather than specific quotas and differentiated tariffs and so on for influencing resource allocation between traded and home goods. However, since tariffs are major sources of revenue for government, you cannot entirely get rid of tariffs. I would argue that if that is the case, then a uniform tariff across all imports which would give us separate exchange rates for exports and imports (but which does not result in different exchange rates for different imports) would be the appropriate policy. Thus from a revenue perspective, we should levy a tariff on a uniform basis on all imports and eliminate the discretionary quantitative restrictions. The argument is often made that you cannot reform the system overnight; you have to give time for the output response to come about, otherwise the reform would fall on its face and so on. I want to come back to that issue in a while. Let me just say for the moment that pending the onset of wholesale reform of foreign exchange regulations, maybe a rationalization of the existing tariffs and elimination of the quantitative restriction would be the right step. Now what about the small-scale industry protection, reservation of products and so on and so forth? Once again, the evidence seems to be, at least that is the way I read the evidence, that the net effect of all these in providing the extra incentive for small-scale industries has been relatively small. If the access to credit, access to imports and other needed inputs for getting an enterprise running and going etc. are fairly easy and equitable, there is no further incentive needed to be provided through reservation of products and through the taxing of large-scale sector products and so on. I would thus focus on the access issue rather than on subsidies and taxes. Turning to export growth, we need to look at trends in the real exchange rate. The real exchange rate data from the various World Bank reports show that during the seventies, when we linked the rupee to the pound, there was an increasing trend. We had the vicarious pleasure of enjoying a devaluation of the Indian rupee resulting from its link to the sinking pound. But since we linked the rupee to a basket of currencies, the rate of increase has slowed down. - 6 - I should emphasize that in any case there has been no substantial increase in real exchange rate. Nevertheless, incentives provided by the slow increase in the real exchange rate is in part, and in large part I would argue, responsible for the dynamism that Attila Karaosmanoglu referred to in the export sector. Now, if this is institutionalized, and the other penalties that the regulatory system was imposing on exports are removed, I do not see any reason whatever that India should not do very well in the world markets. A comparison with other countries is sometimes invidious and even odious, but it cannot be avoided. In the same external environment, if other countries can do very well, there is no reason, if given the right incentives, the Indian exporters could not do very well either. It is sad to note that in 1960, while the size of the Korean manufacturing sector in terms of value added relative to India's was of the order of, maybe, 10 percent or less, and Korea had negligible manufactured exports, today, the size of Korea's manufacturing sector is at least three- fourths of India's. Now Korean manufactured exports are more than five time Oat of India's. Let me turn to infrastructure. I see two major problems. The first is of course the fact mentioned earlier that most of the crucial infrastructure is a public sector monopoly. And some of it is under the center's contro. some of it is under state control. Electricity is a major example. I understar from the data that I have seen, self-generation in the Indian manufacturing seL-or is now over 15 percent of the total electricity generation in the economy. This is outrageous. One need not be a genius to note the high cost of self-generation through captive plants of small size compared to the cost at which electricity could be generated if the public sector generation plants were to function as they ought to function. The problem is not just in electricity generation, but also with the imports of equipment and so on. For a long time the electricity boards, under the indigenous clearance angle, were restricted to buy only whatever was produced by the Bharat Heavy Electricals at whatever time they chose to deliver and of whatever quality that the generator happened to be. If this sort of constraint still continues, there is no point in blaming the generation side alone. Another aspect of the story is the distribution network. Once upon a time in India, even though some of the generating plants were in the government hands, the distribution used to be in the hands of municipalities as well as private enterprises. They used to deliver efficiently. Mr. Chelliah might remember that in Tamil Nadu these enterprises had no problems in collecting their electricity bills, unlike today's state electricity boards. There were no problems in getting the lines connected quickly when they were down. Once informed of the line disruption their crew would be on the scene rapidly and repair it because they would be concerned about the revenue loss if the line was not connected soon enough. There is no such incentive for the repair crews of the electricity boards. A combination of a public and private enterprise both in the generation and distribution end of the spectrum would be appropriate. Of course, I for one would go all the way. There is no particular reason why generation should be in the public sector anyway, but then my colleagues in the left may not agree. But even if they do not want to go all the way, at least we should consider some mixture of public and private provisions. The second major constraint is transportation, that is, railways and road transport. Of course, given the problems that we have had in the railways, - 7 - the long distance lorry transportation in the private sector has expanded enormously. But from an overall prospective of cost/benefit calculation, if we do it right, 1 would be surprised if the kind of long-distance hauling that is taking place on lorries in India, is cost effective. Let me turn to petroleum, coal and so on. I would only menticn just the coal monopoly, which is on the one hand public sector owned; on the other hand, it is under the control of the mafia in some of the mining regions, in Dhanbad in particular. And I do not quite know how one would go about reforming this unholy alliance; but there it is. On the petroleum side, we have to take a longer look at the exploitation of natural gas resources and to limit the drop in the demand for liquid petroleum. There again, problems are well known. Whether these problems can be addressed with the organization of these enterprises within the public sector is something that needs to be thought through. There are many enterprises in the public sector which have no logic, rhyme or reason and they ought to be privatized right away. Ar.d I would not be surprised if there is a good demand for them from private entrepreneurs. Running hotels, running airlines inefficiently, running various other manufacturing enterprises which have no particular externality or public goods role etc. in the public sector has no logic. A whole bunch of money .osing public enterprises can be gotten rid of overnight. Now, to do this, labor legislation would need to be reformed. Whether the political system can face up to the ccnsequences of the existing set-up, whether the interest groups are too entrenched, I just do not know. But if we do not do it now, this problem is going to fester. The existing labor bankruptcy laws and make it extremely difficult for failed enterprises to exit from an industry. Now what are the systemic issues? I want to make just two basic points. The first is that, as far as possible, one has t(_ get away from discretionary, quantitative restrictions, whether they are on imports, on distribution, or on any other activity in the Indian economy. That is one broad rule. Moving away from discretion to a market-linked fiscal-based management system should be the broad principle. The second point is related to what I said earlier about the public sector. At one level it is correct but tautological to say the pdblic sector should do what it has a comparative advantage in doing and should not do what it has no comparative advantage in doing. At another level, it is not logical because after all the entire import substitution policy was based on bucking comparative advantage to begin with. If the system does not respect the principle of comparative advantage in one area it is unlikely to respect it in others. This means essentially that the best one could hope is to circumscribe the area for the public sector narrowly and realize that there is no point trying to plan everything in sight. It does not work, and it will not work, and there is no point in pretending that it is going to work. But if the area is narrowly circumscribed, maybe the technical inputs that are available and the managerial inputs that are there would be better concentrated in that area and could be put to the best use. How do you bring about a package of reforms? The reforms would involve getting rid of industrial licensing systems, MRTP and the whole foreign exchange - 8 - control apparatus and bring in a price-based allocation mechanism. How do you do it? Now, here in the World Bank, it is fashionable to discuss sequencing. What we do first and what we do next may have an impact on the success or failure of the reform. It seems to me, at one level, these are all beside the point. If the leadership is convinced that the system, as it is, is not working and reform is needed, if the leadership is indeed convinced of that, it can convince the public that these reforms are needed and ought to be done. After all, that is the mark of leadership and not taking the cue from the latest opinion poll? If there is leadership, then the question of what you do first, what you do next, is not so very important, because the whole package would have been sold to the public as a very much needed medicine and the public would be ready to take it. The second point I would make on sequencing is that I would nather have a short time period for these reforms than a gradual program drawn over a long time for a number of reasons which are familiar to those who read this literature on sequencing. The main reason is that it allows time for the interest groups to organize and thwart the reforms. I come to my last point which is a summary of all others I made earlier. I think that in very short order, a reform program has to be drawn up; the leadership has to be convinced; and it should be sold to the public; and finally, it should be implemented, not gradually, but within a short period. IIl. ISSUES IN FISCAL POLICY AND FISCAL FEDERALISM Raja Cholliah I hardly have what I may call the Friedmanist passionate fire that T.N. put into his speech, but would be more sedate in dealing with this very dull topic of finances. Before I launch on my remarks, I would like to say to you and T.N. that there is a general agreement on the basic premises on which he was proceeding. The difference seems to be mainly in regard to the speed with which one should carry out the reforms; whether there should be gradualism with proper sequencing or there should be a big bang approach. Also, there is a difference of perception as to whether some substantial changes have already been made which have been reflected in the way in which the Indian economy has shown results in some areas or whether all these changes are just cosmetic changes. There, I think there could be legitimately a difference of opinion. While I share his theoretical perceptions, I believe that we have made some substantial progress in the number of areas that he has touched upon, but not in all of them. And the major problem is now in the fiscal area where no substantial progress has been made - as also perhaps in relation to closing down of loss-making units in the public and private sectors. In the fiscal area, as in a number of other areas, Indian policymakers can make remarkable successes in some respects; but have also continued to follow policies which have led to an accumulation of difficulties and are now threatening to lead us to a fiscal crisis. But this is not to say that the earlier policies have not given substantial results in terms of raising of the savings rate, the building up of a capital market, raising the tax ratio and raising resources for planned development. But unfortunately, as was the fashion in the 50s and the 60s attention was concentrated more on raising of resources than on the way in which they were raised or in the way in which they were utilized. On neither side was efficiency criterion given great weight. But so long as the net RBI credit to government was kept under control and the unspoken rule that borrowed funds should be used mainly for capital purposes was adhered to, there was implicit control on the growth of government expenditure exerted through the political and practical limits to tax increases. But once the political leaders and their advisers gradually inured the public to the undisciplined behavior of the government sector, they could cut through the limit imposed by taxation and finance much higher growth of expenditure through borrowing. This new source of funds that is furnished from borrowing from RBI and the private sector, in excess of prudent norms adhered to until the late 1970s, further eroded the criterion of efficiency. Now I mention all this not because most of you are not aware of this but because I wish to emphasize that central planning faces a dilemma or contains an inherent conflict between efficiency in the use of resource and allocation of resources according to a predetermined plan. Under the kind of planning process that we have had, once certain projects got included in the plan, then those agents who are in charge of projects got the money. There was no link between performance, efficiency and entitlement of funds. Entitlement to funds arises as soon a project is included in the plan. Also entitlement of funds go to the state governments on the basis of a formula. So long as more money would be made - I () - available and more money could be raised either through higher taxes or through unrestrained borrowing, there is not much need to bother about efficiency because money will always be coming. Consider the record of state electricity boards. I have often given this even at meetings of the Planning Commission as a good example of how things we may desire will not be done. That once the total increase in installed capacity was agreed upon in the Planning Commission, it was divided among the regions and each state's share was known. On this basis, the state's plan for power was formulated, Whatever the performance of the State Electricity Board, we were bound to give money for that because more electricity had to be produced, and for that, additional capacity had to be established in that region, and therefore, there was no link between the performance of the electricity board and the quantity of money that it would get. And as far as chief minister was concerned, all the incentives were for him to run the electricity board in as unprofitable way as possible. He gained much by overstaffing; he gained much by not charging enough, he gained much by not interfering with labor which was inefficient, and he could always take the deficits to the Finance Commission. More of it later. So all of these things were loaded against efficiency. No wonder then, those in power at the subnational level were optimizing according to what they could get out of the system. As I said, it was such a remarkable record that India was able to raise the tax ratio from less than 5 percent of GDP to about 19 percent. And although we cannot claim success in using the direct taxes as an efficient or effective instrument for raising resources, there is no doubt that the raising of the tax ratio was an important achievement in terms of the potential that it contained for the very effective and useful role that the government could play and in fact in some ways has played. By the State having a much wider range of activities than it should have taken on, its effectiveness has been reduced but the potential for great use was there because of the rise in the tax ratio. But unfortunately, here again, the way in which resources were raised was neglected. So we have, as all of you know, created a very inefficient indirect tax system. And once you get the civil servants and the tax gatherers used to a particular system, it is virtually impossible to change the system, because we can't change them; we can't change their minds. So, not so much in the area of direct taxes but in the area of indirect taxes which bring in more than 80 percent of our revenues, there is considerable inefficiency. And even within the Planning Commission, it was for me impossible to convince anyone that the system needed change or that we should not add to the inefficiency by imposing a consignment tax. As Mr. Baijal used to say, I was one against everybody else there. They all wanted more money. What the Planning Commission was interested in was more money. It eid not really matter how inefficiently it is raised. For example, the Government raised the interstate sales tax from one percent to four percent. You know the Indian constitution tried to avoid the pitfalls that had beset the assignment of tax powers in the earlier constitutions. It tried to divide the tax powers in such a way that there was no overlapping. But the constitution makers went only by definitions; they did not go by consideration of economic overlapping. Hence the interaction between the Union excises which have become a manufacturer's sales tax and the state sales taxes, leading into cascading and so on. But at least the constitution makers had realized that there should be no tax on interstate trades. But the Government appointed a commission in 1953- 54 and the economists there were such great experts in fiscal theory that they agreed to the imposition of an interstate sales taxl But they said that the rate - 11 - should be only one percent; otherwise it would harm interstate trade. However, later on, the civil servants of the Planning Commission said, "But we need more money, so what's all this nonsense about cascading, let's raise the rate of Interstate sales tax to 2 percent." Then they raised it to 3 percent; then they raised it to 4 percent. Then people found it quite profitable to avoid it by sending things on consignment and escape the additional burden. In fact, all the public sector units do that. Steel, petroleum, and coal enterprises - they all send their basic products on consignment in order to be sold in the state of consumption where the sales tax is paid. Then the states say, well this is wrong, very wrong. We should now have a tax on consignments. So the Parliament amended the constitution to say that a man is a woman -- a consignment is a salet And the Planning Commission supported this. Actually, in between, a committee appointed in 1976 by Finance Minister Subramaniam -- the Indirect Tax Inquiry Committee -- I was a member, recommended the eventful adoption of the value- added tax and had also suggested that this interstate sales tax should be brought down to 1 percent. Just after the Committee's report was submitted it was raised from 3 to 4 percent. So instead of bringing the rate down, they have raised it and I would not be surprised if very soon they raise it to 5 percent. This is a good example to show that efficiency in raising resources was not at all a consideration. Here I am not exaggerating. Absolutely no thought was given to it, even by economists because they, by and large, didn't think that public finance was a worthwhile study. We now come to the area of federal finance. As you know, in the federal system, it is necessary to provide for the channeling of resources to the central government and to the state governments, leaving for a moment the consideration of local governments. In India, as I said, after having studied the experiences of a number of other federal countries, it was decided to give to the central government the major tax powers so that these taxes could be efficiently collected -- taxes on production, income tax, corporation tax and customs. The constitution makers realized that this would mean that the states would not have sufficient resources to fulfill their responsibilities. Hence they introduced the idea of tax sharing and also provided for grants-in-aid from the center to the states. Then they added a provision that there will be constituted an independent Finance Commission every five years by '-he President, which will review the situation and make recommendations about the sharing of the taxes and giving of any grants-in-aid if necessary. Then the Planning Commission was established. And it was considered necessary to give money to these states in order to help them finance their plans, partly because they needed it, partly because giving of money gives some control in the hands of the center to influence state plans. Te Flanning Commission evolved a formula. called the Gadgill formula, which determined the relative shares of different states according to certain criteria, none of which had anything to do with needs as such, i.e. assessed needs or with performance or with efficiency. Now it so happened that the Finance Commission misunderstood their role and thought they were meant to see that the center kept on financing the ever- increasing deficits of the states. There was nothing in the constitution to suggest that. In fact, the first Finance Commission pointed out that it is not the duty of the central government to manage the budgets of the state governments or to underwrite their deficits. It said that each state should manage its own affairs provided they were given reasonable resources. A tradition was established by the later Finance Commissions that deficits could be underwritten - 12 - by the center. The Planning Commission encouraged the states to undertake expenditures during the plan in the hope that when these expenditures became recurrent expenditures, they would be taken care of by the Finance Commission. This induced the states to take a five-year view and to incur additional expenditures. The situation was made worse by the introduction of the so-called centrally sponsored schemes: during a given Plan period, the center will take care of the expenditure on the schemes and after 5 years, it will be moved on to the non-plan side to be taken care of by the Finance Commission. The cumulative result was that larger and larger resources in terms of relative shares of center's revenue had to be passed on to the states. The seventh Finance Commission gave a big blow to central finances by raising the share of excise duties in one stroke from 25 to 40 percent. Ever since, the central revenue budget has been in deficit -- not merely because of that but partly because of that. I am not really concerned here with how much money is given to the states, more and more money could be given if that was found to be really necessary. What is of concern is rather that the way and the manner in which money was being transferred both by the Planning Commission and by the Finance Commission led to profligacy and inefficiency. Those civil servants who have dealt with their state finances would in their private conversations tell you that this is not the way to give money to the states. There is a clear tendency for the states to waste money because it is given in this way. Meanwhile, as I pointed out earlier, the unspoken rule that borrowed funds should be used mainly for capital purposes and that the governments should maintain a balance between revenues and what are called revenue expenditures, that is, recurrent expenditures, was gradually eroded. Thus, on the one hand, resources were being raised, on the revenue side, inefficiently and on the capital side, resources are raised by having a captive market, controlling the rate of interest and giving unjustified tax concessions in order to attract money from the household sector. On the other, on the expenditure side, the money that was being transferred to the states in the wrong way and at central budget level, there the prudent norms of financial behavior were being more and more eroded. With the result that today, the most serious problem in India is not the licensing system but the lack of macro balance which was mentioned first by the Chairman. This is a very serious problem today. As far as the transfer of resources to the states through the Finance Commission is concerned, some changes have been made with the appointment of the ninth Finance Commission. Anticipating the changes to be brought about by the Commission, a virulent attack was launched on the Finance Commission to the effect that it was to apply norms and not going to fill the projected deficits. I must also add that it was not only a question of filling the revenue deficits of the states; the earlier dispensation was that the terms of reference would mention what was called the non-planned capital gap, which is the gap between all the liabilities the sta-cas had for repaying the past loans which they had taken from the center and other entities like LIC and their own capital receipts. The Finance Commission in the past were asked to calculate this gap and to suggest ways of dealing with it. So what would the Finance Commission do? It estimated the gap and said to deal with it, the center should reschedule their loans, write off interest to some extent and also write off some debts of poor states. This approach again induced profligacy, perhaps not profligacy but rather inefficient use of funds: if they invested money and could not get anything out of it, and they could not pay interest or repay loans, then the Finance Commission bailed them out. Now it did not help the states in the long run because the interest payments would go up through rescheduling. The center, on the other hand, had the responsibility to pay back the money to the market and to pay the interest, so the central debt also correspondingly increased. Thus we find that there has been a rapid build up of the public debt of India, particularly at the central level and from less than 30 percent of GDP at the beginning of the 80's, it has gone up to 60 percent at the central level alone. I think if we include debt of the public enterprises and of the state governments, it would be 70 percent of GDP. This problem cannot be settled unless some very radical changes are brought about. I'm giving a seminar on this subject in the Fund soon. I have written a paper for the Fiscal Affairs Department and my calculations show that whatever favorable assumptions you may make, unless the primary deficit is substantially brought down, the build up of debt would be relentless and there is going to be real financial crisis or chaos, I would say, within the next ten years. My calculations show that if the same rate of growth of domestic borrowing should continue as during the last five years, assuming that government's external borrowing would be frozen as a percent of GDP (it is only about 0.65 percent of GDP), then the debt to GDP ratio would increase from 60 percent to 110 percent by 2001. And a very large part of the revenue would be absorbed by interest payments. Additionally, because of the reasons I have given earlier, the return to government's investment of money has been much lower than the interest it has to pay. The ratio of the returns to interest payments fell from 83 percent in the middle of the 70's to less than 50 percent in 1990-91. So the net interest burden also became a substantial proportion of net revenue, even if revenue should grow with a buoyancy of 1.1. There has to be therefore considerable changes in fiscal policy. I suppose not much could be done with the Gadgill formula; in any case, only a limited amount of money flows that way and the total that is given could always be controlled. But the way that money is given through the Finance Commission, dealing with the debts of the states and the manner in which money is used by the center for investment, all of this would have to be reconsidered and put on a different footing. I would suggest that, as T.N. said, there has to be considerable pruning of government's activities. It has to give up a lot of activities. In fact, I had suggested to the present Finance Minister, in a paper that I gave to him, that he should now say that zero-based budgeting would be a reality and that each department should be asked to give up 10 percent of its activities straight away, whichever they consider to be the least important among what they are doing. It would not mean much if only administrative expenditure is controlled because in the revenue budget the administrative expenditures account for about 8 percent, but the so-called development expenditures account for a substantial proportion and most of what is called development expenditure at the central level consist of salaries of people who think they are dealing with developmental subjects -- you have a joint secretary for mustard, a joint secretary for pepper, a joint secretary for ... I am not exaggerating .. it may not be pepper but it will be some other crop. Agriculture is a state subject. Education is mainly a state subject. Rural development is a state subject. Then why have such a large Ministry of Agriculture and Rural Development at the Center? When we were discussing the creation of a program to take care of urban poor, we had a letter from the Urban Development Department Ministry saying, "Please note that if you are going to have any program like this, you must allow us to have a full-fledged Urban Poverty Division." Thus the first thing which the Ministry wants to do is to expand itself. Now it is - 14 - inherent in this approach to planning that we ignore that those agents to whom you give money have interests independent of what the donor has. There is an autonomous desire for departments to expand. There is an autonomous desire on the part of engineerin6 staff to ask for promotions; so we must have a larger staff so that they can have higher posts. They are not yet facing the crunch, it appearst I think substantial saving could come about, through reducing staff but whether it will be done I don't know. Then of course we come to government's net lending, which means giving of money as loans and investment in equity. This has also to be cut down. I have suggested that as far as possible, the financing of public enterprises be done outside the budget. Let all public enterprises except railways and the coal companies which they say are under the mafia -- get their finances from the market. The government can correspondingly cut down the amount of money it is taking under the statutory liquidity ratio, we may set up some organization, maybe a wing of the IDBI, which will then deal with these enterprises on a commercial basis. And they should compete for funds on the basis of performance. And any of these public enterprises who do not operate efficiently must ultimately be closed down. There is no way out of it if we want to save the nation from being drowned in the growth of public debt. The last point I would make is this: There is an inherent contradiction between achieving efficiency and allocating money, willy-nilly according to a plan which has been already prepared. We have to think as to how we should change this entire process of planning. As far as public sector investment is concerned, it would perhaps mean giving up the idea of central planning in some areas, because if you say that the enterprises will get money only if they succeed or if they perform well, then allocations will be set according to market principles and not according to your central plan. Now this I think will be the central dilemma that has to be faced in the next few years. As far as the rest of the problems are concerned, it is not beyond the capacity of Indian policy makers, the Indian people, to bring about the needed change. Now on the whole, I would say, even though I am speaking in the Bank, and in the presence of T.N., ours is a remarkable success storyl Only those who have lived like me, for more than 60 years in India, and known India as it was at that time, would realize how much progress we have made. But we could have made much greater progress if we had only listened to T.N., I agree. And as pointed out by Vijay Joshi in a recent publication, the controlling of inflation of 1971-73, and then again in '79-80 was a remarkable achievement. And we have maintained financial stability for a long period and it is not impossible for us to do so again. But we face some real political problems with it. And if those problems are solved at the political level, I think the economic problem can be faced. - 15 - IV. AGRICULTURE AND POVERTY ALLEVIATION B.8. Minas In this seminar on Policy Challenges in India, I have been asked to address some remarks to issues bearing on Indian agriculture and poverty alleviation policies. In the short time available to me, I intend to share some views with you which are not only selective but also purely personal. I am one of those who believe that the mainspring of agricultural progress and accelerated agricultural production has been and would continue to be the improvements in agricultural technology. The extensive margin for agricultural expansion in India was pretty nearly exhausted by the mid-1960s. It is true that gross cropped area has continued to expand in consequence of large investment in irrigation development. Nevertheless further exploitation of irrigation potential is going to be far more difficult and expensive. Further increases in cropping intensity - double and triple cropping of land to extend gross crop acreages - are also going to be more and more costly. Further growth of agricultural production and incomes is going to depend crucially on what happens to agricultural technology and new inputs in India. I am also of the view that the whole question of prices in Indian agriculture is often vastly exaggerated. This is something that I am willing to debate. Getting prices right in agriculture, at least in India of today, is an overplayed issue. I am in favor of getting prices right. In fact, I fought for getting prices right in the early 1970s with the help and guidance from C. Subramaniam and Jagjivan Ram. At that time, agriculture prices had a lot to chew on: It was indeed necessary to get prices right to exploit the potential of new technology of cereal production. Some of the decisions of the Government of India on agricultural pricing policy in the late 1960s and early 1970s were extremely helpful for the spread of green revolution. Nevertheless, the terms of trade were once again turned against agriculture in the late 1970s and were allowed to remain adverse during the 1980s. It is not my claim that all agricultural prices are right at present. However the potential of price correctives to accelerate agricultural growth is terribly limited today. On a rough guess, if all agricultural prices were right, the growth of Indian agriculture might jump from, say, 2.5 percent to 2.7 percent per annum for a while. This is about all one can expect through pricing reforms. However, there is no reason whatsoever why even this small pay-off should not be harnessed. The whole question of taxes and subsidies in Indian agriculture is a terribly convoluted matter. Land tax as a source of revenue has been allowed to pale into insignificance. There are hidden subsidies in the use of irrigation and power in Indian agriculture. Operating losses (alone) in the irrigation sector amount to about 0.3 percent of GDP. Losses in the power sector amount to about 0.6 percent of GDP - a substantial portion of these losses are allocable to the agricultural sector. Subsidies on fertilizers amount to about 0.7 percent of GDP. However a significant proportion of the fertilizer subsidy in the 1980s went to the fertilizer plants rather than to the Indian farmers. In view of an 16 - element of implicit taxation of some crops through the pricing route, the net effect of the fertilizer subsidy on farmers may not have been positive in most of the 1980s. Approximately 0.7 percent of GDP in the late 1980s has been spent on food subsidies provided through the public distribution system. These subsidies benefit the consumers - their beneficial effects on food producers (via price stabilization achieved through government purchase programs), if any, are difficult to pin down. We have a number of poverty alleviation programs (PAPs) in operation all over the country. As far as the rural areas are concerned, these programs in the past few years have been costing the government around 1.3 percent of GDP. However, not all benefits of the rural PAPs go to farmers. As said earlier, the terms of trade have been kept tilted against agriculture since the late 1970s. The prices of wheat in India have continued to be kept below the international level. Excert in the past few years (when Indian rice prices approached the international level), rice prices were also kept similarly depressed. In conclusion, it is difficult to say whether the implicit taxation of agriculture (through pricing decisions of the government), if computed right, would turn out to be any less than the various subsidies which have been enumerated here. The whole structure of implicit taxes and subsidies for agriculture is indeed so confusing as to make their incentive/disincentive effects difficult to figure out. Any progress towards simplification and rationalization of the tax/subsidy structure in Indian agriculture might go a long way in facilitating the decision processes of the farmers. It must nevertheless be appreciated that political managers all over the world often do not share the enthusiasm of the economist for clarity in policy objectives: the politician's preference for the opaque assures him more degrees of freedom in policy manipulation. Indian farmers, scores of millions of them, are price takers. Output of a crop season is determined by the decisions of millions of small farmers crucially arbitrated by weather gods. Prices are given by the market or some price fixing agency. In this perfectly competitive sector, the price-market solution is obtainable in its full glory. The problems of the kind addressed by T.N. Srinivasan this morning (regarding India's industrial sector) do not arise in the agricultural sector in quite the same form and intensity. Nevertheless, the agricultural sector attracts government intervention because the income distribution produced by the interaction between weather gods and markets is often found unacceptable. Considerations relating to the strategic aspects of food security of the nation are another important reason for intervention. Further, because of the atomistic organization of agricultural production, creation of new technologies in this sector is both a legitimate as well as an inevitable function for the government. As noted earlier, improvement in agricultural technology are a sine qua non of agricultural progress. However, this should not be understood in the technological quick-fix sense. Technological change has to interact with an array of social and economic forces. In the adoption and exploitation of new technologies by the farmer, a whole variety of incentive structures are important. In addition, the establishment of extension services, rural roads and infrastructure for rural health care and promotion of land and water development and drainage would seem essential to exploit the full potential of new agricultural technologies and inputs. - 17 - India's agricultural research establishment seems to have gone to sleep after whatever happened to wheat and rice with the discovery of dwarf varieties. Imaginative responses to the future needs of Indian agriculture are no where in evidence. We are sadly failing in anticipating the opportunities available to us for promoting development which might secure a bright future for Indian agriculture in tomorrow's world. We react to events after they happen. We keep fighting fires of the yesteryear: since we have been short on such and such items for many years, let us produce more of them at home rather than import them. The current emphasis on the development of edible oils crops belongs in this category. It is unlikely that India would ever be able to establish comparative advantage in the production of these crops. Rather than promoting an inefficient use of India's land resources in oil crops and certain beans, India should try to develop its enormous potential and advantage in the production of vegetables and fruits. Besides being highly labor-intensive, vegetable and fruit crops would also have important general ecological benefits as well as strong forward effects in the industrial field. Orchards and vegetable gardens can also supplement fodder supplies in a significant measure and thereby assist in increasing supplies of milk and milk products whose demand is rising at a very fast rate in India. Hills of Utter Pradesh and whole of North-East India can replicate what has been achieved in Himachal Pradesh. In fact a lot of rice production in Punjab and Haryana can be replaced by summer vegetables, provided processing facilities and international marketing channels are developed. Vegetable and fruit products can be transformed through international trade into edible oils and certain grains much more cheaply. However all this would require more research and even more development. The dynamics of comparative advantage in international trade has to be nurtured. Things would not fall into our lap. We must grab the opportunities still available to us in the production and processing of fruits and vegetables and establish our comparative advantage in world markets. In view of the many technological breakthroughs in the biology of animal reproduction in recent years, India can exploit its large stock of useless cows and buffaloes as incubators to receive and nurture "good" embryos whose supplies can be vastly expanded through the use of fertility drugs administered to a limited number of mother animals of known pedigree. The rising demand for milk and milk products, which has already been indicated, can be met through this route in a much shorter time. However, the efforts in this direction in India have been pathetically slow: both vision and will seem to be in terribly short supply. In 1970 I spent ten months at EDI and was responsible for teaching the first General Development Course. I dare say that twenty years ago the Bank seemed to have a lot more technological and institutional knowledge of the agricultural sector than it appears to have today. A lot of bright economists in the Bank today appear to be overly concerned with sophisticated, short-run analyses of policy problems of transitory political interest. The bigger and more durable issues in agricultural development of the member nations are being ignored. This neglect of the mcre durable and structural issues in agricultural development and poverty alleviation may need some correction in the IBRD. There is a strong and organic connection between agricultural development and the incidence of poverty in India. The dominance of this link notwithstanding, poverty is a multi-dimensional phenomenon. India's strategy to - 18 - deal with rural poverty has been translated into a large variety of poverty alleviation (the word "eradication" seems to be gaining ascendancy in the Bank these days) programs. I do not wish to give a complete run down on these programs. The current strategy of poverty alleviation in India essentially consists of two parts: One, since a lot of the rural poor do not have certain assets needed for development, the Integrated Rural Development Program (IRDP) was designed to subsidize acquisition of these assets by the poor. Second, a lot of experts believed that giving assets to poor does not help because a large majority of them find it difficult to meet their working capital needs, or do not have the skills to work with those assets. Therefore, what the poor need is a lot more of wage employment. And it is wage employment which is sought to be created through the National Rural Employment Program (NREP), the Rural Labor Employment Guarantee Program (RLEGP), and now the Jawahar Rozgar Yojana (JRY). A little over one percent of the GDP is being spent on these government programs. The poor are not a homogeneous lot. Different situations and problems characterize different groups of the poor. Approaches to poverty alleviation in different areas have to be modified in different directions. The important policy question here relates to the nature and character of the delivery system for the provision of assistance to the poor. The basic delivery system in India has essentially been the bureaucracy. Very limited use has been made of cooperatives, voluntary organizations and panchayats. While there would seem a lot of room for market institutions in the delivery system for the poverty programs, yet there has been little talk of markets as a component of the delivery system: Powerful people in India are allergic to markets and market- like institutions. Also very little thought, and even less administrative action, has gone into the creation and strengthening of economic organizations, with a social purpose, to handle this vast program for poverty alleviation. The bureaucrats and the politicians have instead turned poverty alleviation into a vast machine for dispensing patronage on an individualized basis. Leakages and corruption are a natural by-product of this bureaucratic delivery system. The recipient system for collecting the assistance from the bureaucratically controlled delivery system is constituted in the main by the individual beneficiaries, who are not at all organized into any meaningful collectivities. The late Professor Raj Krishna used to say that we must organize the poor as a countervailing force to the bureaucracy. Nevertheless, not many organizations of the poor have come into being The recipients do need to organize themselves, nevertheless the task is a difficult one. The reasons and skills for collective action are different in different areas. The recent attempt by the government of India to extend the scope of reservations to the (other) backward classes was largely designed to build a distinct political constituency and a huge vote bank for the party rather than to forge some organizations of the poor to control and improve the impact of the poverty alleviation programs. Different areas in India face different physical, social and institutional problems. In an evaluation study (1972) of the Small Farmers Development Agencies (SFDAs), I found that SFDAs made good and quick progress in those areas which were already endowed with good infrastructure. In those areas which lacked these facilities, the SFDs did not make much headway. The same conclusion seems to be emerging from some recent studies of the IRDP. This program, for instance, has yielded very good results in Western Utter Pradesh, - 19 - whereas its impact in the infrastructurally poor areas of the hilly region and in Eastern U.P. has been much less visible. It is often argued that India's social structure perpetuates poverty. Nevertheless, in our political system, the alleviation of poverty is made out to be the central objective of all political action. This has been the case particularly since the mid 1970s - a durable contribution of the confrontation between Indira Gandhi and Jayaprakash Narayan. The contradiction between the social structure that perpetuates poverty and the political system, which wants to allocate more and more money for poverty alleviation programs, has to be discussed and properly understood. However, there has been very little debate on this bizarre Indian phenomenon. Besides the hefty presence of conspicuous schizophrenia in India's body politic, the emphasis on larger and larger allocations to bureaucratically controlled poverty alleviation programs is best explained in terms of the patronage that it assures both for the bureaucrat and the politician. Not only do these programs make catchy political appeals in the populist environment, they also provide the wherewithal for the political activist and the bureaucrat to perpetuate their patron-client relationship with the poor. Two additional points need to be made on the current wage employment programs of India. The Maharashtra type Employment Guarantee Scheme would appear to have been done in now. The basic idea of the scheme was to provide a "safety net". Those who were not doing anything useful, could be employed at a low wage to do something useful. However the courts have ordered that RLEGP must pay the minimum wage fixed by law. In a number of areas, the market wage is lower than the minimum wage. The RLEGP in future would lose its safety net character. Second important point about rural wage employment programs concerns the following question: what would the wage labor under the RLEGP work on in the future? They cannot go on doing the same dirt road, rebuild the same panchayat office or the little school and the like. A whole strategy to tie up the recipients of wage employment under the RLEGP with general rural development will have to be worked out. I wrote a model of rural development way back in 1969. It was published in the Indian Economic Review of April 1970. The ideas developed in that model would seem immensely relevant even today: integrated development of land, water, drainage and social forestry, water-shed by water- shed, would seem to offer enormous opportunities for absorption of labor, not only in building up these resources but also through the practice of intensive private agriculture which these developments should make possible. However all this would have to be done on private lands and the wage fund provided in the government financed rural wage employment programs shall have to be delivezed to the recipients not by the bureaucracy but through market institutions. My talk thus far has been oriented towards the new policy challenges in India; about the kind of things we might want to do in the future. However, all that has been done since the early 1970s in the area of poverty alleviation programs has also to be put in an empirical perspective in order to appreciate what has been achieved. The one-page statement relating to changes in the incidence of unemployment and poverty in rural India, at quinquennial intervals since 1972-73, which was just circulated, may please be referred. Between 1972-73 and 1987-88, a proportion of work force in agriculture has beei.. falling, albeit very slowly. The male work force in . 20 - agriculture registered a fall of approximately 9 percentage points over this 15 year period. Although the participation rates of females in the work force in India are highly unstable, yet a fall of 5 percentage points has been noticed since 1972-73. The most comprehensive measure of the incidence of unemployment in India is available in the daily status unemployment rates estimated by the NSS. Although 1987-88 was touted by the government of the day as the year of the worst drought in this century, nevertheless the daily status unemployment rates, both for males and females, fell during this year. The proportion of rural people below the poverty line generally falls in a good agricultural year. Of the four years indicated in the table, 1977-78 and 1983 were years of better than average harvests and the incidence of poverty declined. Although I have not been able to process the 1987-88 data on consumer expenditures in a systematic and scientifically correct manner, nevertheless I have made a reasonable guesstimate of the incidence of rural poverty in 1987-88, the year of the drought. It comes out to be around 42 percent as against the firm estimate of 48.7 percent in 1983. In other words, as against the earlier pattern of fall in rural poverty only in good agricultural years, the incidence of poverty also declined in 1987-88 - a year of bad harvests. This is a welcome development which needs an explanation. This development, in my view, has come about in consequence of two things. First, the wage employment, under the poverty alleviation programs, was vastly expanded in the later half of the 1980s. Second, the public distribution system for food grains held up well inspite of bad harvests, because of the good availability of reserve stocks. The wage employment program did not let the rural employment situation to be affected by the drought - also the drought did not turn out to be as severe as it was made out by the government. To sum up, the incidence of rural poverty declined in 1987-88, because of (a) the provision of large wage employment provided in the poverty alleviation programs and (b) the stability in food prices maintained through large releases of food grains in the public distribution system. Some natural questions that arise are the following: Can the vast wage employment programs and releases through the public distribution system be maintained at the 1987-88 level in the future? Will these poverty alleviation programs be able to retain their safety net character? Quite aside from the legal necessity of paying minimum wage under RLEGP, the viability of the Indian fiscal system had already been strained to the outer limits during the late 1980s. Among other things, large public outlays on the poverty alleviation programs and in the supply of subsidized food through the public distribution system have already been partly responsible for stagnation in infrastructural investment for agriculture. And, as we have argued earlier, this lack of infrastructural and institutional development in the backward and poor areas would militate against the success of poverty alleviation programs themselves. India has been in the grip of a multi-dimensional crises for the past few years - mounting debt, unmanageable trade and fiscal deficits, large defence burden and an anarchic law and order situation. The recent gulf crisis has only further intensified this painful tale of economic mismanagement by the government. Under the current circumstances, it is unlikely that wage employment - 21 - programs for poverty alleviation and the public distribution system for the delivery of subsidized food can be maintained at the levels achieved in the late 1980s. The situation today is indeed grim, nevertheless the pith and substance of India's anti-poverty programs can be rescued, provided right lessons are learnt from the experience of the 1980s. Undoubtedly, some significant adjustments would have to be made not only in the size and delivery systems of assistance to the rural poor, but also in the strategy and patterns of rural development and agricultural production in the country. A number of suggestions for changes in the anti-poverty programs as well as for introducing some new thrusts in rural development and agricultural production have already been made. To spare you some valuable time to listen to H.E. Abid Hussain, I shall desist from summarizing my speech: I am also anxious to savor our Ambassador's new ideas. Nonetheless, I do hope that the policy makers of India, and their powerful advisers in the IBRD, would spare some thought for what has been said in the course of my short talk. - 22 - APN PERCENTAGE OF WOP.K FORCE IN AGRICULTURE, DAILY STATUS UNEMPLOYMENT RATES AND INCIDENCE OF POVERTY (Rural India: 1972 - 73 to 1987 - 88) Year Work Force in DS Unemployment Incidence Agriculture (%) Rate (%) of Poverty (%) Male Female Male Female Persons (0) (1) (2) (3) (4) (5) 1972 - 73 83.3 89.8 6.8 11.2 56.8 1977 - 78 80.6 88.1 7.1 9.2 54.2 1983 77.8 87.8 7.5 9.0 48.7 1987 - 88 74.5 84.8 4.6 6.7 42%+* Change - 8.8 - 5.0 - 2.2 - 4.5 - 14%* Note: 1. Data in columns 1, 2, 3 & 4 are taken from different reports of the NSS, published in different issues of Sarvekshana. 2. All estimates in col.(5), except those marked with (*) are taken from Miahas & Jain (1989), "Incidence of Rural Poverty in Different States and All India," Technical Report No. 8915, India Statistical Institute, New Delhi (Revised; Jan. 1990). 3. Figures marked (*) are based on approximate guess work. B.S. Minhas 5 October 1990 - 23 - V. PERFORMANCE AND PROSPECTS OF THE INDIAN ECONOMY His Excellency, Abid Hussain I must thank my friend, Mr. Attila Karaosmanoglu, for asking me to speak in the Seminar. I find the subject of the Seminar quite challenging and Mr. Karaosmanoglu has put it in a correct perspective by referring to the many dilemmas which India's policymakers are facing. While some of these dilemmas are inherent in the present volatile nature of global circumstances, there are some which are specific to India. To my mind, one of India's biggest dilemmas is attitudinal. An overwhelming obsession with problem-solving has bred intellectual pessimism, a kind of exhaustion leaving little energy for creativity. Concern with problems has become a substitute for pouncing on new approaches, new ideas and training people to investigate new possibilities. We fail to anticipate opportunities, and we indulge in fire fighting alone. It is this flaw in our approach which in itself is a challenge, to be overcome but it continues to saddle us with the costs of missed opportunities. This failure begets others. Having said that I should like to describe briefly the overall progress not insignificant, that India has made since its independence. Our achievements in terms of various economic indicators have their own tale to tell. For example, against 50 million tons of foodgrains which we produced in 1950s, India's grain production is now nearing 180 million tons. This is a significant achievement for a country which, until recently was dependent on imported foodgrains under PL 480. It used to be said that India lived from ship to lip. Today we have not only insulated agriculture from weather conditions but have also freed our country of dependence on food from outside. Similarly, India's industrial progress is no less insignificant. Its industrial rate of growth which was no more than 2 percent of GNP in the 50s has now achieved a growth rate of 7-8 percent, which, indeed, is something we can feel proud of. We manufacture almost everything we consume. We have diversified our industrial production to cover a wide range of products, both in the public and private sectors. We have a hierarchy of industries in large, medium and small sectors. India has also kept its cottage and village industries growing. India, 40 years ago was virtually bereft of scientists, technocrats, technologists and such professionals; today this class of people is recognized for its excellence not only within the country but outside. If these men and women of talent and education have succeeded in reaching America and assimilated professionally in this new but highly competitive world, it is due entirely to their ability and proven record of good performance. They got their green cards not as Christmas gifts but in acknowledgement of their good work. The number of our boys and girls who are employed here in the World Bank, in other financial institutions, in medical colleges, in hospitals and in many other businesses all over the world has increased considerably. These boys and girls were trained in Indian institutions by Indian teachers and in the Indian set up. Emergence of this class is in itself a commentary on India's performance in building up human talent and educated manpower. - 24 - In this transformation of India's economy, we relied most heavily on our own efforts. But it was certainly not bereft of foreign assistance. Though the magnitude of foreign assistance was extremely limited, it played a crucial catalytic role by contributing new technologies, scientific personnel and agricultural equipment when the country was not in a position to meet all its requirements indigenously. In pursuit of its development, India created a class of industrial entrepreneurs. On independence, India had few industrial houses of some magnitude. Today, there are at least 13 million small and medium level industrialists, They have come out of the womb of agriculture, from the rural areas. Similarly, workers who operate steel plants, machine tools, chemical factories, engineering industries, etc. are not foreign labor or guest labor, but our men and women coming from the rural hinterland. The State played a crucial role in progressively widening the base of entrepreneurship and in re-orienting labor to the needs of industry. Emergence of this class is also a tribute to the genius of the Indian people. A growing economy needed higher resources and increasing level of investments. This called for higher rates of saving. In India 96 percent of such investment, which has gone into agriculture and industry, has come from indigenous sources. Small savings became a rich source of capital accumulation. Through domestic savings at the rate of 25 percent, India was able to sustain its pace of development. Mobilization of such resources in a relatively poor country was a distinctive feature of economic growth and development in india. While there has been significant all round economic progress in India at a rate of growth of 5-1/2 percent, the level of development that was achieved is still far from sufficient. We are still groping for economic force multipliers. For example, we ask ourselves why agricultural production has remained confined to only few States and not encompassed huge tracts of dry land areas which form over 60 percent of India's total agricultural land. This lacuna has clearly deprived a large section of Indians from having the purchasing power to buy the food they need. The food which is distributed through special programs to reach all sections of the society, does not provide enough intake which is the minimum prescribed for healthy nourishment. In industrial production, facts relating to efficiency, cost of production, and distribution leave much to be desired. Hence the dilemma that inspite of several achievements in terms of various economic statistical indicators, India remains dissatisfied with its performance. Lord Keynes once said that when he was asked by soldeone how his wife was, he replied, "Compared to whose wife?" When we compare our rates of output-input ratio with some other countries, we find that others have done better than us. We have a fine, educated, skilled manpower; our labor is excellent; our professionals are world class, our demands are still very few; our capacity to work under inhospitable environment is matchless and yet we find ourselves caught up in low level of performance. Perhaps, we have gone wrong somewhere in devising our economic policies and in their implementation. One has to find out as to why we have not been able to mend or improve our policies. Why do we insist upon adherence to a set of policies which were good for the 50s but no longer meet the requirements of our new situation? Perhaps our biggest folly is in our mind set. We have become prisoners of some outdated economic and political formulations. We use the tools of scholarship and excellence of mind - 25 - to perpetuate the past and fear change. Wc are more inclined to become missionary rather than scholars. This approach is intellectually faulty and needs to be challenged and corrected if India is to handle the complexity and variety of challenges which it faces. Beliefs and mental attitudes represent an essential feature of progress. They represent a strong non-tangible force which imparts dynamism to one's drive for achievements. Some of our outdated ideas and notions have crippled our otherwise outstanding efforts. Ideas move people; ideas can also destroy them. The Indian mind is still entangled in the old debate about growth and social justice. There are people who continue to argue that for the eradication of poverty, rates of growth are not important. The way they pose this issue gives one the impression as if growth and poverty eradication were two rival objectives. Such a position once taken can cause immense harm. One cannot have social justice without growth though growth by itself is not enough. Dr. Minhas and some others have established it beyond doubt through their studies that there is a direct linkage between growth and poverty eradication. He has proved that where good rains led to bumper harvests, poverty was found to be shrinking. Hence to say that social justice or poverty eradication is possibly independent of growth is to mislead the country. There may indeed be a debate on the contents of growth but to deny the importance of growth is a prescription for disaster. Growth may not be a sufficient condition for social justice but it iv a necessary condition for it. The longer such debates engage good minds, the longer would Indian people suffer the pangs of poverty. Poverty of mind is worse than material poverty. Prof. Jagdish Bhagwati and others have long cleared the misconception associated with the percolation theory to meet the requirements of the people. They have said that growth when accompanied and followed by a pull of strategy helps to distribute the fruits of production better and enable a larger role for people below the poverty line to cross their state of misery and enter a level of better living. Some of our mandarins still try to detract our attention from the strategy of pull up and repeat their prescription of the percolation theory which prevents the country from evolving a better strategy for helping people cross the poverty line. Similarly, the down playing of the middle class which has recently emerged in India shows the reluctance on the part of mandarins to recognize the new asset which India has found. The middle class in India now consists of something over 120 million people. These men and women do not come from the leisure class of India but are the products of a new people who have their roots in rural India. They are the by-products of agriculture, industrial and services development which has taken place in the country. They have come from the ordinary families of small teachers, small builders, small bureaucrats earning their hard income through hard work. The only way that the poor could go forward is to follow the example of this rising new class of men and women and not to accept any longer the old idea that the way the poor can enrich themselves is by impoverishing the rich or strengthen themselves by weakening the strong. But many amongst us still wish to pursue the old adversarial class conflict party line approach. Maybe it was correct at one point of time when the whole game of economics was based on class exploitation which was rooted in the earlier zero sum nature of economic growth. The technology development which Dr. Minhas referred to has brought about a qualitative difference in the material conditions - 26 - in which we operate. New technologies have made a great difference to the economic scene. Failure to take cognizance of this change and failure to adjust our policies to this reality is again rooted in certain ideological bent of mind which is holding up progress. The point I am trying to make is to emphasize the need for thinking afresh and viewing the problems with a new mind set. There are still people in India who are not alive to the new realities and to the obvious changes. They continue to suggest that social justice requires us to keep the growth process on the back burner and this emphasis on industry and agricultural growth should be toned down by denying the flows of technology and investment both from inside and outside the country. Growth has, indeed, a tendency to accentuate inequality and imbalance among the people. The State certainly has got a role to selectively intervene and correct some of these imbalances inherent in the development process. But this has got to be done by providing incentives to a larger number of people to pull themselves up and not by pushing back those who have come up with their effort and dynamism. The State should provide for welfare activities but should not become a succor for those who have failed to muster up sufficient resources for their ventures. But cutting down the growth of development of those who are agents of growth in the country just because they are growing too fast would be like killing the goose that lays the golden egg. It will not serve the purpose of eradication of poverty at all. It would not bring social justice any nearer. It will perpetuate and enhance the number of tte impoverished in the population. Similarly take this idea of self-reliance which is indeed ennobling and a highly motivated thought. But to make self-reliance co-terminus with self- sufficiency is to confuse the two thoughts and would cause immense harm to the country. It would deny the people the opportunities of learning from others and the benefits of creative competition. It is the surest way of destroying the creativity of man's mind which flowers in interaction and grows with competition. It would be a sad country where science perishes but scientists flourish. A closed mind and closed economy go together. Once we have a closed economy one has closed the opportunity for industries to grow. In the absence of competition firms and units of production do not feel an urge to improve. Without a threat to their existence, they get averse to invention, innovation or development. The failure to reach the heights of technological development can be the direct result of the lack of demand for technology for industry and agriculture. Unless the industry or agriculture have to compete with others in the market, they would never turn to the scientific institutions for supply of newer technologies. Similarly when the laboratories and scientific institutions are not under pressure from the field, their creativity remains unchallenged, untested and unflowered. In a non-competitive environment, talk of technological self- reliance remains but a slogan. That is why unfortunately, we have cases of frozen technology when others who took to industrialization much later have overtaken us. The patriotic slogan of national self-reliance can become in the hands of protected industrialists and intellectual laboratories a drag on the society. Similarly on exports there is a stream of opinion that would rely not much on exports but on import substitution as though the two ideas were hostile and inimical, Though, Jawaharlal Nehru had once said that we wanted trade and not aid, his ideas were just given lip service and never tried out with - 27 - seriousness. Import substitution became our idea wiihout recognizing its down side and without understanding that import substitution has to be efficient and cost effective. Our mind set in this regard has of late undergone a change. But changes have to be administered not as a homecpathic medicine but sometimes with surgical skill. Fast reforms and comprehensive reforms; that is what we need. In the first two years of Mr. Rajiv Gandhi's regime, he did come out with reforms which indicated a new mind set visualizing the prospects of the 21st century and moving with confidence to lead India towards it. Time is still on our side to realize our old flaws and to break away from them. Fortunately, India has now found a constituency for reforms: the 120 million people who have now entered the middle class. This is a class which is greedy for more goods and better goods. This is a class which is asking for choices to be given to them. This is a class which is prepared to earn in order to buy and own the latest consumer goods for their wives and children. This is the class which would like their children to attend the best schools. This is a class which would like their income to increase so that they could afford a better standard of life. This is a class which feels that there is nothing shameful in consuming good things of life. This is a class which believes that it can go faster if the State were to get on their side. This is the class which is remodelling the mind set of India for it is not averse to incentives. This is the class which is not indulging in the hypocrisy of preaching one thing and doing the opposite. The new electronic media is conveying to them the dynamism of change in the world and is creating in them a desire and a zeal which is not easy to resist. It is this class which will demand reforms and provide support to reformers. The people who are inclined to bring new changes and move away from the old hackneyed mind sets can look to this class for support. A new awakening is overtakin& the old conservative disposition and "the desolation of reality." The long detour from the nagging question of how to reconcile efficient production with a just society would now be fought out on the terrain where it always belonged - in the performance of a liberal economy. I have faith and confidence in the rise of this new thinking and a generation of leaders born out of the middle class who would bring a new change in India's thinking. The political set up of India which operates in a democratic framework will provide opportunities to this new class to strive for political power. I conclude with the belief that the prospects for reforms in India are improving because for the first time we find that the old self-inflicted ideas which gave a sense of immobility are now about to die. Ideas which could change the mandarins are grappling for supremacy. The existing elites so dependent on maintaining the distortions would be swept away. A new India is already born. Its features are clear and the day is not far off when the children of these new ideas will realize their dreams with a big bang. They will be less obsessed with problems and more interested in new opportunities. They will, I am sure, be the locomotive of new India to meet its challenges and help the country realize its potential. - 28 - VI. COMMENTS AND QUERIES Oktay Yenal Thank you very much, Mr. Ambassador. You certainly are one of the most optimistic economists and officials of the Indian Government and you certainly lifted up our spirits. When I distributed the list of our speakers and the program of this seminar, I received similar comments from a few quarters. And the comment said, what is this? You have put together economists of your own gentration and they are all gray-haired people. There is a new generation of economists in India. Will they get a chance to speak? Although, I still consider myself to be, in spirit, a young Turk and although we've already seen from the presentations we have heard that freshness of ideas doesn't evaporate with the grayness of hair, I thought I should do something so I looked for a representative of the younger generation and I asked Surjit Bhalla and Shankar Acharya to give us their perspectives. I also hope that we shall have the benefi of comments by J. S. Baijal and Gopi Arora. Suriit Bhalla Thank you very much. It's a burden to represent the "younger" generation. Nevertheless, it is a great honor and a privilege to be in this audience to listen to the speakers, some of whom I genuinely consider to be my gurus. I happen to agree with substantial amounts, where substantial is any number greater than 80 per cent, of what has been saidt So in that sense, I really do not want to put myself in the position of any disagreement with what has been said. But I would like, if you will. to emphasize an element which has formed the undercurrent of the discussions here. Just at the end of his remarks, the Ambassador posed a very good question. The fact that a lot of Indian scientists are in America and outside of India is a mark of Indian failure not of Indian success but that's a quibbling point. But back to the central issue, I think, he had a very important point to make as to the constituency which will support reform in India. But then he never answered the question: Who stops us on the path of reform? He said that there is a constituency that will make sure that the reform will come to us, but he never really answered who has stopped us. I think in between he hinted very broadly, and maybe what he couldn't say, so I'll try to say. A definition of development is something that all of us, people around this table, have tried to come to grips with. I leave you with a very simple one: that a society can be considered on the path to development if its leadership is willing to admit to past mistakes. I think that's a necessary condition, and how fast you react to your past mistakes will indicate how fast you develop. - 29 - In India the debate has been as to who's to blame for the fact that we haven't admitted to our past mistakes. And the concentration has been on politicians, on one side, who are not really able to bring about reforms. And on the other side, (and I'm very apprehensive for what I'm going to say because I'm a bureaucrat, my best friends are bureaucrats, both in India and in the U.S.) are the bureaucrats who must share responsibility for the failure of India. Now we have a clear identification problem because people will say, "Look, you have politicians, you have policy makers." What I mean by bureaucrat, I mean senior bureaucrats who are policy makers. Now you say if they do something it won't pass the political economy test, and there will be riots in the streets and so on and so forth. And to that I offer the following. Since the mid-70s which is when most people date the beginning of reforms in India, we've had five different governments. We had the Indira Gandhi emergency which I will call mark 1. The Janta Dal, which is, if you will, Janta Dal mark 1. And then you had Indira Gandhi, mark 2. Then you had Ranjiv Gandhi, mark 1 and now you've got Janta Dal, mark 2. So you've got 5 changes of government and really all will agree that these politicians, in terms of their goals, in terms of their emphasis, were quite different from each other. Yet I would emphasize that what has stayed constant in the Indian decision making firmament are the bureaucrats. And in some cases they have stayed identical in terms of individuals. I am not one of those who believe that there's been no change in India in the last 15 years, and I would even assert that the changes have clearly been in the right direction. But to call it liberalization is I think a misnomer to all those people who have attempted to liberalize elsewhere. An alternative term for what is happening in India is "tinkerization." We have tinkered and if you have seen partial success in that tinkering, then I think we should be grateful but we should also realize that we really will achieve substantially more, if we do get substantial reform. Now let us consider this question as to whether it is the bureaucrats or not who are responsible for policies. One perspective is that the policies have broadly stayed the same, the decision makers have stayed the same, but the politicians have differed. So why don't we look at the decision makers, the bureaucrats. In that case, the decision makers are, therefore, people around this table. But I have no gripe with the bureaucrats around this table. Because as they have mentioned just now, they want change. But there is a substantial body of bureaucrats in India who believe that changes will be bad. Regarding policies: let us take trade policy first. We have only two more allies left in the world today, as far as trade policy is concerned and they would be Cuba and Albania. Because in India's import-export policy, there are three items which are on the restricted list. One is thanite, one is dental chairs and one is dal-making machinery. And so I call up some of my favorite friends and senior policy makers in India and I will be quoting one of them. I said, "What is thanite and why is it on the restricted item list?" He said, "Look, I've been in several meetings with these very same senior policy makers in India. And let me tell you that when they put something on the import-export restrictive list, they do not know whether it is a solid, liquid or gas." This is how a senior active policy maker described policy making in India. And I think that this is a devastating critique. It is the interest group of this - 30 - bureaucracy. It is the ideology of this bureaucracy which represents a major determinant of Indian policy failure. The last point I want to make is that we economists do not like to emphasize ideology because we think in terms of interest groups, but I like to think of ideology independent of interest groups. There is a strong ideology amongst senior bureaucratic policy makers in India today: not different than in the past, and not changing, an ideology which has stayed relatively constant for the last 15 years and which is, and has, had a stranglehold on decision making and on change. And it is a fact that they do not want to admit the mistakes that propel them to commit the same mistakes over and over again and make India a failure. I think I'll end on this note. J.0. Baijal I was planning not to speak at all at this time but since I have to go away at 2:30 to attend one of our Board committees, I can do so only now. I think I can take off on one issue from where Surjit Bhalla left off. Surjit has, of course, come to a judgement and found out the determinants of our inability to change. But I think this requires a little deeper analysis than that. And we would ask ourselves that why is it that bringing about a change is proving to be so difficult. I don't think that the advice which T.N. gave is not known. And as somebody remarked even in one of the Board meetings that at the senior level, persons who are giving advice to the politicians in India have worked in these buildings and these surroundings and these are the same persons who have done very well at the same universities which the people who are here, attended. So, it is not that this advice is not known. Whatever Dr. Chelliah has said is also known. In fact, he has been giving that advice all this time. For the last 10-15 years, we have heard this advice. And the only disagreement, not disagreement, addition I would make to whatever Professor Minhas said was that there are still many areas in India where a lot of foodgrain development is possible. If you talk in geographical terms, Bihar, Assam, etc. in terms of the second crop, and so on and there are phenomenal untapped resources in land, water and so on. But these are minor issues. The major point is that if this advice and all this is known, why is it that we are not able to make changes? Is it because of our institutions and one of them is the bureaucracy which we have set up? Is it because of vested interests? Again bureaucratic vested interests are part of that. Or is it because of a fear, a kind of vague fear, which everybody sort of gets worried about, that if I try to make this change, it will harm me politically, or it will harm me in my position, or if I give this kind of advice, it will be misinterpreted as being sort of going on the Reliance way, or going on this way or that way. Or is there a real worry that if you make so many changes, they can create problems especially on the balance of payments and this risk may not be worth taking and so on and so forth. Theoretically, of course, balance of payment is something which is manageable. Foreign exchange is purchased and sold at a certain price. And if you make the prices right, payments will balance. But whether that theoretical possibility can be achieved in a very short term and if not, what is the risk to the decision maker? You see India has this problem of not having friends with money bags who would provide safe payments. So what are really the reasons for which we are not able to make - 31 - change? I think, this requires a little more, and a little deeper analysis than merely saying that because parties have been changing and politicians have been changing and because the bulk of bureaucracy which comes from a certain kind of set up is constant, they are responsible for inertia. I must add that the persons have all changed there also, they keep on changing too fast in the opinion of many observers. But if Surjit's explanation is to be accepted, then there is a very simple solution. You just have to give up that specific bureaucratic system. It is not a very difficult solution. But I am not quite sure whether this is going to lead to any change in the pace of change. Now there are lots of other things. I would like to keep up the tempo on this one so that this particular aspect can be covered at the pre-lunch session. One more point and that is, I wanted to bring to everybody's attention what Abid said and which nobody noticed. When he referred to Planning Commission, he said that 'what' you call Planning Commission. He never admitted that what he was doing was planning and this is a fact. T. N. Srinivasan My point simply that fear of the adjustment costs involved (political, economic, bureaucratic, what have you) is stopping us from going ahead with the reforms that we all know are essential. Far be it for me to suggest that whatever I am saying is new. Quite the contrary. Most of it is well-known. But on this particular question of adjustment costs, there are two or three responses possible. First, these costs are exaggerated. In fact, if you think through what you perceive to be adjustment costs, they turn out to be fears, not reality based on any circumstances on the ground. Second, given the right kind of incentives, the responses that we can expect from the Indian economy and the Indian industry would be quick and would be quantitatively significant. I think this exaggeration of inflexibilities and rigidities inhibiting supply response stould be avoided. Third, is it really the case that the system cannot think up a way of designing a program which would be mutually consistent, hold together and can be sold to the voting public and also to the industry and the other constituencies involved? I do not think so. After all, the main elements of the reforms are known. Let me take one example. If you want to make a credible change in trade restrictions, one way to do it is, first of all, you change the quantitative restrictions into tariffs. Then you bind these tariffs in agreement with the GATT to provide credibility to a commitment that once having reduced the tariffs, or having narrowed the range of tariffs to a reasonable magnitude, that you are going to stick to it. That is to say, you will not do as we have always done; one day we not only announce freer import-export policies, but also that they will remain freer in the long-term. Then the very next day, we introduce 250 amendments to the previous day's policy pronouncement and even make an announcement that every week or every month we will change the policies as the circumstances warrant. That kind of an attitude to change is not credible. But if one can commit to binding tariffs under GATT, announced tariff reductions will have greater credibility. That is only one example. One can think of several such things. Once again, I do not see a problem in designing a credible reform program. But if the fear of the unknown is going to keep us from doing what we need to do all the time and if we go down the structuralist route and imagine - 32 - everything is inflexible, so that nothing can bi moved and price signals do not matter and all that we can do is to tinker with the quantities as the short-term circumstances warrant, we will never get out of the bind that we are in now. Gopi Arora There's very little time but I would just comment on Surjit's description of the bureaucrats as being the stumbling blocks. I think, as a shorthand, it's a good explanation, but I would like to find out why it is that bureaucrats who, after all, are intelligent human beings, and who also live in a world of ideas, believe what they do believe. I would like to ask Surjit to suggest as to how it is that the hold of ideas or theories or set of ideologies which have been shown not to be working successfully, has remained so pervasive and so strong. And it is not only bureaucrats who believe in those ideas but also economists. The question is why it is that there has been this reluctance on the part of the intellectual establishment in India to profit not only from the lessons of India, but also from lessons of other economies where those ideas were originally tried out. The idea that economic development could be guided and carefully planned arose in a particular context of world history in which the Indian development began to take place. I think there is something interesting here. I imagine if one were reflecting on one's experience and if one thought one had been wrong, one might develop a guilt complex. One appears as an apostate in the eyes of the faithful, a traitor to something which one held to be sacred and dear. Perhaps there will be some personal element, too, in the sense that bureaucracy gives an illusion of power; therefore it does not want to give up power. There may be also something of that. But I think to many it is also a question of whether the ideas that they had believed in were wrong or not and that's an important question. And they themselves are not the originators of those ideas. They were and are in fact the consumers of them. Shankar Acharya It's pleasant to be flattered and called young when one is middle-aged; so I won't try and refute that. I shall try and be brief. Of course, when one is obliged to follow the fascinating eloquence of Ambassador Hussain, anything one says appears to be a case of going from the sublime to the ridiculous. I do believe that there is some tension between the set of policies that T.N. is suggesting for us and those that Raja is suggesting. I very much agree with Raja that in the immediate future, the critical problem is one of macro imbalance. For as long as we have to cope with this macro-economic problem, I am not personally very hopeful of a major restructuring of the customs tariff and import licensing regimes to encourage the kind of efficiency in industry and trade that otherwise I would very much like to see. This is, of course, more a positive prediction and less a normative recommendation. My pessimism rests on an appreciation of the nature of the fiscal problem. Basically, I feel that the crux of the fiscal problem is rooted in the expenditure side. This is true both at the Central Government's level and at the - 33 - levels of the State governments. In either case what we have are (to use the term deployed by the Rudolphs) "demand groups," which are deeply entrenched in budgets at different levels of government. So what do I see for the future? If I am to be a little "optimistic" I would say that, politically, inflation is very, very costly in India and has been shown to be so. Therefore, when push comes to shove, we may see some elements of government expenditure pruned. But my fear is that the ax will fall mainly on investment and development expenditure because the lobby for such expenditure Is ultimately more in the realm of ideas. In contrast, the lobbyist for current expenditure are, at least in the short-run, in the form of strong, well-articulated pressure groups. Thus, my short-run "optimistic" prediction is that we will probably contain inflation but only at the expense of growth. A more pessimistic assessment would be that the expenditure juggernaut would remain substantially unchecked. In that case, I do not see how we can avoid acceleration in inflation to levels of 15-20 per cent per year or higher. And if this more pessimistic scenario does come about, the key question I would like to pose is whether this order of inflationary pressure is likely to accelerate or retard the forces for economic policy reform in the Indian political economy. I do not have an answer but I would like to pose the question to the distinguished panel present here. . 34- VII. SUMMING UP - REMARKS OF A. KARAOSMANOGLU Well, this really has been an extremely interesting, thought-provoking and enjoyable seminar. Therefore, I personally feel gratitude to all the speakers. Let me try to give a few brief points on what I have drawn from this discussion. When I discuss with my Indian colleagues, friends, counterparts, there are a series of questions that typically emerge. And they emerged in this seminar also. One of them is: Why are we where we are? Are we where we are because of the bureaucracy and planning or despite the bureaucracy and planning, both in terms of the successes of India and in terms of the failures of India. Thus, we usually have some differences of opinion as they appeared this morning. But by and large, one can have a reasonable and not necessarily very controversial discussion on these questions. The second type of question which usually emerges is: What would have happened if the advice of our panelists this morning had been accepted years ago? That's a discussion which leads nowhere because you cannot really decide what would have happened if the advice were to be taken. To my view, that is a rather sterile area of discussion one should really avoid. But then the question becomes: What are the challenges today? There, I think increasingly, there is quite a bit of uniformity in ideas and an acceptance of the basic challenges that are facing India as an economic entity, as a political entity, as a social entity, and I think we have observed this also this morning in our discussions. Because of the time limitations, I am not going to indicate them one by one. But then the more difficult question arises. And that is, what needs to be done and how are we coping with it at this point? It was quite interesting that in this morning's discussion, we have seen also quite a bit of uniformity in the type of needs, in identifying the basic thrust that the economy and society should take. But, how It will be done and why it is not being done are different questions. And how much is being done is also a critical question. I think that we tend in our discussions with colleagues to talk about the opening up of the economy, simplification of procedures, etc., and my colleagues a few months ago told me that the procedures were really very much simplified now in terms of import-export policies. And I said, how is it formulated? Where is it? They said, the procedures are only 800 pages long now. So, there are some differences of perception as to how much we do, and what we do but basically the thrust is the same and it is there. I would not take Turkey as an example to be followed by any country at this point, certainly not for India. But there is one thing which I would like to mention. It is not systematically studied or scientifically proven, but it is my real impression that one event caused much change in terms of the outlook of Turkey's economists, the bureaucrats and the politicians. The winter of 1979 turned out to be one of most harsh, the most difficult winters Turkey has lived through. There was a major balance of payments difficulty and crisis. The . 35 - country could not import oil unless it paid cash. And we had to buy it on the spot market because we didn't have the necessary reserves in cash. So, all these bureaucrats, all the intellectuals and university professors had to live in their houses, in their offices, with their old coats and two or three changes of clothes in order not to freeze. That has caused, in my mind, a basic change in their understanding and attitude. They discovered that was the end of the road in terms of inward orientation. That was the time when one really had to think, about being self-reliant and not reliant on the outside and these thoughts started some change in the approach. I hope in the case of India, one does not need to arrive at that point where the central electricity system or the special generators don't work because you cannot import the necessary oil due to foreign exchange difficulty. But change starts in different ways and gains momentum in different ways. However, when one looks at the present day challenges, not only the long-term challenges, but the short-term challenge, I think Shankar Acharya and J.S. Baijal basically summarized the response I get from Indian policy makers who say that there are great uncertainties at this point and a straight jacket in terms of balance of payments. They say it would be foolhardy to think that we can at this point make very drastic, very bold new initiatives. Of course, there is probably merit to that but a country as large as India, as diversified as India and with as vibrant a democracy as one has in India, there will never be a very good time to have a difference in attitudes unless some people in position of power, either political power or bureaucratic power or intellectual power, really trigger some change and are prepared to take, however calculated it may be, some risks and start making the changes. I think if that starts, since there is a general consensus about what really needs to be done and how it could be done, with some differences, i think the roads would be opened. I must say I basically share Abid's optimism. I am optimistic. That doesn't mean that I am saying that India will not go through a balance of payments crisis or may not go through a balance of payments crisis before things start changing. But in the medium and long-term, India will work these things out successfully. I have seen how the Indian countryside and India has changed in the last 30 years and that process will accelerate. I would like to conclude with one really precious memory. I think it was in January, 1961. It was two or three in the morning in the garden of one of the houses that were given to civil servants in India, and I was with Petambar Pant. He kept asking me a lot of questions about Turkey in his machine-gun style. What is the rate of growth? What is the composition of GDP? What is the savings rate? What is this, what is that, etc., and I was trying to answer as quickly as I could that we had only an export level of about $500 million. We were trying to stretch our imagination to see whether we could make it $550 million. Per capita income was over 150 dollars and the rate of growth in Turkey in those days for the last 5 years had been about 5 per cent. He turned to me and said, "Attila, why are you trying to plan?" He said, "If I get to that point, I will stop all the planning in India." Maybe the time has come. ASIA RE(GION DISCISSION IAPiR SIRIES Title Author I)ate (Originator DP 74 A ('kv Study of a ( idual Appro vach to 1-conomwe Refotm feiv Viet Njm I-xperience ol 198s 88 7 Drabek Septeiber 1990 1. Drahek (80504) ID18S On i stimating Inadequtcy o Energy ltke,s. Rde4ld 1,xd Consumpion Behv<ior versus Nutritional Norms B S Minhas September 1990 S Jaiyaithi (81419) 11)1>88 Asia Region Seminar on Policy hl<lenges in India Octobcr 1990 C Chamherlin (81409) Notc: Extra copies may be obtained from the Asia Information Service Center.