India’s Economic Reforms

The Economist writes about what we can expect:

The [Common Minimum Programme] is less ambitious than Congress’s economic manifesto (10% annual economic growth; abolition of unemployment, hunger, poverty and illiteracy). But its admirable goalsannual growth of 7-8%, alleviating poverty, helping farmers, empowering women, raising spending on health and education and so onare so vaguely presented that it is like a child’s letter to Santa Claus. Everybody can pick a desired outcome from the list, and believe that Christmas is coming. Santa, however, will find the chimney blocked by hard economic reality, in particular a fiscal deficit of around 10% of GDP and a federal system that has proved shockingly bad at implementing even the worthiest policies.

Mr Chidambaram, however, has identified the correct objective. He says he wants to be the investment minister. What India desperately needs is investment, public and private, above all in infrastructure, education and health. Reform is about removing the obstacles to it.

Perhaps the CMP’s most eye-catching proposal is a promise of an employment-guarantee act, to provide one member of each poor and lower-middle class family with 100 days of work at the minimum wage on asset-creating projects. Arjun Sengupta, a former executive director of the IMF who helped draft Congress’s economic manifesto, estimates that a self-selecting group of 50m families might apply. His estimate, assuming a wage of 50 rupees ($1.10) per day, is that the scheme would cost 250 billion rupees ($5.6 billion), about 1% of GDP. But, he says, it would replace other entitlements for the poor costing 180 billion rupees.

Besides meeting the basic needs of the very poor, the scheme would bring two other benefits: jobs and much-needed infrastructure. It is thought that 40m Indians are looking for work. That is already more than 10% of a labour force growing at 2.3% a year. A vast, cheap labour force could go to work on road improvements, rainwater reservoirs, irrigation channels, dykes and community centres. Even close to the cities and highways, roads soon peter out into pot-holed dirt tracks. Three-quarters of cultivated land is unirrigated and dependent on the monsoonwhose lavishness last summer is a big factor in the booming year that has followed.

Paradoxical as it may sound, Mr Chidambaram’s best hope of achieving his goals as investment minister is to cut the government’s deficit. He is committed to doing this by a fiscal-responsibility law passed last year. He has already pushed back the deadline for eliminating the revenue deficit by a year, to 2009. His first budget, to be delivered in the first week of July, gives him the chance to begin the serious tax reform his government has promised. As a proportion of GDP, tax receipts are actually lower than a decade ago. The present system is based on harassment, coercion and suspicion (as even the previous finance minister admitted) as well as corruption. What is needed is a simpler structure, less riddled with discretion-based exemptions, and a broader tax base.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.