Comment

The other day, Fareed Zakaria, editor of Newsweek International, had a sharp message to give the UPA government: reforms cannot be avoided anymore.

Speaking at a function in Delhi, he said: “It has been possible to go without enacting a major reform programme in India because the effects of the 1990s reforms were still working their way through the system. But now that free ride is over.”

That’s good news. Till the meltdown happened, the government had beenliving in a fool’s paradise. Encouragedby high growth rates and boomingstock markets, it convinced itself that it was doing a fantastic job with theeconomy.

Now that that illusion is dying, we could see some real reforms. Theoutperformance of the economy in the last five years had little to do withwhat Manmohan Singh and P Chidambaram did.

The momentum built up earlier kept it cruising along. There was no major initiative to put the economy on a higher growth path, barringthe huge increases in social sector spending. Nothing was done even to improve the efficacy of social sector spending. The crores spent have largely gone down the drain.

It is worth recalling that the 1991-92reforms were forced on us by external bankruptcy. And Manmohan Singh — widely acknowledged, but possibly wrongly, as the main architect of those reforms — was not exactly all that gung-ho once he was out of power. No sooner did he stop being finance minister than he started criticising those who weretrying to implement reforms in subsequent governments — the United Front and NDA.

According to Zakaria, no government — especially democratic ones — is willing to sell the idea of short-term pain for long-term gain. This is why subsidies are not cut, and welfare programmes bloat beyond recognition without delivering commensurate benefits. Put another way, governments reform only when there is no other alternative left. A related problem, one pointed out by Thomas Friedman in his latest book, Hot, Flat, and Crowded, is that governments which command a lot of resources are always loath to reform.

The logic is simple. If I have oil wealth or lots of tax revenue in the kitty, Ican buy the citizen’s loyalties by giving her freebies. This is an easy way to retain power. Examples are a dime a dozen.

The Saudis run a feudal society because they have enough oil wealth to buy off their citizens. Putin’s Russia changed colours from democracy to greater despotism when oil wealth started flooding the state’s coffers. Ditto for India’scurrent regime.

The UPA inherited an economy growing at close to doubledigits, with buoyant tax revenues. It, therefore, chose to run a loose ship, and wasted money on pork-barrel schemes. In contrast, the NDA regime, which saw slower growth and weaker tax revenues, had no option but to reform public ownership.

It sold off some state-run companies, raised oil prices morefrequently and came close to disinvesting controlling stakes in oil companies — till politics intervened.

If the main oil companies had been privatised, the UPA government today would have had no option but to run a sensible policy of passing on at least a part of the oil price increases. I am not saying that the NDA government was more reformist than the UPA — just that it had fewer options. After Pokhran, when Bill Clinton ordered sanctions, the NDA had to do many things to attract foreign investment — open up insurance and telecoms, among other things.

Towards the end of the NDA regime, when the state’s coffers started overflowing and elections loomed, the zest for reform dwindled. The moral of the story is clear: it is not good to entrust the government — any government — with too manyresources if you want it to take sensible economic decisions.

On the bright side, the current global meltdown is going to rob government of resources, and we could see some real reform. Two cheers to the crisis.
Email: r_jagannathan@dnaindia.net