The Magic Wand of Reforms

Dr Shubhada Sabade

Our country needs a crisis to accept and face major challenges. We needed peaking atrocities of the
British rule to unite, fight and emerge victorious in 1947. Fruit was priceless Independence. We
needed Balance of Payment crisis of 1990 which saw our forex reserves dwindle down to $ 2.2 Bn
to accept the 1991 reforms that delivered the Liberalisation, Privatisation, Globalisation model.
Fruit was second-highest growth rate in the world, 300+Bn forex reserves and self-generated
economic strength. Both the struggles, not comparable though, meant lots of pains to many people.
But we accepted it albeit some resistance. Ironically, it's difficult for people to comprehend and
accept painful policy reforms when everything is hunky-dory. But when in trouble already, we don't
mind some more. Like a patient takes bitter medicine more readily than a healthy person. Today, the
pace with which India's macroeconomic fundamentals have moved south, leaves us knocking at the
doors of a crisis and hence is the biggest justification to usher in difficult reforms. Management
education must prepare students to seek opportunities in the oncoming changes rather than lament
the pains.

Just some months back we boasted of 'excellent' macroeconomic fundamentals despite recessionary
tendencies, especially amidst global blues. Our GDP growth rate was good around 8%, although a
bit down from the high of 9.5. Inflation was high but still appeared controllable. People had jobs.
Forex reserves over $ 300 Bn looked good. Although fiscal and current account deficits were high,
the trend seemed reversible. Rupee was pretty stable without RBI intervention and stock markets
were performing. Suddenly(?) something happened and India growth story started looking weak.
Growth rate has now slipped below 6%, unemployment has risen, inflation is adamantly high,
Rupee is sliding fast below 55, forex reserves dropped below 300, the twin deficits widened and
stock markets turned bearish. So, what has gone wrong?

The investment cycle downturn theory attempts to explain recession. But why have investments
dropped? Let us not blame it on the US or Europe. It's said that many huge investment projects are
awaiting approval for months. The policy paralysis of last several months, whatever its origin, has
cost India growth, jobless, inflation, investment, foreign funds and moreover, loss of entrepreneurial
enthusiasm, the 'animal spirit'. There is no dearth of funds in private hands and banks. But if credit
off-take and private investment upturn is desired, the roadblocks in the producers' path must be
removed asap. This points to the dire need for several urgent reforms. Besides private business,
investment can also come from the government which can be carefully channelised into productive
avenues. But this also needs several major reforms.

Fast-tracking infrastructure projects needs reforms and by infrastructure I don't just mean roads,
railways, ports and energy. I mean irrigation, warehousing and logistics; social infrastructure of
education, health, sanitation, food and drinking water especially in rural India, probably on the lines
of 'PURA' model. Petroleum prices need to be decontrolled gradually. Oil extraction has gone down
despite more than 100 discoveries due to non-decision on approvals. This sector needs reforms.
Since most subsidies end up being gobbled up by the non-deserving and their delivery is a costly
affair, all subsidies must be aimed at being phased out one day, by initially replacing them with
direct cash-transfers and subsequently by lifting the under-privileged population to levels where
they won't need subsidies any longer. Education sector needs bold reforms. We have one of the
biggest education systems in the world by quantity. Quality of curriculum, teaching, rules and
procedures, regulators' integrity are all questionable. FDI and FII are awaiting quick favourable
decisions. Land legislation and agriculture needs urgent reforms which alone can save the ailing
sector that still happens to be the backbone of our economy. Corruption is at its high, it distorts most
well-intended policies and needs brave reforms.
If only by some magic wand the investment cycle can be revived urgently, India can be put back on
the high growth trajectory with macroeconomic strength. If government expenditure, although
raising deficit, encourages private investment expenditure and household savings rather than
consumption expenditure, it will generate the required funds while raising the employment level
and supply of goods and services. This will raise tax collections and reduce deficit too. With both
demand and supply sides taken care of, inflation will come down and savings will rise further while
maintaining consumers' purchasing power and market. Thus incremental investment will have the
'multiplier effect' on raising incomes which in turn will induce more investment, known as the
'accelerator effect'. Together these will generate the 'leverage effect' that will not only pull the
economy out of recession but also put it on an automatic upward spiral.

Since most problems in India need reforms, the issue boils down to political will. There is a narrow
corridor of a few months from the President's election till the general elections in which all the
magic can happen through reforms. And by their very nature, reforms don't take a lot of time to be
announced, the home work does. Effect will be seen in short to medium term and surely in the long
run, the reformers will have created history. So dear PM-FM, the whole country today looks upon
you with great hope and expectations. Turn good economics into good politics for onces.

Author is Professor of Economics at Symbiosis, Indian Institute of Planning & Management, Indus
B-school and Pune Institute of Business Management and can be contacted at
shubhadasabade@hotmail.com.