21 May 2005

Manmohan Singh and the economy

21 May 2005
The Hindu

Manmohan Singh and the economy

The biggest job, employment generation, has been left undone.

BY Siddharth Varadarajan

GIVEN THE Indian economy's deep-rooted structural problems — which relate more to the chronic insufficiency of aggregate demand than to mere macroeconomic imbalances — one year is too short a period in which to say anything definitive about the performance of Prime Minister Manmohan Singh on the economic front.

The United Progressive Alliance Government inherited an economy whose vital statistics seemed reasonably comforting on the surface. Even if the annualised growth rate of 8.1per cent envisaged by the Tenth Five Year Plan was never really tenable given the recession in manufacturing from 2001 to 2003, the economy nevertheless managed to grow at a creditable average rate of between 6 and 7 per cent per annum.

But beneath the surface of this statistically significant achievement lay three significant weaknesses, which the BJP and its allies were to pay the price for in full measure. The economy was failing to generate sufficient employment; declining levels of public investment in the economic and social infrastructure of the country were beginning to take their toll, particularly in the rural sector; and the distributional aspect of the reforms process was distinctly unhealthy, as measured by rising inequality and the shift in relative factor incomes in favour of corporate profits at the expense of wages.

In the 2004 general election, the NDA fell victim to the political disenchantment these economic failings inevitably generated. In its campaign, the Congress successfully tapped into people's anxieties about the direction of the economy and promised either the outright reversal of certain BJP policies — such as the undermining of food security for the poor through the dismantling of the Public Distribution System — or a critical re-evaluation of dogmas like privatisation. However, no one issue fired the public imagination — particularly in the countryside — more than the promise made by the Congress during the campaign of providing employment to the poor.

One year on, the Prime Minister has clearly not managed to bring about a change on the employment front. To give him the benefit of the doubt, the structural processes producing jobless growth in India and other more mature capitalist economies are not easy to comprehend, let alone deal with in such a short time frame. Dr. Singh has managed to shepherd the economy along the steady-state path it was already on, except for the initial bout of inflation generated by the rising international price of oil.

A sub-optimal path

However, there is little recognition of the fact that this steady-state path is a sub-optimal one for the country as a whole, even if foreign investors and the Indian corporate sector appear happy to be on it.

Indeed, the manner in which the UPA Government has diluted the commitment it made in its Common Minimum Programme for a comprehensive employment guarantee programme for the country's rural poor suggests the issue of joblessness is not being taken seriously at the highest levels. The fact that Dr. Singh is beginning his second year now with not even the watered-down Bill on employment guarantee anywhere close to getting legislative assent is the single biggest failure of the UPA Government on the economic front.

By allowing unfounded fiscal concerns about the cost of funding the employment guarantee programme to come in the way of the most important economic initiative his Government has promised to take, the Prime Minister is undermining the credibility of his own party's election campaign.

Dr. Singh also lost an opportunity to turn the fiscal argument on its head by being more aggressive on the tax reform front. Late last year, he had dropped broad hints that the next budget would involve a major overhaul of the country's tax system — something which is urgently needed given the low tax-GDP ratio.

What Finance Minister P. Chidambaram produced this year, however — including the irritating cash withdrawal tax and the fringe benefits tax — bore absolutely no resemblance to the Prime Minister's promises of reform. This, then, is the Government's second major failing on the economic front.

The issue is not the ability to push tax collections up in a year but whether the UPA was willing to show the political spine necessary on the taxation front. And it has been found wanting.

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