Liberalisation logjams

“I WOULD step down only if my conscience permits it.” That was a limpet-like response by Finance Minister Yashwant Sinha rejecting demands for his resignation over the UTI scam. His conscience may not have any scruples. Nevertheless, the slowdown in the economy has made his continuation in this hot seat untenable in the eyes of vocal sections of the bourgeoisie. Though most overzealous in pushing through reforms, the thankless job has made him look like the villain of the piece. As the sluggish economy slows down to settle at the socalled “new Hindu rate of growth”, the desperate bourgeoisie is on the lookout for a new superman. Incidentally, by a strange coincidence, a section of the Sangh Parivar has also started calling for Sinha’s head, ostensibly for altogether different reasons.
The Commodity Climbdown
Commodity (Major mkt) 1998 1999 2000 2001
Groundnut (Davangere) 1125 1106 1113 --
Sunflower (Chitradurga) 1250 1163 850 1180
Maize (Bangalore) 432 566 420 433
Ragi (Bangalore) 497 542 544 426
Source: Karnataka State Agriculture Marketing Board Courtesy: The Economic Times

No matter whether he stays for long or not, there is a new chorus now from the ‘reformist’ crowd. While Vajpayee, in his wisdom, sets a ridiculously high target of 9% GDP growth and simplemindedly calls for a new package of reforms to provide the booster shot, more realistic voices have started calling for greater public investment. Hopes are pinned on a good monsoon to provide the much needed market stimuli for the industry and, as a new piece of discovery, increasing farm productivity is back into the discourse.

But the reforms are delivering diminishing returns. Forget the 9% growth, even maintaining the trend rate of six-plus percentage GDP growth has become difficult. The Central Statistical Organisation (CSO) scaled down the growth estimate for 2000-01 to 5.2 from 6 per cent. The deceleration in industry has been a constant feature since November 1996. The figure for industrial growth in April this year was a meagre 2.7%, and it has more or less remained at that level from November 2000 onwards. The service sector is also showing signs of fatigue. The growth in agriculture, despite sharp fluctuations, hovers around an abysmally low average rate. Bimal Jalan’s liberal rate cuts have not led to a spurt in investments but only to a situation where the banks are flush with funds that have no takers.
Plantation Pangs
Average Prices(Rs/Kg)
All teas Rubber Coffee
1996 41.42 51.22 62.15
1997 59.31 39.88 65.25
1998 68.78 30.13 73.03
1999 57.09 29.97 59.91
2000 44.64 31.25 39.95


Jan May

50.29 28.30 30.04
Production Cost


65 45 65


It is not just the economy but the reforms agenda itself which is in doldrums. It is a bit amusing to see all the votaries of reforms -- who till now vociferously argued that the government should get out of business -- clamouring for greater government investment in infrastructure as the only panacea for the slowdown. It is also a bit of an irony to see financial papers advising the government to move away from “fiscal orthodoxy” and be liberal with fiscal deficit. But a yawning revenue deficit – and the generous tax-cuts for the rich and the corporate houses, the ballooning defence spending in spite of the socalled peace initiatives, and above all, the massive mutual fund bailout package – leave little room for pump priming the economy as in the 1980s. More and more Indian companies are adjusting to globalisation in a bizarre way by abandoning manufacturing and taking to trading in goods from China and Southeast Asia. The “liberalised” industry has also started screaming that the proposed competition law is draconian.

The BSE index is back to where it was before the reforms. The gloomy scenario in the world economy doesn’t give grounds for much optimism on the export front. A handful of success stories notwithstanding, the IT sector has nothing dramatic to offer other than expanded body-shopping amidst a lot of hype about India emerging as an IT superpower. Meanwhile, the Enron debacle threatens to depress FDI prospects. Hopes pinned on better agricultural growth this year -- over poor performance in the previous years -- are misplaced, because in a scenario of depressed prices, greater output growth might not generate commensurate market expansion for the industry, especially in the fast-moving consumer goods segment. What to speak of the productive potential of a developing economy where more luxury cars than tractors have been sold in the past ten years.

All these have had a telling impact on employment. According to a report, the employment growth rate in India has fallen from 2 per cent in 1980s and early 1990s to 0.98 per cent in the last six years, much below the rate of expansion of the workforce. On the other hand, one million organised sector jobs have been wiped out in downsizing in 1999-2000, according to a leading newsmagazine. Corporates could shore up their declining profit margins only by resorting to a downsizing spree. Bangalore witnessed more cuts in IT jobs in the last one year than what Hyderabad could generate in the last 10 years.

All indicators point to difficult years ahead. A thin layer of filthy rich in a liberal economy with a liberalised but stagnant agriculture can hardly sustain industrialisation and service sector growth. Reforms too, it seems, devour their architects. Earlier reformist finance ministers had to leave office as a result of electoral defeats. Mr.Sinha might earn the well-deserved distinction of having to demit office while the mediocre rag-tag coalition, known for its dearth of talents, still remains in power. Perhaps it is time now for him to pack his bags for Mauritius. q

The liberalisation strategy has become the biggest obstacle today to rapid agricultural growth. Very low but flat agricultural productivity has come back as the prime concern today. In a country where the share of working population directly engaged in, or dependent on, agriculture has remained stagnant at over 60%, the share of agriculture in gross domestic capital formation is steadily declining during the reform years. As against agriculture’s share of about 25% in GDP, the gross capital formation in agriculture accounted for about 8% in gross domestic capital formation. The share of gross capital formation in agriculture in gross domestic capital formation is declining faster than share of agriculture in GDP.

While the green revolution had exhausted its potential even before the 1990s, the reforms strategy has only worsened things for agriculture in the ‘90s. The average output growth rate was much lower in the ‘90s than in the ‘80s, reflecting stagnation or decline in productivity across many states and crops. This closely mirrored the decline in share of public investment in agriculture from 32% in 1993-94 to 24% in 1999-2000, a conscious liberalisation strategy, which has clearly backfired.

The sharp fall in the prices of several agricultural commodities, especially plantation crops and oilseeds, following trade liberalisation, continues, in some cases for the fourth year in a row (See charts). The actual imports may be low but the very prospect of cheaper imports depresses the prices, a point which is often missed by some defenders of liberalisation. Those who point to the positive terms of trade in favour of agriculture during these years also miss the point that the terms of trade figures are arrived at on the basis of MSP, whereas the actual market prices the farmers are getting are very much below, often by 25-40%.

The procurement crisis shows no sign of abating. From about 45 million tonnes last year, the foodgrain stocks with the FCI have hit an unbearable level of 60 million tonnes. Fresh arrivals of kharif crop, expected within three months, threaten to plunge the farmers into a mind-boggling crisis. In a belated but half-hearted move, the government slashed the PDS prices for APL (above the poverty line) category by 30% but did not effect any price cut for the BPL category. Doubts have been expressed about the efficacy of this move to clear stocks. Because the offtake by the APL category in the recent past has been nil, while the offtake in BPL category has been declining, showing greater sensitivity to price. In 1998-99, for instance, while the allocation for wheat and rice was 10.11 million tonne and 12.93 million tonne respectively, the offtake was 7.95 million tonne and 10.74 million tonne. In 1999-2000, while the allocation was 10.37 million tonne and 13.84 million tonne, the offtake drastically declined to 5 million tonne and 10.95 million tonne respectively. While the offtake in the APL category was nil in these years, the offtake, as well as the decline, were accounted for totally by the BPL category. The APL prices were almost at par with – and in some places even higher than – the open market prices, and the BPL offtake came down following an ill-advised price increase, which didn’t suit the paying capacity of the poor, and, which moreover, brought BPL prices of poor quality grains closer (at about 60-70%) to open market prices of grains of similar quality. Even after 30% reduction, the slashed APL prices – calculated at minimum support price plus economic cost of carrying – have not come down far below the open market prices because open market prices have also come down. This is because private procurement prices have also fallen by 30% and more compared to the MSP as the farmers have been forced into distress sale in many places in the absence of government procurement. If the government had been really keen on clearing the stocks, reduction in BPL prices would have made sense. Seen in the context of a parallel decision to allow exports at reduced prices, this move appears to be more of a gesture to deflect criticism than an exercise to clear stocks or increase food availability for the poor. The repeatedly promised food-for-work schemes have only remained on paper. Vajpayee government behaves like an ostrich in the face of the lingering agrarian crisis.