Two Years of the UPA

- Ila Patnaik

The good, the bad and the ugly

The good


Nuclear deal

For decades, India had a principled stance that it would

not give up nuclear weapons. In return, the world

strangled India's ability to import Uranium and thus make

nuclear energy. Suddenly, that is history. The US and

India have entered into a historic deal, whereby Indian

nuclear weapons will be accepted by the world, and the

world will be willing to sell fuel and reactors to

India. This is great news for low cost electricity

generation in India. It also removes a long-standing

irritant that was holding back deeper friendship between

India and the US, two natural allies on the global stage.


What happens when you mix the worst piece of Indian

infrastructure (railways) with the politician from whom

people expect the least (Lalu Prasad Yadav)? Magical

results! The performance of the railways has been simply

astounding. A far reaching reforms process has begun, by

permitting the entry of the private sector into container

transportation. Someday, the railways will be like roads:

the government will own the rails but multiple private

companies will compete in offering trains. And we will

remember Lalu Prasad Yadav for having started it all.

Fiscal revolution For decades, we used to bemoan the Indian crisis

on the fiscal deficit. Then came the rescue in the form of

the FRBM Act, initiated by Yashwant Sinha, supported by

Jaswant Singh, and seen through by

P. Chidambaram. Far-reaching tax reforms were initiated,

including the VAT and and an attack on the "exemption raj"

highlighted by Kelkar. The deficit is now down to just

3.7%. A lower deficit means the government is grabbing

less resources, and more money is available for


Airports & civil aviation

Aviation has been revolutionised, first by the entry of

new airlines. In a moribund sector that was trapped in the

business interests of Indian Airlines, Air India, Jet

Airways and Sahara, suddenly, we have competition! Prices

have crashed and the middle class is flying. Tourism has

prospered like never before. The second revolution has

been unleashed, even though results are not on the table

yet - that of privatisation of the airport. Now we can

dream that the Delhi and Bombay airports will look as

wonderful as the Delhi Metro. Praful Patel did what a

Congress minister would never have been able to do.

Capital account convertibility

After years of a deadlock, the PM and the FM are ready

to move on to the next big milestone of an India that is

growing up: opening up the capital account. The RBI is

still dragging its feet, having setup a committee for

"fuller" convertibility as opposed to "full"

convertibility. But it will be hard for the RBI to

hoodwink this PM and this FM, and within 10 years, the

Indian Rupee could be one of the great hard currencies of

the world.

The bad


Wrong taxes

A great part of the "fiscal revolution" described

above was rationality in taxation. We have slashed

customs, shifted to VAT, lowered rates, and removed

exemptions. But in the UPA years, a series of wrong taxes

have crept back. The education cess, the securities

transaction tax and the cash withdrawal tax -- all these

are flat wrong. One expects better when an economist is

the prime minister! The reformers have to now settle in

for a ten-year fight to get rid of these.

Mindless expenditure on Education

The government is pouring huge money into its "flagship

program" - the Sarkari Shiksha Ahiyan (SSA). But there is

no evidence that SSA works. Independent tests show that

our children continue to learn little at government



NUMBERS. What is needed is fundamental educational reform

- not a more bloated government that spends more and more

on dysfunctional institutional mechanisms.

Crippled Oil policy

The world price of petrol goes up. India imports

petrol. The Indian price of petrol should go up. Obvious?

Not if you are Mani Shankar Aiyer or Murli Deora. Both

these ministers have derailed the effort at getting the

government out of price controls in the oil sector. We are

doing this exactly wrong: subsidising consumers to use

more scarce oil. Men and nations will only do the right

thing after exhausting every reasonable alternative.

6th pay commission

As Yashwant Sinha is reported to have said, the 5th Pay

Commision "nuked Indian public finance". Now, in a shallow

attempt at manipulating the next general elections,

Manmohan Singh has embarked on the 6th Pay Commission. He

did not need to do this. Now, the devil is in the

details. If he finds good economists to drive the 6th pay

commission, it can even do some good. More likely, he

won't get fiscal hawks, and the 6th Pay Commission will

nuke Indian public finance again. We learn from history

that we learn nothing from history.

NREGA : Unbounded expenditures?

This is one way of generating employement that even

Communist China did not think of. Let people dig holes and

the government pay them. We have also discovered a new way

of redistribution. The better off you are, the bigger the

transfer to you. So a worker in a poor state will get Rs

60 and a worker in a rich state Rs 120. And, as to how

much will be spent after all State governments have

finished competing with each other to make the centre pay

whatever minimum wage they fix, even the finance ministry

has no decent estimates.

Stalled PFRDA Bill India is on the cusp of a demographic

transition. Waves of young people are coming into the

labour force. This is the perfect time to catch them into

a modern pension system, where each person can build up a

personal hoard of pension wealth to shelter himself in old

age. The New Pension System was a fundamental reform,

initiated through extensive public discussion from 1998 to

2002. The UPA has been hijacked by the trade unions - who

represent 2% of India - and has completely stalled the

pension reform. We are losing valuable years. Years from

now, starving old people will remember the UPA for this.

Stalled disinvestment

Arun Shourie did yeoman service exposing the massive

scale of theft from PSUs by the political class - whether

it is cronies of ministers consuming free rooms at ITDC

hotels or it is cronies of bureaucrats selling expensive

chicken to ITDC hotels. His jihad on privatisation stirred

up this hornets nest of various crooks feeding on

PSUs. But his accomplishments - such as the sale of VSNL

or TCS - were major victories of the NDA. The UPA has

killed off privatisation / disinvestment at the central

level. West Bengal continues to powerfully move forward

with privatisation. Remember Great Eastern. But the UPA

behaves asif what is good enough for West Bengal is not

good enough for India. Think BHEL.

Divide and Conquer: Higher education

There must be something wrong with higher education - the

NDA had Murli Manohar Joshi and the Congress has Arjun

Singh. Top universities in the world are begging to be

permitted to setup campuses in India. Instead of a mere

3,000 seats at IIT, we could have 30,000 seats at

university campuses in India run by Harvard and

Stanford. Foreign producers have transformed our TVs and

our cellphones, but clearly higher education is not

important enough to benefit from the same reforms, and we

are stuck in a Stalinist model of education. All we get is

a tiny increase to accomodate quotas.

Rebuilding the planning commission

Modern market economies do not have planning commissions.

The NDA was making progress on driving down the importance

of the planning commission. A few more years of that, and

it would have been possible to close down the planning

commission. Now the UPA has done damage by putting a key

player in cabinet into the planning commission, and

resurrecting the role of the planning commision.

The ugly


SEZs: The mother of all exemptions

Cost: Rs 1,000,000,000,000.

Biggest benefit: Tax exemptions to real estate

developers. Exports will get some tax breaks too, but

nothing compared to what the developers will

get. Land acquisition will displace ordinary people on a

scale that will make the Narmada dam look like small

change. With tax havens inside India, Caymen Islands will

pale into insignificance.

The country does not benefit. The real estate buyer does

not benefit. The government does not benefit. A huge

benefit goes to the real estate developers. Why this giant

gift to real estate developers. One can only wonder how

much election funding will flow out of this trillion rupee


UPA versus FRBM

Indian fiscal was in a nightmarish state by the late

1980s. Manmohan Singh began India's fiscal recovery in the

early 1990s. After him, every finance minister has fought

on this question - P. Chidambaram, Yashwant Sinha and

Jaswant Singh. Getting the central fiscal deficit down to

3.7% of GDP has been a great achievement, and is already

generating results through a higher investment rate. And

the FRBM promises us the nirvana of a fiscal deficit of no

worse than 3% by 2008-09, and that too only for the

purpose of capital expenditure.

Alas, this glorious achievement is under extreme attack

from the UPA. The SEZ Act - the mother of all exemptions -

will contaminate growth of tax revenues. The NREG and the

6th pay commission will contaminate expenditures. The UPA

is in a mood to roll out more and more foolish welfare

programs. By 2009-10, the entire 15-year effort of

fighting India's fiscal crisis could have been undone. The

UPA could be remembered for having destroyed a marvellous

15-year piece of work. It won't be long when Moody's and

S&P catch on and the FDI-FII numbers start dwindling.


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