Two Years of the UPA
- Ila Patnaik
The good, the bad and the ugly
The good
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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.
Railways
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
investment.
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
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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
schools - e.g. ONE HORRIBLE FACT: ONLY HALF THE
STUDENTS IN CLASSES II TO V CAN SUBTRACT TWO DIGIT
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
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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
handout.
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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