The Economic Environment

An Approach to Globalisation & Development

The 75-Day Agenda

1. The Economic Environment

The agenda for the new Government of India, emerging out of the General Elections 1998, is extremely complex and heavy. There are numerous issues to be addressed -- many problems and concerns to be resolved. In this document only key, priority issues are covered.

However, principal focus of the economic agenda has to be the revival of the economy and economic growth. These are critical and crucial to bringing back confidence and employment generation. All initiatives and policies relating to the national economy must converge into a single objective -- the revival of economic growth to 7% GDP per annum and, then, to go beyond 7% to 8% GDP growth annually.

The economic situation moved from a position of stagnation in the early 90s to an annual GDP growth rate of 7% for three years. However, over the 2-year period 1996-97 and 1997-98 the industrial growth rate declined following restrictive credit policies initiated in 1995-96, aimed at reducing the rate of inflation. The inflation rate was curbed but at the high cost of industrial growth being sacrificed. As a result, Government revenues on account of indirect taxes have declined and the fiscal position has deteriorated. With agriculture also showing low growth, the GDP growth is down to about 5.0 to 5.5% for 1997-98.

There is also a crisis in Exports. Strong supporting policies are required to turnaround Exports.

The next 7 years are very crucial for India's policy makers, political leaders and industry. After 2005, there is nothing that can be done to promote the interest of the economy in a rule-bound multilateral trading system. The new Government must see the agenda in the background of imperatives before the economy during 1998-2004. If India loses this time the country will lose many opportunities forever and may not be able to take its position in the global economy. This point is extremely important.

Concurrently, with the withdrawal of the Government from developmental capital expenditure, and significant delays in approvals for private sector infrastructure projects, there has been a vacuum in investment, causing a recession in basic industries. The capital market has also been depressed with very few public issues. The investment climate is, therefore, extremely depressed and India needs to spend 8-9% of GDP on infrastructure.

There are many other issues of concern but the principal factors relate to investment downturn and, with that, depressed demand for almost all products and services. It is caused not only by inadequate Government investment but also by less than full use of allocated funds.

II. An approach to globalisation and development

Globalisation, flowing from Information Technology and connectivity, is here to stay as an international phenomenon.

India has no choice but to recognise this fact of economic life.

What India needs to do is to manage this globalisation process to its own advantage because the country has the potential to be internationally and globally competitive. Indeed, there are a number of areas in which India is already so.

The Development Agenda for India to cope with the growing pains and pressures of globalisation and international competition, need to be proactive and positive, not defensive and negative. Upto now, India has been far from proactive.

There are 7 key Action Points:

(a) Plan: The first issue is for India to develop a road map that provides a Plan - a strategy. The Draft 9th Five Year Plan is not such a plan. In fact, the Planning Commission as now functioning is redundant. What India needs is a strategic plan.

(b) Policy: The second issue is of Policy. India does not have a clear, transparent, coherent policy framework which provides for the achievement of 7 to 8% per annum GDP growth covering both domestic and external agendas. Currently, there are numerous ambiguities and lack of clarity.

The Policy frame must cover Savings, Investment, Financial Sector, Tax Reforms, Agriculture, Services, Industrial Relations, Manufacturing, Technology, Public Sector, Government Expenditure, Foreign Trade, Market Growth, Monetary Policy, Education, Training, Judicial et al. It is a complex matrix of policies which must integrate into a national framework.

(c) Processes: The third issue relates to processes, or, as usually described, procedures. From Industry to Agriculture to Services; from the rich to the poor; everyone and every segment of society is faced with enormously complex procedures which cause delay, harassment and cost.

A key agenda item, therefore, is to abolish procedures which have long outlived their usefulness and simplify life of all Indian citizens and organisations. This would build a new ethos and an efficient economy and society.

(d) Partnership: In this era of globalisation, India cannot function in isolation. India has to build mutually beneficial Partnerships and, for this, too, there is need for clarity and strategy.

For example, in industry, joint ventures have seen as a shortcut to market pre-emption and profit. In the medium-term many joint ventures have been broken up and the strategy towards such partnership-building has been a failure. There is need for much greater thought about the kind of partnership India needs and seeks.

As a natural corollary, India also must be clear on areas where partnerships are not possible and the country has to "go it alone".

(e) Private Sector: The Indian private sector has, at last, been given the frontline to fuel development and growth. But, this is of recent origin since, for over 40 years of independent India, the private sector was not trusted.

India, happily, has a rich resource of entrepreneurship -- unlike many other countries - and can be competitive as small, medium and large industry.

The growth and efficiency of the Indian private sector is an issue of national concern and action.

(f) Public Sector: The commanding heights of the national economy have been occupied by the public sector but, unfortunately, the controls and interventions by Government--as the owner--have inhibited and restricted the public sector. It is time for a change of policy in order that the assets, the employment, the technology and the skills in the public sector are revamped and become globally competitive.

(g) People: India has world class human resources--truly competitive by any standards. As the same time, India has huge unemployment. It is, therefore, necessary to frame a People Development Strategy to build skills, to upgrade knowledge and create jobs, linked to economic growth.

To repeat--1998 to 2004 are critical years keeping in view WTO issues.

III. The 75 Day Agenda

There are many, many issues to be tackled by the new Government of India. To focus on key issues, a list of priority agenda points is given below for the first 75 days covering the period mid-March to end-May 1998.

1. Central Budget

An early Central Budget preferably by end April 1998--or early May--so that the remaining 11 months of the fiscal year gain the benefit of an early Budget.

2. Savings

The Budget must bring a scheme for promoting long-term savings so as to raise the savings rate from 26 to 27% in 1998-99 and reach for 30% by 2000. This is achievable.

3. Capital Expenditure

The Budget must provide for a significant increase in developmental, capital expenditure to spur infrastructure--industrial and social--and agricultural investment and development, thus bringing back growth.

4. Excise Duties

The Budget must reduce Excise Duties significantly (especially for items under MRP) to generate additional demand as well as additional revenues from lower rates linked to higher output and better compliance.

5. Customs Duties

The Budget must maintain Custom Duties at current levels except where there are certain serious anomalies which need correction.

6. Subsidies

Focus subsidy to the targeted audience--the really poor and needy. Arrest leakages and misuse. A beginning to be made with at least one area of subsidy.

7. Public Sector

Government must announce disinvestment by select profit-making public sector companies so as to reduce Government equity holding to below 50%. This will bring a strong response from the capital market and help Government's fiscal position. The funds so generated to be used for restructuring of the units and rehabilitation of workmen. Statutory status for the "Disinvestment Commission" together with strengthening the Commission would be necessary.

8. Insurance

The Government must open up the Insurance Sector for private sector participation. This would provide competition as also garner the much needed long-term funds for infrastructure development. Splitting LIC into 2 or 3 components would also generate competition and better consumer service.

9. Credit Policy

RBI must reduce interest rates and revert to the earlier policy of credit relaxation--a policy which was reversed a few weeks ago. The cost of borrowing must be reduced to promote investment. Small Industry must get benefits of lower interest rates. An early April announcement is needed instead of the usual late April timing.

10. Exchange Rate Policy

RBI must continue to play a positive role in regard to the exchange rate so as to maintain international confidence in the rupee.

11. Banks/FIs

Government should announce the merger of select banks and financial institutions so as to build a stronger banking system, able to cope with the kind of problems faced by South East and East Asia. This is also required to meet WTO challenges.

12. SEBI

The reorganisation of SEBI should be speedily implemented since the revival of the capital market is key to this investment climate. This would include review of the personnel in SEBI.

13. Industrial Policy

A new Industrial Policy should be announced which goes far beyond merely covering industrial licensing issues. Government must come out with an Industrial Policy which enables India to meet the pressures of globalisation and competition. This must include and cover Mergers, Acquisitions and Take-overs.

14. Export

Export is critical to India's economic health but Exports have been both stagnant and declining. A new, dynamic and strong Export Policy must be framed quickly. External economic relations must be a key component of Export Policy.

15. Infrastructure

Decision must be announced in respect of all pending infrastructure project applications. Completion of short-term and medium-term projects within time bound period focusing on upgrading existing roads, adding new equipment at ports and airports etc. These will give short-term impact.

16. Regulatory Authorities

The TRAI has proved to be independent. However, no other regulatory authorities have been set up. There is an apprehension the Government is rethinking the setting up of independent regulatory authorities for Insurance, Power, Ports, Roads, Airport, etc. This needs to be dispelled and, at least, 1-2 regulatory authorities need to be finalised and announced. Work is advanced in the Ministries.

17. Statutory status must be given to IRAI, TRAI, Tariff Commission and other Regulatory Bodies to be effective. Advisory status would be incorrect.

18. Agriculture

Agriculture is a huge area calling for reform and deregulation. A beginning should be made by announcing some new policies which result in lesser controls and a more vibrant agricultural sector. Government investments are also required to be announced. A price guarantee scheme for crops which are vulnerable would support farmers.

19. Procedures

Procedures are a major constraint to growth. The Government must announce abolition of a whole set of procedures in the first 75 days especially those which are faced by the general public (e.g. ration cards, electricity, water, telephone, etc).

20. Technology

A new, brief Technology Policy based on high priority for domestic action on technology development should be announced since Technology is a key to competitiveness.

21. Education

Education, especially primary and vocational education, is a most crucial area of action and reform. Government action must reflect this priority within the first 75 days.

22. Consultative Bodies of Government/Industry

The consultative Committee and Boards, e.g., Board of Trade, Customs & Excise Council, etc. are not functioning. These need to be reconstituted, announced and meetings held. A new seriousness is required.

23. Planning Commission

The Planning Commission needs to be completely revamped, both in terms of people as also its role and work.

24. International Trade Organisation

An International Trade Organisation (ITO) must be established based on the model of USTR in USA which would be India's dedicated arm to deal with WTO.

25. Anti-Dumping Duty

The Anti-Dumping Duty set-up is now in Commerce Ministry. The Safeguard Duty Organisation is in Finance Ministry. These should both be in Commerce Ministry and integrated.

26. Sengupta Committee

The Arjun Sengupta Committee on Capital Goods should be wound up. Inspite of the Government's, public assurances this Committee has not completed its work.

Many other Committees can be abolished.

27. Export-Import Policy

The Export-Import Policy, (EXIM) usually announced on 31st March should be expedited and brought out by 15th April. The EXIM Policy must reflect massive abolition of procedures.

28. Targets

Economic targets should be agreed and announced relating to investment, foreign exchange reserves, exports, imports, etc.

29. Purchase Preference

The purchase preference allowed to public sector should be abolished.

30. Sugar

Decontrol and Delicensing of Sugar should be done.

31. FIPB/FIPC

FIPB should be abolished. As a corollary, Foreign Investment Promotion Council (FIPC) should be wound up. A new Board for Investments should be set up to deal with both domestic and foreign investment. FIPB only deals with foreign investment. There is no window for Indian companies.

32. Excise Refunds/MODVAT Credit

For Government's own credibility, refunds of excise and other duties should be expedited. Denial of MODVAT Credit should be stopped.

33. Daily Agenda for Action