Author: Arvind Panagariya
Publication: The Times of India
Date: December 14, 2013
URL: http://m.timesofindia.com/home/opinion/edit-page/New-government-could-make-quick-gains-in-growth-by-fixing-paralysis-in-decision-making/articleshow/27311051.cms

In a recent article on this page (December 3), finance minister P Chidambaram enumerated the achievements of his government as well as his own. No doubt, he deserves much credit for facing head on many challenges he inherited from his predecessor.

 Rapid growth and concomitant rise in revenues have led to a build up of huge appetite for spending in most ministries in recent years. The recent sharp decline in growth, which arrested growth in revenues, did not curb this appetite. Consequently, the task of playing the bad cop to contain fiscal deficit fell squarely on the FM's shoulders.

 He performed this task admirably, keeping his word on fiscal deficit in 2012-13 and promising in the current fiscal year not to breach the red line under any circumstances. The FM also deserves credit for reassuring investors on retrospective taxation and for bringing down the current account deficit by letting the rupee finally depreciate.

 But his defence of the record of the United Progressive Alliance (UPA) beyond these accomplishments is less persuasive. To absolve his government of responsibility for the continued fragile state of the economy, the FM refers to a number of recent surveys that paint India in favourable light and states, "Why do I quote these surveys and studies? No government delivers growth. Government only delivers conditions for growth."

 But he then proceeds to compare the record of the National Democratic Alliance (NDA) government between 1998 and 2004 with that of UPA I between 2004 and 2009 along several dimensions and concludes, "I am sorry I cannot pick a best year under any head between 1998 and 2004."

 Now there is an inconsistency between stating that governments do not deliver growth when growth failure occurs and simultaneously patting a government on the back for delivering growth when such growth does materialise. But this is precisely what the FM has done.

 A critic might further ask precisely what policies did UPA I deliver to produce the high growth during 2004 to 2009. Beyond continued trade liberalisation and trimming of the small-scale-industries (SSI) reservation list, this writer is hard-pressed to think of reforms during this period to which high growth could be attributed. Even progress in infrastructure, which had acquired great momentum under NDA and faced little political opposition, greatly slowed down.

 The most plausible explanation for high growth from 2004 and 2009 is the accumulation of reforms undertaken by India's two great prime ministers in recent history: P V Narasimha Rao and Atal Bihari Vajpayee. Ironically, if we apply the yardstick suggested by Chidambaram — delivery of conditions for growth — Vajpayee's NDA government deserves much applause.

 Even a partial list of measures conducive to growth during that period is impressive: the new telecom policy, end to import licensing in consumer goods, trade and foreign investment liberalisation, end to SSI reservation for substantial exporters, indirect-tax reform, privatisation, building of infrastructure, open skies policy, agricultural produce marketing reform, end to administered interest rates on most government savings instruments, and monetary policy reform.

 When it comes to growth, most economic policies pay dividend with a lag. For this reason UPA I, which ruled from 2004 to 2009, reaped what NDA had sown. Likewise, UPA II is now reaping what the UPA I had sown. Of course, current policies are not irrelevant to growth. Benefits from NDA reforms would have been largely nullified had UPA I gone back on those reforms. Likewise, decision-making paralysis under UPA II has significantly contributed to the recent slowdown.

 Looking ahead, there is both good news and bad news for the government that would come to power in 2014. Good news is that to the extent that paralysis in decision-making is causing the current decline in growth rate, it will be easy to make quick gains in growth.

 Restoring normalcy to the decision-making process will potentially return India's economy to full capacity utilisation. For example, access to coal and gas will quickly allow electricity generation to rapidly expand. Ending the paralysis will essentially require the new government to assume full responsibility for its decisions instead of passing the buck to bureaucrats.

 Bad news is that the new government will have its work cut out in so far as reforms necessary to sustain and accelerate growth in the longer run are concerned. There still remain vestiges of Prime Minister Indira Gandhi's statist regime, which must be dismantled. To this, UPA has added poorly designed social programmes, which will require remodelling or replacing.

 Thus, after restoring confidence of the bureaucracy, the new government will have to quickly proceed to the task of building highways and rural roads; reforming the electricity sector, labour and land markets, and higher education; and creating social programmes that empower people rather than government employees — who have done a rather poor job of delivering promised services in areas of health, education and others for many decades, thereby depriving generations of Indians of those services.