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It's a good time to push and sustain reforms, WEF chief tells India

Amberish K Diwanji in New Delhi

India needs a gross domestic product growth rate of 7.5 to 8 per cent in the next seven to eight years to double its per capita income, said World Economic Forum managing director Claude Smajda. He spoke at the 15th India Economic Forum organised jointly by the WEF and Confederation of Indian Industry.

Smajda had the gathering of business delegates and media spellbound as he delivered his speech without once referring to his notes yet reeling off data and statistics, thus clearly showing that he knew and understood the Indian economic scene better than many others.

The WEF managing director warned against complacency following the failure of the WTO talks in Seattle. The talks failure only showed that much more work needed to be done in more detail before negotiators reached a settlement.

Clearly, the mantra at the summit is Second Generation Reforms, now that India appears to have achieved political stability and the new government has put economic reforms at the top of its agenda.

Smajda said that besides the political stability and the economic recovery underway both in India and the world, especially East Asia, the "feel-good factor" had returned to businessmen and the people. "Everyone is confident that an economic boom is coming. Even the Bombay Stock Exchange Sensex has been hovering near the 5000 mark, adding to the positive feelings in the nation," he declared.

He stated that the Indian government and people must use the coming economic boom period to push through difficult reforms. "It is always easier to carry out reforms because a growing economy can absorb the shock and pain of restructuring better than a stagnant economy," he added.

Like earlier speakers, he too referred to the slew of economic bills introduced by the new government in the Lok Sabha. He said they were strong indications of the government's resolve to push through reforms. "Today, insurance premium in India is around $8 billion, once the private companies come in, it will go up to $25 billion," he added.

"But these alone are not enough," he said, "it is imperative that the government sustains these measures. All too often reforms hit a ceiling and the process stops and then you have to restart."

Smajda listed six factors that were important for India in its bid to reform and push up economic growth:

• First, control the burgeoning fiscal deficit. "The country's fiscal deficit last year was six per cent of GDP against a target of 4.5 per cent. If you added the states' and public sector units' deficit, the total deficit shot up to 8.5 per cent. This year, the fiscal deficit will be 6.5 per cent while the total deficit will be 9 per cent," he warned.

  While he admitted certain factors, notably the Kargil war, the last elections, the cyclone in Orissa and the increase in the world oil prices had hurt finance minister's bid to curb the deficit, he warned that such a deficit was simply unsustainable and would seriously impair India's economic growth. "Already, 50 per cent of your revenue services the outstanding debt, and while expenditure has increased, revenues have not," he added.

• Second, there is a need to completely restructure the financial market. He pointed out that today, the government was the biggest borrower in the market, which effectively meant that the private sector was being crowded out. "How is it that in a country where inflation is at a low three per cent, the borrowing interest rate is over five per cent? This high interest is a very real block in economic growth," he stated.

  He listed the bloated bureaucracy, subsidies and loss-making public sector companies as the culprits for the government's high borrowing. On subsidies, he said it was no one's case that the government should not help the poor, but he pointed out that free power only benefitted rich farmers since the poor farmer, who actually needed the subsidies, usually lived without electricity!

  Smajda made a fervent plea to privatise the loss-making public sector units, saying that the funds realised from privatisation must not be used to fill the deficit but to retire the public debt and injecting efficiency into the PSU. He added that India must expand its tax base to increase its revenue. "In a country of 1 billion, it is hard to imagine that only 15 million pay taxes!"

• Third, infrastructure, the hardware of globalisation, is important. He lamented that though the telecom and power sectors had been opened up to private companies, few investments had been made. "This only shows that further reforms are called for to ensure greater private participation," he said.

  Smajda pointed to the recent telecom controversy as scaring off investors and the fact that most state electricity boards needed restructuring to attract investment.

• Fourth, an institutionalised, legal framework was needed to attract investment and funds. "India has a great legal system but it is very slow. The Companies Act was amended only recently. The telecom row only shows how important it is to have a proper framework in place that clearly lists the rules and guidelines," he declared.

  He added that procedures must be transparent so that no one can be charged with prejudice in clearing certain projects and rejecting others.

• Fifth, the need for India to have speed, flexibility and versatility. "India has built-in rigidities, such as the bureaucracy that takes its own time in reaching decisions. The government must give the bureaucracy a time-frame to reach a decision, otherwise investors will complain," he warned.

  He also complained about the rigid labour laws in the country, and called for a change.

• Sixth, the knowledge-based economy has gained in siginificance. "In such a set-up, India must spend more on its social sector, providing primary education to all. In fact, by diverting the government's scarce resources to this sector, it will be able to curb the fiscal deficit," he said.

However, despite his complaints, Smajda also listed some bright spots, especially the phenomenal growth in industries such as information technology, pharamaceuticals, media and communications, and entertainment.

"In the past, India compared its reforms with itself, with its earlier structure and felt that it had come a long way. While that is true, now India must compare itself with other countries, see how fast they are reforming and ensure that it is not left behind," he concluded.

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