Hiatus in the economy: opportunities for reform

The Central Statistical Organization has revised estimates of GDP (gross domestic product) for India for the year 2000/01. It is now estimated that growth of GDP registered a mere 4%, which is, in some sense, a return to the situation at the start of the 1990s. If ever there was an imperative for introducing economic reforms with some degree of seriousness, now is certainly the time. While arguments could be made that the expenditure of the central government is a small portion of the country?s economic output, the basic fact is that a large part of it represents unproductive expenditure. The increase in emoluments of central government employees resulting from the Sixth Pay Commission recommendations without implementing other provisions which were enunciated, such as the downsizing of the number of government employees, has led to a spiral in the states as well, resulting in higher budget deficits at a time when government expenditure should actually have been coming down visibly both at the centre and the states. In the current situation, one major input for bringing about renewed economic growth would be a large-scale increase in FDI (foreign direct investments). This, however, will require a genuine implementation of the second generation of reforms, and a restructuring of decision making to promote FDI, which would provide comfort to potential investors from overseas. The truth is that the image of India as an attractive destination for FDI needs considerable polishing, if we are to be successful in this area. While immediate steps can be taken to revive the economy, some long-term imperatives also have to be kept in mind, most important among which is the need to create a new economy in rural areas. Ideally, the development and growth of infrastructure in urban areas can be financed by the private sector, if pricing and other policy measures were appropriately restructured. Government should then be investing resources at its command in rural infrastructure. Unless rural areas have access to capital, technology, and connectivity, rural enterprise will not develop and create higher incomes and wealth among the poorest sections of Indian society. The current sluggish conditions in the economy are an opportunity to make certain radical changes, just as Dr Manmohan Singh was able to bring about with the first generation of reforms in 1991.