COMMENTARY
INTERVIEWS
SPECIALS
CHAT
ARCHIVES

UN agency's reports lauds slow pace of reforms

The fact that so-called Asian Tigers like Thailand have had to reintroduce controls in the financial sector would seem to justify India's slow liberalisation policies.

"It would seem that the Asian Tigers are being put back into the cage while sleeping Tigers like India and other South Asian countries are being uncaged," said well-known economist V R Panchmukhi while releasing the 'Economic and Social Survey of Asia and the Pacific 1998' today in New Delhi.

Although the survey brought out by the United Nation's Economic and Social Commission for Asia and the Pacific justifies some of India's slowness, it is critical of some policies which carry the seeds of instability for the future.

Panchmukhi, director of Research and Informations System for the Non-Aligned and Other Developing Countries (RIS), referred especially to the artificial maintenance of the rupee's value against the dollar by the Reserve Bank of India as one of these measures.

Such artificial currency values was the major reason for the financial crisis of the Asian economies which also suffered from overheating, the report suggests.

But India has been maintaining a steadily improving growth rate of around 7.0 per cent and is expected to do even better towards the end of the century, the report said. This is in spite of the gloomy picture of India's economy painted by some political parties.

The ESCAP survey projects a growth rate for India of 7.2 per cent which would be reached by the year 2000.

The figures for poverty in the survey also show that India has made steady though not rapid progress in reducing absolute poverty, although absolute poverty in the country still remains widespread.

According to Panchmukhi, what is significant and also staggering is the fact that because of population growth, the number of people in India who remain poor continues to hover around 300 million people.

In fact, the number of people living below the poverty line dipped from 332 million in 1984 to 307 million in 1988 and then shot back up to 320 million people in 1994.

Another area of caution for India sounded by the ESCAP survey is privatisation of the public sector since this could lead to joblessness and other social problems.

Panchmukhi said the size of the national renewal fund is too small to handle the kind of joblessness which could be unleashed by unrestricted privatisation. Besides there was no programme to retrain those who could get thrown out of jobs.

Stagnant domestic savings rates and failure to attract foreign capital to any significant extent continue to restrain investment growth in India.

A major reason for low domestic savings rate in the past has been high budget deficits which India has been trying to reduce while continuing to enhance economic growth and stability.

In South Asia, growth in agriculture over the past several years has provided a very welcome boost to GDP growth rate and this has been particularly true of India.

However, land reforms continues to be a drag on the agricultural sector and a major stumbling block to achieving equity and growth.

In fact, small holdings having proved to be more productive and strict enforcement of land ceilings would actually have contributed to faster agricultural growth, Panchmukhi said.

Panchmukhi said in the package of liberalisation, the lessons drawn should include not opening the capital markets indiscriminately.

In the name of liberalisation, India should also not allow the banking sector to operate without controls as happened with the Asian Tigers which speculated in the real estate markets on large and liberal borrowings.

Only foreign institutional investors are allowed to invest in the Indian capital markets with restrictions on the proportion of ownership of company shares, Dr Panchmukhi said.

He said the emphasis should be on very sustained and rigorous building measures. He said the approach would have to be cautious in certain segments of the economy.

Between 1996 and 1997, double-digit inflation prevailed in all countries of the South Asian region with the exception of India. High growth of money supply as a result of large budget deficits has been traditionally considered a primary cause for fuelling inflation in South Asian countries.

India reached the highest rate of saving and investment rates (28 per cent) among all the south Asian countries barring Pakistan. Rates of investment and savings in India have always been relatively high given the low level of per capita income.

Panchmukhi said India should reach a high equilibrium level of savings and investment ensuring that investments do not far exceed the saving rate as happened with the Asian Tigers.

Panchmukhi said while the percentage of the absolutely poor had come down from 51 per cent in 1978 to 36 per cent in 1994, the high population growth rate had offset this development and the number of poor had declined only marginally from 329 million in 1974 to 320 million in 1994.

"The number of poor in India remains appallingly large," he added.

The ESCAP report stressed that high economic growth should not be the only objective of the developing countries and that this should be accompanied by special measures targetted at equity. Equity, according to the UN agency, meant reduction of both poverty and inequality.

"Inequality not only retards economic growth, it also leads to social tensions," Panchmukhi observed.

Quoting from a recent study on India done by economists M Ravallion and G Datt, the ESCAP report noted that India's poor had gained from economic growth, which accounted for roughly 80 per cent of the cumulative decline in poverty.

Interestingly, it was rural economic growth which played a major role in reducing national poverty, with even the urban poor benefitting from it.

On the other hand, urban growth helped to reduce urban poverty but also had adverse distributional consequences. Also, it had no discernible impact on rural poverty.

UNI