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| Sunday, 22 December 2002 |
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Biz Buzz : "The Indian model for development Yezdi Malegam, Co-Chairman of Deloitte, Haskins and Sells, India, in his address at the National Conference of the Institute of Chartered Accountants last week made an excellent analysis of the policy reforms in India that transformed its economy from a sluggish state to a flourishing status. Over the eleven years from 1991 to 2002 India had achieved a near miracle. Its foreign reserves increased from US$ One Billion to 64 Billion, literacy improved from 53% to 64%, Inflation dropped from 12% to 4%, Interest rates fell from 16% to 8% and unemployment reduced from 36% to 24%. What did India do right? From 1951 to 1965 the Indian policy makers pursued a mixed economic system in which the state was the dominant player in the core sectors of the economy and was responsible for providing the physical and social infrastructure necessary for economic growth. Almost all economic activity was stifled by over regulation. Price controls, exchange controls and steeper and steeper taxation were the responses to contain inflation, manage foreign reserves and raise Government revenue. The period from 1966 to 1991 was described by Malegam as one of mixed signals and uncertainty that led to a retrospection of the role of the planning process in economic development. The policy makers realized that the private sector should drive the economy if the weaknesses and the inefficiencies of the public sector were to be overcome. State intervention in economic activity was quite rightly blamed for uncertainty with investments and corrupt practices. The emerging consensus in India was that the controlled economy should be liberalised. In 1991 India embarked on a reform process that relaxed foreign investment rules,import controls and exchange controls. Policy was shifted to ensure a gradual and sustainable integration between international and domestic markets. The reforms included deregulation of economic activity, withdrawal of the Government from inefficient production of tradables, privatisations, improving the transparency in the application of policies and procedures and the removal of certain subsidies. Privatisation of State Owned Enterprises (SOE's) was a major plank in the post 1991 liberalization of the Indian economy. Out of 239 SOE's held by the Central Government 48 have been privatised including 20 in the last three years. Malegam's paper acknowledged that SOE's had a 9% (Indian Rs. 146 billion) return on equity but much of it (Rs. 118 billion or 80%) came from 12 enterprises in the petroleum and natural gas sector which operated under monopoly conditions. He argued in favour of the privatisation programme but emphasised the need for a social safety net to protect employees rendered redundant in the privatisation process. Professor Rohan Samarajeewa and Ranel T. Wijesinha who were panelists at the session on Public Private partnership contributed with further experiences and evidence to endorse Malegem's views on privatisation. Samarajeewa who was a much admired Director General of the telecom Regulatory Commission attributed the success of the telecom industry in Sri Lanka to the bipartisan approach of successive Governments from the 1980's to liberalise the sector, allow competition and privatise the dominant operator SLT. Sceptics argue that SOE's can be efficiently run, make profits and also serve the public interest better than the private owners would do. The Indian (as well as Sri Lankan) experiences have shown that reforms in the public sector are difficult to be implemented and if implemented are short lived; often limited to the tenure of a capable and honest minister or his nominees on the governing boards of SOE's. Sri Lanka liberalised the economy twenty four years ahead of India and started the privatization programme in the early 1980's. By 1987 enabling legislation to privatise SOE's was in place and major privatisation programmes including the plantations and telecom had been implemented successfully by the mid 1990's. In 1991 Sri Lanka had US $ 2 billion in foreign reserves, which is in excess of India. Today they stand at US$ 2.3 billion while India has US$ 64 billion. Sri Lanka's policy makers and economists have analysed what went wrong. It's not too late to take a lesson from India which had pursued a bipartisan approach to national issues and implemented with vigor the reform agenda once the Government gave the nod. Note :Adopted from Mr. Yezdi H. Malegam's paper on Private Sector Public Sector Partnership as Catalyst for Long Term Economic Growth; presented at the National Conference of the Institute of Chartered Accountants 12th - 14th December 2002. " |
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