The newspapers, as
usual, call it a slew of reforms. It is not clear what they mean, as the word
“SLEW” means a large number. Are the announcements made by the government large
reforms in the economic system?
Perhaps not in the true sense of the word. Prime Minister Manmohan Singh in his short address to the nation stated that oil companies lose ₹17 per litre of diesel sold, and that only the rich and businesses benefit by this subsidy, as they are the ones who ride in SUVs, etc. This may not be entirely correct as millions of farmers use diesel for various purposes including irrigation.
Be that as it may, the nominal increase of ₹5 a litre, when the gap is₹17, is by no stretch of the imagination a reform. What this tends to achieve is to enable truck operators and others to raise freight rates proportionally more in anticipation of further increases. The fiscal impact has been assessed at just about ₹20,000 crore.
Even with this increase, the PM stated, the gap in recovery will be₹1,60,000 crore. If diesel had gone up by ₹17 freight rates would not have been hiked proportionately. The working group on road transport for the 12th Plan has projected freight traffic of 1,489 BTKM (Billion Tonne Kilometre) in 2013-14.
So the impact of
market-related diesel prices may lead to some increase in freight rates but not
necessarily by the same proportion, as the cost of fuel for an average-sized
truck may comes to only ₹15 per km at a price of ₹60 per litre. Spread
over 8/25 tons that a truck carries, the increase from ₹45 a litre
to ₹60 will be only a fraction of a rupee per kilogram of load.
By increasing fuel
prices in spurts the UPA government has done incalculable harm to the battle
for inflation control. It has given truckers an opportunity to increase freight
rates beyond what was warranted, fuelling inflation. Periodic increases lead opposition
parties to call for bandhs and strikes, causing further disruptions to the
economy every now and then. No one has calculated the loss of GDP due to these
liberalisation of diesel prices would have led to one agitation and people
would probably have understood that they must face reality. The suppression of
normal price increases the market warrants leads to unpleasant consequences. It
is unfortunate that the minds in the ministry of finance have not perceived
this cold fact. The story about the aam aadmi suffering is just crocodile tears
to take political advantage of a mismanaged economic situation. It is
unfortunate that the government has not shown the courage to free diesel
The same is true of cooking gas. There is no reason to subsidise cooking gas as it leads to irresponsible use of gas. West Bengal chief minister Mamata Banerjee wanted two gas cylinders per household at subsidised rates. Surely she was ill advised as all normal families require at the most 6/8 cylinders a year. Some of these political outbursts are irrational and the UPA should have gone the whole hog in freeing all petroleum goods from price regulations, restricting subsidy only to BPL families. Had they done so, inflation in India would not have leapfrogged, but followed the international trend. This is a lost opportunity.
While allowing Foreign
Direct Investment in aviation the government has laid down such conditions that
even an adventurous foreign airline may hesitate to enter. The 49 per cent
limit will subsume FDI and FII investment. Foreign airlines can invest only in
a company whose chairman and at least two-thirds of its directors are Indian
citizens, and the company is substantially under Indian ownership and control.
A one-shot liberalisation of diesel prices would have led to one agitation and people would probably have understood that they must face reality. The suppression of normal price increases the market warrants leads to unpleasant consequences. It is unfortunate that the minds in the ministry of finance have not perceived this cold fact. The story about the aam aadmi suffering is crocodile tears to take advantage of a mismanaged economic situation.
Which foreign airline is going to sink its money in an Indian airline with such conditions unless it acts as a cover for Indian money stashed abroad to come in under this route? It would be too much to expect Singapore Airlines or British Airways to invest in, say, Kingfisher Airlines under these conditions.
A foreign airline would seek operational control over the airline in which it wanted to invest. This is not possible under present conditions. It is also well known that the Directorate-General of Civil Aviation functions more as a revenge seeker and less as a regulator. Many of its senior officers are under vigilance enquiry or being charge-sheeted. Officers who have been indicted and are back in business at the DGCA are reported to be seeking revenge against those who complained either through the RTI or directly.
Even if some foreign
airline takes Dutch courage and dares to invest, how is it going to enforce
economical fares in the face of an average of 25 per cent VAT on aviation
turbine fuel? The aviation minister has already excluded Air India from the
unlikely possibility of any such misadventure of investment by an ill advised
foreign airline, as nobody wants to leave that milch cow.
The government can disinvest in SBI, a prince among banks, but it does not want to do so in Air India because of the vast commissions it offers in the purchase of aircraft.
Else why would Air
India have ordered over 100 aircraft when it cannot afford to buy even one out
of its own funds?
If the government had decided to sell Air India that would have been a big ticket reform. Having run the airline by proxy for some time when the author was DGCA, to keep airline float is the biggest mistake the government has committed.
The employment results indicate that a Walmart store opening reduces county-level retail employment by about 150 workers, implying that each Wal-Mart worker replaces approximately 1.4 retail workers. The payroll results indicate that Walmart store openings lead to declines in county-level earnings of about $1.4 million.
The way out, given
that some airline is prepared to take the risk, is to pass a resolution in the
board to hand over operational control to the foreign equity partner’s
nominated managing director. Perhaps Emirates will insist on this if it wants a
stake in Kingfisher Airlines.
The decision to allow
51 per cent FDI in retail, hedged in by many conditions for some time to come,
will have a cosmetic effect at best. Indian retail giants like Reliance Fresh,
More, Big Bazaar are yet to make any profit. Their operations do not seem to
have had any effect on farm gate prices or displaced local retailers. A study
by the Indian Council for Research in International Relations (Sept 2008,
WP222) has strongly recommended FDI in retail on the grounds that there is
enough space for both the small retailer and the large ones, and that the
farmers welcome it.
Montek Singh Ahluwalia
has waxed eloquent about the jobs FDI in retail will provide for our youth, and
better quality goods at cheaper prices, and so on. He should have read the
insightful paper by David Newmark, Junfu Jhang and Stephen Ciccarala done for
the Federal Reserve of St Louis on the impact on employment near Walmart stores
in the US.
They say, “The employment results indicate that a Walmart store opening reduces county-level retail employment by about 150 workers, implying that each Wal-Mart worker replaces approximately 1.4 retail workers. This represents a 2.7 per cent reduction in average retail employment. The payroll results indicate that Walmart store openings lead to declines in county-level retail earnings of about $1.4 million, or 1.5 per cent. Of course, these effects occurred against a backdrop of rising retail employment, and only imply lower retail employment growth than would have occurred absent the effects of Walmart”.
Surely, the economist that he is, Montek Ahluwalia would have, if not studied, at least heard of these studies conducted in the home state of Walmart. The author, having been in the thick of reforms that opened the Indian economy to FDI, is not opposed to FDI in retail, not for the reasons that are being adumbrated but that it will create a spirit of competition among our retailers to do better in terms of quality and price to retain their customer base.
Kancheepuram district have complained to the author that they are unable to
sell their grains to the government procurement agency owing to prolonged
waiting periods at the centres and so perforce they sell it to a middleman who
arranges the procedures at the procurement centres. If these large stores make
direct purchases at the farm gate farmers will gain.
On October 4, 2012
finance minister P Chidambaram announced a series of measure which include
increase in FDI in the insurance and Pension sectors to 49 per cent provided
Parliament approves the amendments, changes in the Forward Market Commission
authority by enhancing its powers and allowing derivatives, approving the new
Companies Bill, etc.
For the present they are only announcements as they have to be approved by Parliament, where UPA II has to make a persuasive case. None of these are likely to have any immediate impact, either on the fiscal deficit or on the working of the system in a significant way. What could work is a radical change in the procedures followed for approval of projects, to which the PM has now committed.
The government should have restored the proposal to increase railway fares and earmarked all the additional resources for systems improvement. India is the only country that has open toilets in compartments, including first-class coaches. Doing away with them would have been a major reform.
Governments at the
Centre and in the states have not perceptibly tackled the one single problem
that besieges the enforcement of law at the right time and in right places. The
judiciary and the governments have together to take the blame for this
deplorable state of affairs.
The Supreme Court is
quick to pass orders on things that do not concern them, like linking of rivers
in India, but does not force the state and the Central governments to increase
the number of subordinate judges manifold, to tackle the millions of pending
Former law minister M
Veerappa Moily’s vision and mission for the judiciary remains on paper. Why
can’t the Supreme Court lay down a time schedule for strengthening the system
so that decisions are expedited? The National Court Management System is
unlikely to have any impact unless the numbers of courts are increased
substantially on a war footing with adequate training facilities for judges.
Why can’t the chief ministers and the prime minister categorically ask their officers to enforce the rule of law and interfere only when they fail? Why can they not give a call to all to the people of India that no one should pay anything for getting their rights?
Why don’t they amend
the Constitution to forfeit all property found in excess of known sources of
income, and not explained within a stipulated time, among public servants, and
their services terminated till they are proved not guilty without a shadow of
Why can’t special
courts be established in every district headquarters only to try corruption
Why can’t separate boards be set up to transfer and promote officers without political interference? Why can’t the central government pass a Public Accountability Act to enforce discipline in the matter of dispensing what the public has to get as a matter of right?
Why can’t they then prohibit the entry of all wheelers and dealers into government offices instead of giving them passes denied even to senior bureaucrats who have retired?
When they do all these and more on the administrative front, then they could be called big ticket reforms that will take India to a high growth path, even when the rest of the world may languish.