"Managing India's Economy in the Next Decade" Montek S. Ahluwalia

"Managing India's Economy in the Next Decade"
Montek S. Ahluwalia

It is a privilege to be invited to deliver the convocation address at the 34^th Convocation of the Indian Institute of Management in Calcutta. IIM Calcutta has established a truly enviable reputation as one of the foremost management institutes in the country. It is also recognised as a leading institute of higher education internationally. It is indeed a pleasure to be with you on this important occasion.

I would like to begin by offering my congratulations to the graduating class of 1999. In reflecting on what I should say on this occasion I was struck by the fact that except for those of you who intend to go on to take another degree, the rest of you will all be characterised throughout your working lives as having been educated entirely in the previous century! Those of us who have spent most of our working lives in this century therefore have a special sense of association with you as our ambassadors to the future. For myself, I have no doubt you will represent this century with distinction, and all our good wishes will be with you in the exciting times ahead.

The cusp of the century, which in this case is also the cusp of the millenium, is perhaps an appropriate occasion to look ahead and ask ourselves how will the future be different from the past? That is what planners are supposed to do. It is also what good managers do. I thought it would be appropriate to use this opportunity to share some thoughts on the challenges of economic management which face us as we head into the first decade of next century.

I am told that managers engaged in looking ahead routinely undertake a SWOT analysis and this is relevant for the country also. What are the country's strengths and weaknesses? What are its opportunities and threats? I cannot of course attempt a comprehensive accounting of these aspects within the time span available for this address. I will therefore only touch on some of the important highlights.

Our most important strength is reflected in the fact that despite many constraints and difficulties, India's economy has been undergoing a long term acceleration. India grew at an average rate of around 3.7 per cent per year from 1960-61 to 1979-80, and the late Prof. Raj Krishna described this lack luster performance by the catchy phrase "the Hindu rate of growth". Raj Krishna's phrase proved so catchy that the image of India as a poor performer stuck for a long time, even after the facts began to change.

India's growth rate improved significantly in the 1980s to reach an average of 5.8%. This was the period when the first steps at economic reforms were introduced and they clearly had favourable effects on economic growth. The growth rate declined to 5.1% in the first half of the 1990s, reflecting the severe crisis of 1991, but as we know, that crisis led to the introduction of wide ranging economic reforms in the early 1990s which led to further improvement in growth. The growth rate increased to 6.5% per year for the four years ending 1998-99.

It is important to view this performance in the right comparative perspective. India's performance in the 1980s and 1990s is clearly not as good as that of China or the other fast growth economies of East Asia. East Asian countries typically grew about 2 percentage points faster than India in the 1980s and the gap actually widened in the 1990s prior to the East Asian crisis. However if India lagged behind East Asia, our performance in the 1980s and the 1990s was much better than that of any of the other regional groupings of developing countries. In fact India's growth rate was actually higher than all developing countries taken together, even when East Asia is included in the group.

In short, we are entering the next decade with a growth performance which augurs well for the future. We seem to have reached the capacity to grow at about 6.5% per year. Against the background the target for the remaining three years of the Ninth Plan i.e. upto the year 2001-02, to achieve a growth rate of 7% per annum, is no longer an impossible objective. The real challenge is whether we can push beyond this level to reach 8% growth at least by the end of the first decade of the 21^st century. This is not easy and will call for a determined effort on many fronts and I will touch on some of these issues later in my remarks.

But first let me mention another dimension in which there is some good news which has not received the attention it deserves. I refer to population growth, where we are at last beginning to see the possibility of declining growth rates which have eluded us for so long. In the three decades from 1960 to 1990 India's population growth exceeded 2% per year. Birth rates declined during this period but death rates also declined, and there was no relief in the natural growth in population which continued at rates above 2 per cent per year. The picture has begun to change in the 1990s as death rates have bottomed out while birth rates continue to fall. The growth rate of population declined to 1.9% in the first half of the 1990s and is expected to fall further to around 1.62% in the second half. The projected growth of population in the next decade is expected to fall further to 1.53% per year.

The slowing of population growth is an important source of strength which we did not have earlier. If we can achieve GDP growth of 7.5% in the next decade, while population growth falls to a little over 1.5%, it means our growth rate of per capita income will be almost 6 per cent per year. This would be a commendable achievement by any standards and it will certainly open up the possibility of much faster reductions in poverty than we have known in the past. In the 1960s and 1970s, when GDP grew at 3.7% and population at 2.1%, our per capita income grew at only 1.6% per year. At this rate, per capita income increased by only 37% in 20 years. At 6% growth per year, the same increase in per capita income would take less than 6 years!

A third important source of strength in our economy as we move into the next decade derives from the changes brought about by economic reforms. The compulsions of democracy and the need to build a broad base of consensus forced a slower pace than many technocrats would have liked but it is also true that the cumulative extent of the change brought about through this gradualist process is very significant. Indian industry has been freed from numerous restrictions, which held it back earlier and it is now able to invest and expand much more freely in response to market signals. The economy is today more open to foreign trade and Indian producers are under strong pressure to be competitive in both price and quality. Imports have been progressively freed from quantitative restrictions and we have firmly committed to eliminate all import restrictions by the year 2003. Import tariffs, which used to be highly protectionist in 1990 have been sharply reduced. They are still much higher than in other developing countries, but successive Finance Ministers have signalled the intention to bring our levels of protection down to the levels prevailing in other developing countries and this signal is forcing industry as well as the banks which finance them to plan for creation of competitive capacities. A process of reform in the public sector has also begun. Partial privatisation has been implemented for a number of public sector enterprises which is atleast making these enterprises less dependent upon government funds and forcing them to improve their competitiveness in the market. A more substantial process of privatisation through strategic sales is also being contemplated for some public sector enterprises. Financial sector reforms, which are an important institutional underpinning for real sector reform, have also made considerable progress. In some ways we are actually ahead of many developing countries because we began the process of banking reform in the early 1990s, thus anticipating by several years what many other developing countries are now doing in the wake of the East Asian crisis.

The full impact of these reforms has not yet been felt in terms of improved economic performance. This is partly because the process of reforms was slow and it is only relatively recently that many of the reforms have been put fully in place – in fact as I have pointed out, some are still unfolding. It also took time for Indian industry to reassess the situation and respond. It is only in the last two or three years that corporate leaders have finally begun to rethink their strategies and restructure their empires. The process has clearly begun but it has yet to spread widely. It is only when that happens that we will reap the full efficiency benefits of the reforms of the 1990s. I believe we will see these benefits to a much greater extent in the next decade than we have done so far.

So much for strengths. What about weaknesses ? There are indeed important weaknesses which we must address if we want to realise the enormous potential of the next decade.

Our most important weakness lies in the inadequacy of our social sector development. Whether we look at literacy or at educational achievements, especially at primary and secondary school levels, or at access to basic health services, India lags for behind other developing countries, including some of the least developed countries in sub-Saharan Africa. Our social indicators also show glaring gender inequality, which is a sure sign of social backwardness with far reaching consequences.

Filling these gaps is essential not just because the provision of basic social services such as education, health, drinking water, etc. is important for the welfare of the poor but also because meeting these needs directly increases the income earning capacity of the poor and their ability to participate in a general acceleration in growth. Educational deficiencies are particularly important in this context since education and acquisition of skills is the single most important factor contributing to upward mobility in income levels.

Since these sectors are the responsibility of the States, our success in this area will depend critically upon the ability of the State Governments to finance the large expenditures needed in these sectors and, equally important, upon their ability to manage resources efficiently so that expenditure leads to actual provision of services. There are serious problems in both areas.

All State Governments now face severe financial problems. There was a time when many State governments enjoyed a positive balance from current revenues, which was used to finance part of their plan expenditure, the rest being financed through borrowed resources. Today almost all States have a negative balance from current revenues which means they are borrowing even to meet current expenditure. Their plan is financed entirely by additional borrowings. This is a recipe for fiscal disaster.

The road to financial viability in the States is a difficult one but the journey must begin if we are to have any hope of achieving our development objectives in the next decade. What needs to be done is fairly well known. The process of downsizing government must begin both in the Centre and in the States. We must also move to eliminate the huge hidden subsidies such as for example the enormous losses in the power sector and in irrigation. Basic reforms in how these sectors are managed are now unavoidable. None of this is easy nor can it be done overnight. The first step must be a clear recognition that it needs to be done. Once this is recognised it is necessary to put the issue on the political agenda. A determined effort, spread over a period of three to four years is needed and could yield substantial results.

Another area of weakness, which could jeopardise our growth prospects is the weakness in our physical infrastructure. The supply and quality of power, the capacity of our road networks, railways and ports, the efficiency of the telecommunication system and even the quality of our municipal services and urban infrastructure all fall far short of what is needed to achieve 8% growth. Massive investments are needed in all these areas, combined with significant improvements in quality.

How can this be achieved ? I believe we need to recognise the special management challenges of infrastructure development to a much greater extent than we have done so far. We have been locked into a system where infrastructure services are provided by a monopoly public sector supplier, usually within a framework of inadequate user charges which do not cover the cost of the service. The result is that the flow of resources is inadequate even to maintain existing capacity, let alone assure expansion and modernisation. This has happened in power, in roads and in railways. The fact that each sector consists of a public sector monopoly adds its own inefficiencies and lack of attention to customer requirements.

We have to break out of this vicious circle. We have to recognise that users have to pay the economic cost of infrastructure services. If there is a case for subsidising some sections, such subsidies must be strictly limited to well defined and clearly deserving target groups and not extended generally to large numbers in the belief that "the common man" can not afford to pay. Along with rationalising tariffs and user charges we must also open up the public sector monopoly and allow competing supply by the private sector wherever possible.

Efforts have been made in this direction in each of the infrastructure sectors but many of these initiatives have got bogged down. Tariff rationalisation, whether it is in power or railways or telecommunications is proving difficult. The effort to attract private suppliers is also proving more complex than was supposed. We have not created the enabling environment which would enable the private sector to enter these regulated areas with confidence that they will face a level playing field. It may be necessary to go back to the drawing board and rethink the framework of policy in some of these sectors to make it possible for efficient private sector suppliers to enter and provide a competing service. Customers will certainly benefit whenever this happens as the experience with private airlines and cellular phones already demonstrates.

These are some of challenges facing us as we head into the first decade of the 21^st Century. Viewed as economic or management problems they seem simple enough. Indeed it is difficult for economists or management specialists to imagine how else these problems can be tackled. Viewed from a political perspective however things are much complex. Politicians need to manage political change by building awareness of the need for change and working towards a consensus in favour of change. We have not done as much in this area as we should. Perhaps our management institutes, such as IIM, Calcutta, can devote some of their energies to this very important aspects of policy by interacting with governments and injecting a management perspective which is much needed.

I hope the young managers who are graduating today will be involved in some way in solving some of these problems. Past experience suggests that new initiatives are possible, policies can be modified, and attitudes to policy can be changed over time. If we can continue to show such flexibility in future we can be reasonably sure that the decade ahead will bring new levels of prosperity to the country and new professional challenge to the managers of the future.