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World Bank and GoI on same wavelength

Subir Roy | August 13, 2003

It seems a bit unreal to talk right now about a crisis looming ahead of the Indian economy.

The rupee is appreciating and reserves piling up by the day; a good monsoon seems likely to propel growth, aided by an industrial revival; the stock market is bouncy again and a feel good factor seems to be in the air after a long long time.

But there is the clear undertone of an emerging crisis in the World Bank's latest detailed study of the economy, its development policy review, India: Sustaining Reform, Reducing Poverty.

Under these circumstances it was unsurprising for the government spokesman to simply brush aside such carping criticism, as he did. But the review actually demonstrates how much both official Indian thinking and the World Bank have travelled in the last decade.

For its part, Government of India has internalised the most important aspect of the Bank's critique of current Indian economic practice, the worsening fiscal mess.

Jaswant Singh underlined this by describing the general government debt situation as serious and the need not to "stretch ourselves beyond the size of the mat," while moving the Fiscal Responsibility Bill.

That legislation now commits the government to move to zero revenue deficit by 2008.

The Bank has also changed. It has implicitly acknowledged the positive changes that have taken place in the Indian planning process. It used the ninth plan road map to signpost its own programmes in India and has adopted the stated goals of the tenth plan in the review to build its entire structure of policy prescriptions.

The Bank's own approach to adjustment and reform has also changed with there being a greater realisation that a one size policy does not fit all. Hence, there is less of a one dimensional call for a rollback of government and emphasis on the nature and quality of government expenditure.

This is most visible in the issue of service delivery to the poor. There is a move away from the dogma of privatisation and emphasis on the accountability of public money and finding local solutions.

How does the Bank reconcile the low inflation, falling interest rates and overall macroeconomic stability with its concern over the fiscal situation?

It looks at the tenth plan target of 8 per cent growth needed to make a dent on poverty, to warn that "growth could continue to be substandard even if a crisis does not erupt." It is fiscal policy, which 'has contributed to keeping growth below potential.'

And is there a chance that the fiscal deterioration will eventually translate into an external crisis as in 1990? The Bank's understanding is that "India is not vulnerable to the type of collapse suffered by Russia or Argentina. But it is vulnerable to substandard growth without a fiscal adjustment."

Worry about the future stems from several counts. There is both a slowing down of improvement in some development indicators and a deterioration of the employment situation in the latter part of the nineties.

There has been an increase in the unemployment rate during 1993-00. This is traced to a deceleration in rural employment growth resulting from slow agricultural growth.

The low capacity of rural industry and services to absorb labour from agriculture has not helped. Progress in health indicators has been 'slowing down precariously'.

The infant mortality rate fell more slowly in the nineties than in the eighties and there was no improvement in the mortality rate for children under five during the nineties.

The review highlights how much the government spends on the civil service and what it gets out of it. For comparable skills, government compensations are way ahead of private sector benchmarks.

The fiscal deterioration in the late nineties owes a lot to the revision of civil service salaries and pensions, which are now an important contributor to the intractable fiscal imbalance.

Though the economy pays such a heavy price to keep its civil servants happy, there is little motivation for the latter to deliver better.

Public expenditure on social services rose sharply in the later nineties, not to improve their deliveries but to pay civil servants more.

And the final irony is that this higher expenditure added a 'spurious' half per cent to the annual growth figures during the period 1997-00.

The Bank has highlighted the fiscal situation and a not very favourable investment climate as key factors retarding growth. But another trend covered in the review though not overly highlighted, the emerging divide between the leader and laggard states, can have the most serious implications.

Broadly, the southern and western states make up the leaders and the northern and eastern states the laggards. These two groups are differentiated in terms of both per capita income and levels of poverty.

The leaders spend more on social services and have a lower population growth rate, thus accentuating the divide in terms of per capita income.

In an earlier era, the policy solution would have been to direct public investment at the laggards. Today, states have to fend for themselves and attract investment.

But the laggards also suffer from another impediment, a particularly poor investment climate. Only better governance can turn these states around whereas their governance deficit lies at the root of their poor performance.

The divergence between the two pulls down the national average for both economic and human development indicators. But more importantly it tends to hide both successes and colossal failures.

States as badly off as Sub-Saharan Africa and those doing considerably better than India's country ranking all get subsumed in the grand national averages.

The same set of policies are not suited for the two but as of now, different policy packages for leaders and laggards are not being devised. As the division between the two is likely to continue and get worse, what this will do to the nation needs serious and immediate pondering.

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