A report card

Economist Dr. Ila Patnaik, who writes a weekly column for Indian Express, wrote a report card for the UPA Government.

She is a right of center economist and a fan of Milton Friedman. This means that she is not going to get one of those Bharat* awards anytime soon. But she writes well. Check out her column on investment in states (Tamil Nadu has dropped to 9th place in per capita investment) and the dubious ways the UPA Government is controlling inflation. Her scathing column on our financial policy shows the true colors of our Harvard Educated FM. She has also spoken out against the sorry state of affairs in our Public Distribution system.

Here is report card, reproduced in full. Things have changed somewhat since this was written.

Two Years of the UPA
Ila Patnaik
The good, the bad and the ugly


The good


Nuclear deal

For decades, India had a principled stance that it would not give up nuclear weapons. In return, the world strangled India's ability to import Uranium and thus make nuclear energy. Suddenly, that is history. The US and India have entered into a historic deal, whereby Indian nuclear weapons will be accepted by the world, and the world will be willing to sell fuel and reactors to India. This is great news for low cost electricity generation in India. It also removes a long-standing irritant that was holding back deeper friendship between India and the US, two natural allies on the global stage.

Railways

What happens when you mix the worst piece of Indian infrastructure (railways) with the politician from whom people expect the least (Lalu Prasad Yadav)? Magical results! The performance of the railways has been simply astounding. A far reaching reforms process has begun, by permitting the entry of the private sector into container transportation. Someday, the railways will be like roads:

the government will own the rails but multiple private companies will compete in offering trains. And we will remember Lalu Prasad Yadav for having started it all.

Fiscal revolution

For decades, we used to bemoan the Indian crisis on the fiscal deficit. Then came the rescue in the form of the FRBM Act, initiated by Yashwant Sinha, supported by Jaswant Singh, and seen through by P. Chidambaram. Far-reaching tax reforms were initiated, including the VAT and and an attack on the "exemption raj" highlighted by Kelkar. The deficit is now down to just 3.7%. A lower deficit means the government is grabbing less resources, and more money is available for investment.

Airports & civil aviation

Aviation has been revolutionised, first by the entry of new airlines. In a moribund sector that was trapped in the business interests of Indian Airlines, Air India, Jet Airways and Sahara, suddenly, we have competition! Prices have crashed and the middle class is flying. Tourism has prospered like never before. The second revolution has been unleashed, even though results are not on the table yet - that of privatisation of the airport. Now we can dream that the Delhi and Bombay airports will look as wonderful as the Delhi Metro. Praful Patel did what a Congress minister would never have been able to do.

Capital account convertibility

After years of a deadlock, the PM and the FM are ready to move on to the next big milestone of an India that is growing up: opening up the capital account. The RBI is still dragging its feet, having setup a committee for "fuller" convertibility as opposed to "full" convertibility. But it will be hard for the RBI to hoodwink this PM and this FM, and within 10 years, the Indian Rupee could be one of the great hard currencies of the world.

The bad

Wrong taxes

A great part of the "fiscal revolution" described above was rationality in taxation. We have slashed customs, shifted to VAT, lowered rates, and removed exemptions. But in the UPA years, a series of wrong taxes have crept back. The education cess, the securities transaction tax and the cash withdrawal tax -- all these are flat wrong. One expects better when an economist is the prime minister! The reformers have to now settle in for a ten-year fight to get rid of these.

Mindless expenditure on Education

The government is pouring huge money into its "flagship program" - the Sarkari Shiksha Ahiyan (SSA). But there is no evidence that SSA works. Independent tests show that our children continue to learn little at government schools - e.g. ONE HORRIBLE FACT: ONLY HALF THE STUDENTS IN CLASSES II TO V CAN SUBTRACT TWO DIGIT NUMBERS. What is needed is fundamental educational reform - not a more bloated government that spends more and more on dysfunctional institutional mechanisms.

Crippled Oil policy

The world price of petrol goes up. India imports petrol. The Indian price of petrol should go up. Obvious? Not if you are Mani Shankar Aiyer or Murli Deora. Both these ministers have derailed the effort at getting the government out of price controls in the oil sector. We are doing this exactly wrong: subsidising consumers to use more scarce oil. Men and nations will only do the right thing after exhausting every reasonable alternative.

6th pay commission

As Yashwant Sinha is reported to have said, the 5th Pay Commision "nuked Indian public finance". Now, in a shallow attempt at manipulating the next general elections, Manmohan Singh has embarked on the 6th Pay Commission. He did not need to do this. Now, the devil is in the details. If he finds good economists to drive the 6th pay commission, it can even do some good. More likely, he won't get fiscal hawks, and the 6th Pay Commission will nuke Indian public finance again. We learn from history that we learn nothing from history.

NREGA : Unbounded expenditures?

This is one way of generating employement that even Communist China did not think of. Let people dig holes and the government pay them. We have also discovered a new way of redistribution. The better off you are, the bigger the transfer to you. So a worker in a poor state will get Rs 60 and a worker in a rich state Rs 120. And, as to how much will be spent after all State governments have finished competing with each other to make the centre pay whatever minimum wage they fix, even the finance ministry has no decent estimates.

Stalled PFRDA Bill

India is on the cusp of a demographic transition. Waves of young people are coming into the labour force. This is the perfect time to catch them into a modern pension system, where each person can build up a personal hoard of pension wealth to shelter himself in old age. The New Pension System was a fundamental reform, initiated through extensive public discussion from 1998 to 2002. The UPA has been hijacked by the trade unions - who represent 2% of India - and has completely stalled the pension reform. We are losing valuable years. Years from now, starving old people will remember the UPA for this.

Stalled disinvestment

Arun Shourie did yeoman service exposing the massive scale of theft from PSUs by the political class - whether it is cronies of ministers consuming free rooms at ITDC hotels or it is cronies of bureaucrats selling expensive chicken to ITDC hotels. His jihad on privatisation stirred up this hornets nest of various crooks feeding on PSUs. But his accomplishments - such as the sale of VSNL or TCS - were major victories of the NDA. The UPA has killed off privatisation / disinvestment at the central level. West Bengal continues to powerfully move forward with privatisation. Remember Great Eastern. But the UPA behaves asif what is good enough for West Bengal is not good enough for India. Think BHEL.

Divide and Conquer: Higher education

There must be something wrong with higher education - the NDA had Murli Manohar Joshi and the Congress has Arjun Singh. Top universities in the world are begging to be permitted to setup campuses in India. Instead of a mere 3,000 seats at IIT, we could have 30,000 seats at university campuses in India run by Harvard and Stanford. Foreign producers have transformed our TVs and our cellphones, but clearly higher education is not important enough to benefit from the same reforms, and we are stuck in a Stalinist model of education. All we get is a tiny increase to accomodate quotas.

Rebuilding the planning commission

Modern market economies do not have planning commissions. The NDA was making progress on driving down the importance of the planning commission. A few more years of that, and it would have been possible to close down the planning commission. Now the UPA has done damage by putting a key player in cabinet into the planning commission, and resurrecting the role of the planning commision.


The ugly


SEZs: The mother of all exemptions

Cost: Rs 1,000,000,000,000.
Biggest benefit: Tax exemptions to real estate developers. Exports will get some tax breaks too, but nothing compared to what the developers will get. Land acquisition will displace ordinary people on a scale that will make the Narmada dam look like small change. With tax havens inside India, Caymen Islands will pale into insignificance. The country does not benefit. The real estate buyer does not benefit. The government does not benefit. A huge benefit goes to the real estate developers. Why this giant gift to real estate developers. One can only wonder how much election funding will flow out of this trillion rupee handout.

UPA versus FRBM

Indian fiscal was in a nightmarish state by the late 1980s. Manmohan Singh began India's fiscal recovery in the early 1990s. After him, every finance minister has fought on this question - P. Chidambaram, Yashwant Sinha and Jaswant Singh. Getting the central fiscal deficit down to 3.7% of GDP has been a great achievement, and is already generating results through a higher investment rate. And the FRBM promises us the nirvana of a fiscal deficit of no worse than 3% by 2008-09, and that too only for the purpose of capital expenditure. Alas, this glorious achievement is under extreme attack from the UPA. The SEZ Act - the mother of all exemptions - will contaminate growth of tax revenues. The NREG and the 6th pay commission will contaminate expenditures. The UPA is in a mood to roll out more and more foolish welfare programs. By 2009-10, the entire 15-year effort of fighting India's fiscal crisis could have been undone. The UPA could be remembered for having destroyed a marvellous 15-year piece of work. It won't be long when Moody's and S&P catch on and the FDI-FII numbers start dwindling.