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Lecture 1: 9 April, 1997 The State Of The Indian Economy - 1997. Speaker: SRI G.V. Ramakrishna, Chairman, Disinvestment Commission, Government of India Venue: ITC Hotel Grand Kakatiya, Greenlands, Hyderabad.

Sri G.V. Ramakrishna, delivering the First Memorial Lecture

I am indeed very grateful to the Hyderabad Management Association for inviting me to deliver this first lecture in honour of the memory of the Late Sri R.Kothandaraman. I had occasion to know Mr.Kothandaraman personally during the eighties. He was a man of great learning, dedication and integrity. He was large hearted and humane in his approach to all those with whom he had come in contact. After a brilliant academic career he entered the Government of India and later joined the Income Tax Department. He developed wide interest in a number of areas like mathematics, philosophy, the fine arts and sports. He was able to combine strict enforcement of the law and the rules with a practical and compassionate approach. He was a life member of the Hyderabad Management Association. I am very happy that when these qualities are called for in many public functionaries today, you are honouring the memory of a civil servant who personified them during his life.

To talk about the Indian economy is both easy and difficult today. It is easy because of the abundance of material and analysis available specially after the process of liberalisation began in 1991 and the Indian economy became the object of interest around the world. It is difficult because of my aversion to repeat what is already well known or to repeat clichs as solution to our problems. This cannot however be avoided altogether. I shall, therefore, confine my talk to those areas, which may be considered to be strengths of the economy, and also those areas of concern in the immediate and short term. Although we had adopted, several decades ago, the socialistic pattern of society, we were in fact a mixed economy. Almost the whole of agriculture, trade and consumer industries were under private ownership and management. It was in the area of heavy industry and infrastructure that the State had to play a major role in order to provide a measure of self-reliance. The Indian private sector and private capital had not yet matured to the level that was required for promoting investment in these capital intensive areas. That is why a large Indian public sector came into existence in areas such as steel, heavy engineering and machinery manufacturing.

The ideology of State ownership combined with the deficiencies to private control, both foreign and Indian, in important sectors like petroleum and coal led to the nationalisation of these industries. Political compulsions for providing employment led to the setting up of several industries in uneconomic locations. A large number of industries, which had become sick in the hands of the private owners were also taken over by the State mainly to protect employment. Today the total investment in the Central Public Sector Undertakings is about Rs.1, 70,000 crores with nearly half of the Undertakings being loss making. The fact, however, remains that the foundation of our economic growth in the last few decades have been provided by the public sector in the areas of petroleum, coal, steel, power and heavy machinery building. Private industry has been supported to a substantial extent by production by these units specially during long periods when our capacity to import was severely curtailed owing to paucity of foreign exchange. With the indiscriminate expansion of the public sector into the manufacture of consumer goods like textiles, TV sets, bicycles and processed food, the lack of commercial orientation of the management and excessive Government control resulted in uneconomic operations and mounting losses. Loss making PSUs became an increasing burden on the Central budget.

It is, however, an unfortunate fact that private entrepreneurial talent remained suppressed under the system of extensive controls in industrial licensing, imports, exports and capital markets for nearly 40 years. Although eminent persons like Rajaji had spoken against License Permit Quota Regime and sought liberalisation, the process of unshackling the entrepreneurial talents of our people and reducing controls had begun only during the early 80s and the process was halting and lacked genuine conviction. It required a major economic crisis in 1991 to give a big push to the process of the liberalisation. The world had also changed at that time and the new system of international trade was being put in place through the Uruguay Round talks which eventually resulted in the setting up of the World Trade Organisation and the signing of 34 different International Agreements and Understandings covering all aspects of trade and including new areas such as Trade Related Intellectual Property Rights, Trade Related Investment Measures and Trade in Services. Today the world is rapidly getting integrated with freer movement of goods, capital and services across national borders. It is, however, a fact that many developing countries including India have to make structural adjustments to cope with international rules and competition in all these areas. The process is not going to be easy or painless or costless and the new rules of the game are already being applied and will become increasingly challenging in the next two or three years. The process of liberalisation that started in 1991 has brought about major changes in the structure of our economy with the removal of controls or industrial licensing, imports and exports, capital markets and the convertibility of the rupee in the current account and partial convertibility in the capital account. There is now greater opportunity for Indian entrepreneurs to show their undoubted initiatives and capabilities. They have, however, to meet the increasing challenge coming from new investments by multinationals and by freer imports with reduced duties. There is a school of thought which is of the view, to which I subscribe, that when the Uruguay round started in 1987 we should have begun to liberalise the Indian economy by opening up several sectors for Indian private sector entry and to provide opportunities for Indian industries to get prepared for facing global challenges. This was, however, not done with the result that Indian industry has had no lead-time to prepare itself to become more competitive and strong to face foreign challenges. I am one of those who believes that while the process of liberalisation since 1991 has removed many outdated controls

unleashed entrepreneurial talents of our people and has pushed the rate of growth of our economy from the earlier rate of abut 4-5 per cent to about 7 per cent, the last few years have also seen major gaps in policy making in important areas which are now beginning to have their impact on the future of the Indian economy. Let me now turn to the major areas of concern. Although we were the first developing country to have an official population policy our achievements have been far from satisfactory. Many countries, which started later, have shown much better results. Our current rate of population growth is about 1.9 per cent, which means an additional of about 18 million people very year. When we became Independent in 1947 our population was about 343 million and today it is about 960 million, an addition of over 600 million people in the last 50 years. The provision of basic necessities for this rapidly growing population in terms of food, housing, education, water supply, and health care and sanitation facilities is one of the major challenges facing the country. The currently estimated level of people below the poverty line in India is close to 330 million. In the last few years, there has been a significant drop in investment in agriculture. The green revolution seems to have lost steam, land holdings are getting increasingly fragmented and productivity is stagnant. Land is also being diverted for commercial crops. We therefore, see today the growth rate of food grains production being only 1.7 per cent as against the growth rate of population of 1.9 per cent. We have begun to think in terms of large food imports. With the push towards international prices for domestic production the element of subsidy will increase and add to budget deficits. The food security of this country has become significantly vulnerable and serious attention needs to be paid to this basic requirement for survival. The energy security of this country is as important as food security but is now becoming as vulnerable as the latter. We are becoming increasingly dependent on imported energy, whether it is petroleum or natural gas or even non-coking coal for power generation. With 70 billion tonnes of coal reserves, we are producing about 300 million tonnes per year while China with twice our reserves produces nearly 1200 million tonnes per year. The increasing power shortage in all parts of the country is now acting as a major constraint to more rapid industrial growth and to our export capabilities. Development of hydropower and indigenous coal based thermal power needs serious attention.

The delay in adjusting petroleum prices is affecting the viability of our major oil companies. It is time to face the truth and bite the bullet. Apart from power, infrastructure shortages in several other areas are also reaching critical dimensions. Ports, railways, highways and telecommunications have not seen the kind of imaginative policies required for rapid augmentation. The policies for accessing private capital and management in these areas have been less than effective and the last six years have been a period of lost opportunities. Even in the area of power we have not been able to attract private investments owing to unclear policies, slow Government procedures and the poor financial condition of the State Electricity Boards (SEBs). After six years of trying to get private investment we are now realising that Government has to step in to ensure minimum growth in power generation capacity. It is difficult to ensure this in a situation of growing fiscal deficit arising from large revenue expenditure on interest on debt, defence and internal security. One of the major reasons why we are unable to access private capital in power is because of the financial bankruptcy of many SEBs. The annual commercial losses of the State Electricity Boards are about Rs.11, 000 crores. Supply of electricity to various consumers below cost of generation is resulting in subsidies of close to Rs.20, 000 crores a year and Government budgets are simply unable to bridge this gap. Technical losses in transmission and distributions also have a large element of revenue loss to SEBs owing to pilferage and non-billing for power. Independent tariff fixation bodies have to be set up and SEBs required to function on commercial lines with minimum political interference and full accountability. After 10 years of talking of Energy Conservation we have yet to set up a statutory authority for this purpose. The fiscal deficit of the Centre and the States and the Public Sector Enterprises are now likely to exceed 9 per cent of GDP. The regular recourse to borrowings have led to the huge burden of public debt on the Central Government whose outstanding debt is now over Rs.7, 70,000 crores. The annual interest payments have risen in the last three years from Rs.50,00 crores to Rs.68,00 crores. Forty six per cent of Central revenues go for meeting interest payments and a substantial part of borrowings goes for meeting revenue expenditure. Interest payments exceed borrowings. We are clearly living beyond our means. The debt situation and deficit in the annual budget have to be tackled more seriously. It is as a result of this imbalance that Government expenditures essential in areas

where private sector cannot enter, such as agriculture, irrigation, rural development and social-infrastructure are lagging behind. Many State Governments do not have the money to buy the medicines for public health schemes or to maintain school buildings and roads. Only 5 per cent of the rural population has sanitation facilities and even drinking water is a problem in many parts of the country during the summer months. While huge amounts are being spent in some of these areas the benefits actually reaching the beneficiaries are very low owing to inefficiencies, wastage and leakage in the administrative system. A major drain on the budget of the Central and the State is on account of loss making Public Sector Undertakings. The process of disinvestment in public sector undertakings has to draw not only additional receipts into the budget but also reduce the drain on the budget on account o these loss making Undertakings. Excess labour in most PSUs is a genuine problem and needs to be tackled in an effective and equitable manner. The Disinvestment Commission has been set up to address these issues. The first report of the Commission lays out the broad strategy for the public sector. The various Labour Laws are out of tune with todays needs and need revision, Along with this there should be a system of providing social security to employees who are found to be redundant both in the private and public sectors. While efforts to raise revenues meet with stiff resistance reduction in expenditure on subsidies becomes difficult owing to political compulsions. The result is that reduction of the revenue deficit is becoming a major problem. Increasing resort to Government borrowings with consequent rise in interest payments will soon lead us to an internal debt trap. This will erode the confidence of investors - both Indian and foreign in the economy with further adverse consequences. If there is the perception of a weak economy, and weaker political will to tackle the major problems, the foreign exchange reserves may dwindle very fast. The last thing we need is a repetition of the 1991 crisis. The next few years are likely to be years of strain for the Indian economy. The transition to a more open and competitive economy cannot be painless. It is important that every section of the society makes its contribution whether it is by way of better compliance with tax laws or by increasing savings for investments. The poorer sections of our society should be fully protected. This calls for an equitable sharing of the burden and greater openness in informing the people about the potential of the economy and also the actual areas of concern and threats to our economy. Such a national understanding and national effort can come about only if the people

have confidence in getting a clean and efficient administration that will use the savings of the people without wastages or leakages. There should be a close look at the huge subsidies which are a big drain on the budget and a serious effort made to confine subsidies only to the most deserving poor people. Public sector disinvestment has to be given a major impetus to reduce the drain on the budget owing to the loss making undertakings and to augment Government receipts from disinvestment in the profitable ones by giving them greater autonomy and commercial orientation. These measures will provide resources to enable the State to participate, along with the private sector in making large investments in infrastructure areas like power, highways, ports water supply, sewerage etc. Clear policies are also essential for accessing Indian and foreign private capital in the infrastructure areas through transparent competitive bidding procedures. Regulatory authorities should be set up to promote competitive pricing of services and goods and to protect consumer interests. A major thrust is essential in the area of population planning with emphasis on education of young women in rural areas. This calls for strong and imaginative leadership at all levels. Our country has enough resilience and capacity to meet these challenges but effective solutions can be found only if there is more open discussion and the feeling among the people that everyone is contributing according to his capacity. I am sure the people of this country will rise to the occasion.