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ECONOMY Blueprint For A Perfect 10 BT's very own take on the reactions of Team Vajpayee as McKinsey unveiled its blueprint for growth. By Seetha
Prime minister atal behari vajpayee watches glumly as members of his Cabinet troop in. This sluggishness in the economy is getting on his nerves. And ever since he spoke about a 9 per cent growth rate, he's been flooded with gratuitous advice on how that can be done. First from the dons in the Economic Advisory Council, then from the Task Force on Employment Generation headed by that nice imf-wallah Montek Singh Ahluwalia. All of them making the same impractical suggestions. He wonders where those reports are. Gathering dust somewhere, he presumes. And now here's McKinsey-The Firm-with its heavy-weight 3-kg report. India is the 15th country, including the UK, France, Brazil, Sweden, Japan and South Korea, for whom McKinsey has prepared reports like this one. Those countries don't seem to be doing too badly, so there's no harm in listening. Maybe-Vajpayee perks up as a wicked thought passes through his head-I'll get some new points to make at the meeting of the advisory committee on trade and industry tomorrow morning. He sits up, as the head of McKinsey Global Institute, William Lewis, and his partner Shirish Sankhe are about to begin their presentation. McKinsey, they explain, spent 16 months studying 13 sectors, which account for 26 per cent of India's Gross Domestic Product (GDP) and 24 per cent of its employment. It then listed 13 key actions that should put the zing back into the economy. Vajpayee groans. Why 13? His first government had lasted 13 days, the next 13 months and this government was sworn in on October 13, 1999. He thought the jinx had been broken, but how wrong he was. For six months, the government has been simply lurching from one crisis to another.
The Indian economy, the presentation announces, could grow at an annual clip of 10 per cent. Sitting next to the Prime Minister, Finance Minister Yashwant Sinha nearly chokes on his tea. It's bad enough that Vajpayeeji wants 9 per cent growth when he can barely manage to deliver 6 per cent. The Planning Commission had come to his rescue by scaling down the growth target to 8 per cent. And now these suits from The Firm are talking about 10 per cent! Three major obstacles are preventing this from happening, the McKinseyites say. First, product market barriers, or rules and policies governing different sectors, slow down GDP growth by 2.3 per cent. Second, land market distortions in the form of outdated tenancy laws and rent control account for 1.3 per cent of lost growth. And, third, the continued dominance of the public sector stifles growth by 0.7 per cent. Inflexible labour laws and poor transport infrastructure are only minor barriers, says McKinsey, accounting for lost growth equal to only 0.5 per cent. Vajpayee's gloom lifts a bit. ''The battle with Sharad Yadav can wait,'' he thinks with a half smile. ''He's been making noises that there'll be no labour law reform without a consensus. Should I have made him the labour minister?'' ''The earlier reforms did a good job of delicensing,'' Lewis hastens to explain, ''but rules about how you can operate in various sectors still remain.'' He talks about how the Milk and Milk Products Order (MMPO) has prevented the entry of high quality private dairy plants and protected government-owned plants and cooperative dairies from competition. Or consider the differential taxes and duties for units within a sector. He gives the example of the wheat milling sector, productivity in which was 2.2 per cent of US levels. That's largely because the chakkis paid less tax on their wheat than the large mills. In fact, adds Sankhe, the small scale reservation policy is not allowing economies of scale. Vajpayee's mind begins to wander. He's been hearing this ever since Abid Hussain submitted his report on the small scale industry back in 1997. In any case, who's going to take on the Laghu Udyog Bharti, the Rashtriya Swayamsevak Sangh (RSS)-affiliated small-scale (SSI) industry association. Just two years back, they had successfully got the investment limit for SSIs lowered from Rs 3 crore from Rs 1 crore. He forces himself to pay attention to what the McKinseyites are saying. Now Lewis is talking about how the land market distortions limit land available for housing and retail, the largest domestic sectors outside agriculture. ''If you get retailing and construction right,'' explains Lewis, ''a lot of good things happen''. Retailing, for example, has a tremendous effect on upstream industries-the farmers, food processing units, and the wholesale traders.
Vajpayee recalls Ahluwalia saying something similar before leaving for Washington: ''Too often there is a feeling that these department stores are displacing lots and lots of little shops. But while they may be getting rid of a lot of self employment, they are creating higher quality organised sector employment and they are creating a supply chain which leads to downstream efficiencies.'' Ahluwalia's report too had spoken about allowing foreign direct investment (FDI) in retail, ending the various restrictions on land use. But Vajpayee balks at the very thought. Open up retailing, end reservations for small scale units, scrap the rent control act! He sends up a silent prayer thanking the lord that Human Resources Minister Murli Manohar Joshi wasn't around. Who knows how the swadeshi hardliner would have reacted. Why doesn't McKinsey talk about growth in agriculture, he wonders, that's so much more politically appealing. But what's this? Lewis is saying he doesn't see great increases in productivity in agriculture. Once everybody has access to tractors, Lewis elaborates, the next stage is the highly mechanised stage. But for that the cost of agricultural labour has to increase to a level where mechanisation pays off. It'll take India nearly 10 years to reach that stage. And it will only happen when the modern sector (manufacturing and services) begins pulling away labour from the rural areas, pushing up labour costs. ''The engine of change in rural India is actually creating more jobs in the transition (personal services) and modern sectors,'' says Lewis. So, Vajpayee muses, there's no getting away from further freeing industry from controls. Now Sankhe is talking about how the public sector is fostering inefficiency. Productivity in the retail banking sector, the slides reveal, is only 12 per cent of US levels though it has the potential to reach 90 per cent. That's because the public sector banks are a drag. Even in telecom, productivity is only 48 per cent of US levels (against a potential of 89 per cent) because state control of key players limits their incentive to increase productivity. Newly-promoted disinvestment crusader (sorry) minister Arun Shourie is taking notes furiously. Vajpayee sighs. Poor man, when will he realise that disinvestment is about politics and not economics? I've shifted Sharad Yadav and Ram Vilas Paswan out of the civil aviation and telecommunications ministries, but how do I manage heavy industries minister Manohar Joshi and petroleum minister Ram Naik? They'll never accept privatisation. He agreed with everything The Firm was saying. But, then turning to home minister L.K. Advani, he asks: ''Lekin yeh sab hoga kaise? (How will all this happen?)'' The Firm had an answer ready: ''Communicating the need for reforms and their benefits to the Indian people will be critical to ensure their smooth implementation.'' Hadn't they heard of that old adage ''there is no one more deaf than those who will not hear''? Worse, it was putting the onus of pushing reforms even in states on the Centre, if necessary by providing fiscal incentives for reforms. Planning Commission deputy chairman Pant winced. He recalled the din that Jyoti Basu, then still steering West Bengal, and former chief minister of Kerala E.K. Nayanar raised when the Commission wrote to the states about monitoring their performance. A cynical sneer appeared on Sinha's normally impassive face. The finance ministry had signed memorandums of understanding with several state governments linking funds with reforms. None of them had worked. Vajpayee simply loves the last suggestion. The government, the consultants advise, must appoint a small team of senior cabinet ministers, under the Prime Minister's direct supervision, to push through the implementation of the 13 actions. Now this, he said to himself, was eminently do-able. In fact, he'd already done it by setting up the cabinet committee (eighth, ninth? chhodo, who keeps track?) on economic strategy just three days before. The presentation was over. As Vajpayee shook hands with Lewis and Sankhe, he told them that Home Minister L.K. Advani, an avid Bollywood movie buff, had organised a special screening of the latest Hindi film-Nayak-over dinner. It's about a chief minister challenging an aggressive and critical television reporter to take on his job for a day. Was Vajpayee hinting at a similar challenge to the suits from The Firm? |
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time: 6.30 pm, August 6, 2001