Listening to the post-Budget discussion in the media what disappoints me most is the reaction of the Indian Left. From the Indian Right the expectations are so little that there is no scope for disappointment there.
For the CPM it will be a blunder if they fail to support the present government vigorously. In Dr Manmohan Singh India has a prime minister of remarkable intelligence, secular credentials and commitment to the disadvantaged. He should be a natural ally for the enlightened left.
It is true that the policies he will pursue will not be the same that the left parties would ideally like to follow. There are two reasons for this. First, there is genuine difference. The PM believes in a more open economy and regards the market as a more significant core of the modern economy than the left does.
However, what the left has to realise is that the market economy he aims to achieve is different from the anarcho-capitalism that some politicians and market-fundamentalist economists (this breed has virtually disappeared in the US but there are quite a few in India) have been recommending, and which can quickly descend to crony capitalism.
The balance of policies that the government is attempting is good. But my point is that, even if the left chooses not to support the policy, it should support the government.
If the CPM is worried about its cadres, it could tell them: "These are not the policies that we would follow if we were in power, but we have chosen to support this government and for good measure. We can advise it to do things differently, but we will not threaten to bring it down. To do so is to risk playing into the hands of communalism and crony capitalism."
The second reason the policies of this government look different from what outsiders recommend is that a party in power has to take account of constraints that those outside can ignore.
Just like realpolitik, there should be something called "realeconomik"-- the compromises you have to make in order to remain in power and do some of the things dear to you.
I find the present government's tolerance of tainted ministers and its failure to cut down on the massive subsidies that India doles out to various sectors, which have nothing to do with helping the poor, disappointing.
But I would treat these as part of realeconomik and partly the inevitable mistakes of a budget-in-a-hurry. The serious budgetary and policy changes surely lie ahead, and if we want the economy to progress, we must make room for the government to get down to the business of long-run planning and governance, instead of having all its energies spent on the politics of survival.
When that happens, here are some of things the government ought to do. I should clarify that I am not attempting to be comprehensive but dwell instead on some of the more tricky and yet important questions of policy making that lie ahead.
First, at the time of the Budget it is natural to obsess over big questions, but good economic performance disproportionately depends on the small things--what may be called the "nuts and bolts of an economy".
Consider a simple statistic compiled by the World Bank. If you wish to start a business in India, the number of days that it takes on average to get all the requisite permissions and actually start operation is 88. Just how inefficient this is you realise when you compare it with some other countries. In Singapore this takes eight days and in the US four.
Market fundamentalists will tell you that this is because those countries have less government regulation. But that is not true. By most measures, one needs more government permissions in the US than in India.
It is just that in the US the bureaucracy is organised much better and the system is bribery-free. So the market fundamentalist's belief that an efficient nation is one with no government presence is not correct. If that was all there was to it, economic development would not have been such a challenge.
The fact is that we need government, and need it to be efficient and corruption-free. One of the first tasks of this government should be to work towards this objective; so that life becomes easier for honest citizens and people are able to be entrepreneurial without having to be corrupt.
The hitch is that cleaning up the bureaucracy is not an easy task and not simply a matter of determination, as some naively think. There are many walks of life with rampant corruption, where to suddenly bring in draconian laws and vigilance could bring business and transaction to a halt.
It has to be remembered that many of the excesses of India's infamous bureaucracy began with the noble aim of controlling corruption; and this subsequently strangled business and enterprise. We must not repeat that mistake. Many people may remember how, two decades ago, a "vigilant" customs made travel into India a horrifying experience.
Moreover, from all accounts, customs collection was no better for that. A system for controlling corruption and not adversely affecting business is an intricate problem and has to be backed up with serious research and planning before it is put into effect.
Second, let me turn to privatisation. There are many areas where India needs to privatise, but the popular opinions expressed on this are often naïve and dangerous. The first fallacy is the belief that a state-owned firm ought to be privatised if and only if it is a loss-making one.
This fallacy is made by people who think of privatisation solely as an instrument for raising revenue. But privatisation's main aim should be to improve the efficacy of resource use. Hence, it should occur when there is reason to believe that the resources controlled by a public enterprise will be used more effectively by a private firm.
Suppose an airline company run by the government is very profitable; but it turns out that this is because of entry restrictions on private airlines. Profitability is then perfectly compatible with poor performance.
It is then entirely possible that sold to a private group the airline would do a better job in ferrying passengers and cargo; and in that case it should be privatised.
The opposite problem is to assume that wherever you see malfunctioning the problem can be solved through privatisation. Consider airports. Indian airports are an embarrassment and a stumbling block in the country's progress.
But airports cannot be privatised by simply selling off the whole thing to a private group. If we did that, what would be there to guarantee that the private group would not convert the airport into a highly profitable horse-racing track? Clearly, one needs an intricate contract to make sure that the private firm makes not only profit but provides the service it is meant to provide.
Russia's privatisation programme that descended to a rush to strip the assets of firms and sell them off is a stark reminder how privatisation can descend to loot.
I cannot go into the details of privatisation mechanisms here but here is one rule that could be useful: Even before we privatise, we should open up all sectors to the entry of private firms. This will bring public firms under competition and the ones that perform well under those circumstances could be allowed to stay.
Finally, the government needs to attend to the formation of investment--physical and human. There is much evidence that higher savings (and investment) are closely related to a nation's growth rate. Unfortunately, India's savings rate has fallen from 25.1 per cent of the national income in 1996 to approximately 24 per cent now.
Analysis shows that while private savings--that is, savings by people like you and me, have risen over the same period from 23.1 per cent to over 26 per cent, savings by the government have fallen sharply. Public savings have been negative since 1998. This calls for measures to cut down on government consumption and waste.
While this boosts physical investment, we should simultaneously work to raise "human capital," which is the economist's term for knowledge and skill formation and this brings me back full-circle to the imperative of education.
The author is Visiting Professor of Economics, Harvard University, and Professor of Economics, Cornell University. Powered by 